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Form 10-Q SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
Indicate by check mark whether each 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, and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
As of the close of business on October 31, 2001, Consolidated Edison, Inc. (Con Edison) had outstanding 212,236,944 Common Shares ($.10 par value). Con Edison owns all of the outstanding common equity of Consolidated Edison Company of New York, Inc. (Con Edison of New York) and Orange and Rockland Utilities, Inc. (O&R).
O&R meets the conditions specified in general instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.
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TABLE OF CONTENTS
* O&R is omitting this information pursuant to General Instruction H of Form 10-Q.
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Filing Format
This Quarterly Report on Form 10-Q is a combined report being filed separately by three different registrants: Consolidated Edison, Inc. (Con Edison), Consolidated Edison Company of New York, Inc. (Con Edison of New York) and Orange and Rockland Utilities, Inc. (O&R). Neither Con Edison of New York nor O&R makes any representation as to the information contained in this report relating to Con Edison or the subsidiaries of Con Edison other than itself.
O&R, a wholly-owned subsidiary of Con Edison, meets the conditions specified in General Instruction H of Form 10-Q and is permitted to use the reduced disclosure format for wholly-owned subsidiaries of companies, such as Con Edison, that are reporting companies under the Securities Exchange Act of 1934. Accordingly, O&R has omitted from this report the information called for by Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations and has included in this report its Management's Narrative Analysis of the Results of Operations. In accordance with general instruction H, O&R has also omitted from this report the information, if any, called for by Part I, Item 3, Quantitative and Qualitative Disclosure About Market Risk; Part II, Item 2, Changes in Securities and Use of Proceeds; Part II, Item 3, Defaults Upon Senior Securities; and Part II, Item 4, Submission of Matters to a Vote of Security Holders.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements, which are statements of future expectation and not facts. Words such as "estimates," "expects," "anticipates," "intends," "plans" and similar expressions identify forward-looking statements. Actual results or developments might differ materially from those included in the forward-looking statements because of factors such as competition and industry restructuring, developments relating to the company's nuclear generating unit (which it sold in September 2001—see Note C to the Con Edison financial statements in Part I, Item 1 of this report), developments relating to Northeast Utilities (see Note D to the Con Edison financial statements in Part I, Item 1 of this report), developments relating to the World Trade Center attack (See "World Trade Center Attack" in Part I, Item 2 of this report), developments in wholesale energy markets, technological developments, changes in economic conditions, changes in historical weather patterns, changes in laws, regulations or regulatory policies, developments in legal or public policy doctrines, and other presently unknown or unforeseen factors.
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Consolidated Edison, Inc. CONSOLIDATED BALANCE SHEET (Unaudited)
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The accompanying notes are an integral part of these financial statements.
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Consolidated Edison, Inc. CONSOLIDATED INCOME STATEMENT
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Consolidated Edison, Inc. CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)
Consolidated Edison, Inc. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
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Consolidated Edison, Inc. CONSOLIDATED STATEMENT OF CASH FLOWS
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NOTES TO FINANCIAL STATEMENTS - CON EDISON
Note A - General
These footnotes accompany and form an integral part of the interim consolidated financial statements of Consolidated Edison, Inc. (Con Edison) and its subsidiaries, including the regulated utility Consolidated Edison Company of New York, Inc. (Con Edison of New York), the regulated utility Orange and Rockland Utilities, Inc. (O&R) and several non-utility subsidiaries. These financial statements are unaudited but, in the opinion of Con Edison's management, reflect all adjustments (which include only normally recurring adjustments) necessary for a fair statement of the results for the interim periods presented. These financial statements should be read together with the audited Con Edison financial statements (including the notes thereto) included in the combined Con Edison, Con Edison of New York and O&R Annual Reports on Form 10-K for the year ended December 31, 2000 (the Form 10-K).
Recoverable Energy Costs
Con Edison's utility subsidiaries generally recover all of their prudently incurred fuel, purchased power and gas costs in accordance with rate provisions approved by their state public utility commissions. At September 30, 2001, Con Edison's New Jersey utility subsidiary, Rockland Electric Company, had deferred $73.5 million of such costs for charge to customers in the manner and at such time as is to be determined by the New Jersey Board of Public Utilities. See "Recoverable Energy Costs" in Note A to the Con Edison financial statements included in Item 8 of the Form 10-K.
Guarantees of Subsidiary Obligations
Con Edison has guaranteed certain obligations of its subsidiaries in an aggregate amount of approximately $1 billion at September 30, 2001. Con Edison does not expect to incur losses as a result of the guarantees. See "Guarantees of Subsidiary Obligations" in Note A to the Con Edison financial statements included in Item 8 of the Form 10-K.
Earnings Per Common Share
For the three months ended September 30, 2001 and 2000, the weighted average number of shares used to calculate the diluted earnings per common share included dilutive common stock equivalents of approximately 213,171,000 shares and 212,069,000 shares, respectively. For the nine months ended September 30, 2001 and 2000, the weighted average number of shares used to calculate the diluted earnings per common share included dilutive common stock equivalents of 212,870,000 shares and 213,319,000 shares, respectively. See "Earnings Per Common Share" in Note A to the Con Edison financial statements included in Item 8 of the Form 10-K.
New Accounting Standards
During 2001, the Financial Accounting Standards Board has issued four new accounting standards: Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets," SFAS No. 143, "Accounting for Asset Retirement Obligations" and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The company has not yet determined the impact the new accounting standards will have on its financial statements.
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SFAS No. 141 requires that all business combinations initiated after June 30, 2001 use the purchase method of accounting, which includes recognition of goodwill.
SFAS No. 142, which the company is required to adopt on January 1, 2002, provides that goodwill, including amounts previously recognized under the purchase method, will no longer be subject to amortization and instead will be subject to periodic reviews for impairment. If determined to be impaired, goodwill will be reduced to its fair value and an impairment charge will be recognized in income. Con Edison is required to determine whether or not its goodwill is impaired following its adoption of SFAS 142. In accordance with SFAS 142, Con Edison is also required to review its goodwill for impairment each year and whenever an event or series of events occurs indicating that goodwill might be impaired.
SFAS No. 143, which the company is required to adopt on January 1, 2003, requires entities to record the fair value of a liability associated with an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes the cost by increasing the carrying amount of the related asset. The liability is increased to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. Upon retirement of the asset, the entity either settles the obligation for the amount recorded or incurs a gain or loss.
SFAS No. 144, which the company is required to adopt on January 1, 2002, replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing or discontinued operations. The statement also broadens the reporting of discontinued operations.
Note B - Environmental Matters
Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or generated in the course of operations of Con Edison's utility subsidiaries and may be present in their facilities and equipment.
The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (Superfund) and similar state statutes impose joint and several strict liability, regardless of fault, upon generators of hazardous substances for resulting removal and remedial costs and environmental damages. Liabilities under these laws can be material and in some instances may be imposed without regard to fault, or may be imposed for past acts, even though such past acts may have been lawful at the time they occurred.
At September 30, 2001, Con Edison had accrued $130.9 million as its best estimate of the utility subsidiaries' liability for sites as to which they have received process or notice alleging that hazardous substances generated by them (and, in most instances, other potentially responsible parties) were deposited. There will be additional liability at these sites and other sites, the amount of which is not presently determinable but may be material to Con Edison's financial position, results of operations or liquidity.
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Con Edison's utility subsidiaries are permitted under current rate agreements to defer for subsequent recovery through rates certain site investigation and remediation costs with respect to hazardous waste. At September 30, 2001, $60.6 million of such costs had been deferred as regulatory assets.
Suits have been brought in New York State and federal courts against Con Edison's utility subsidiaries 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 utility subsidiaries. Many of these suits have been disposed of without any payment by the utility subsidiaries, or for immaterial amounts. The amounts specified in all the remaining suits total billions of dollars but Con Edison believes that these amounts are greatly exaggerated, as were the claims already disposed of. Based on the information and relevant circumstances known to Con Edison at this time, it does not believe that these suits will have a material adverse effect on its financial position, results of operations or liquidity.
Note C - Nuclear Generation
In September 2001, the sale of Con Edison of New York's nuclear generating unit and related assets, and the transfer to the buyer of the company's nuclear decommissioning trust funds, was completed. The net after-tax loss from the sale, which has been deferred as a regulatory asset, was $166.5 million. The loss on the sale is recoverable from customers pursuant to the agreements covering the company's electric rates, which provide that the company "will be given a reasonable opportunity to recover stranded and strandable costs remaining at March 31, 2005, including a reasonable return on investments, under the parameters and during the time periods set forth therein." See"Rate and Restructuring Agreements" in Note A to the Con Edison financial statements included in Item 8 of the Form 10-K.
The New York State Public Service Commission (PSC) is investigating the February 2000 to January 2001 outage of the nuclear generating unit, its causes and the prudence of the company's actions regarding the operation and maintenance of the generating unit. An appeal is pending in the United States Court of Appeals for the Second Circuit of the October 2000 decision by the United States District Court for the Northern District of New York, in an action entitled Consolidated Edison Company of New York, Inc. v. Pataki, et al., in which the court determined that the law that directed the PSC to prohibit the company from recovering replacement power costs for the outage from customers was unconstitutional and granted the company's motion for a permanent injunction to prevent its implementation. The company is unable to predict whether or not any proceedings, lawsuits, legislation or other actions relating to the nuclear generating unit will have a material adverse effect on its financial position, results of operations or liquidity. For additional information, see Note G to Con Edison's financial statements included in Item 8 of the Form 10-K.
Note D - Northeast Utilities
In May 2001, Con Edison amended its complaint against Northeast Utilities in the proceeding it commenced in March 2001 in the United States District Court for the Southern District of New York, entitled Consolidated Edison, Inc. v. Northeast Utilities, with respect to their agreement and plan of merger, dated as of October 13, 1999, as amended and restated as of January 11, 2000 (the merger agreement). As amended, Con Edison's complaint seeks, among other things, recovery of damages
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sustained by it as a result of the material breach of the merger agreement by Northeast Utilities and the court's declaration that under the merger agreement Con Edison has no further or continuing obligations to Northeast Utilities, and that Northeast Utilities has no further or continuing rights as against Con Edison.
In June 2001, Northeast Utilities withdrew the separate action it commenced in March 2001 in the same court and filed as a counter-claim to Con Edison's amended complaint its claim that Con Edison materially breached the merger agreement and that as a result Northeast Utilities and its shareholders have suffered substantial damages, including the difference between the consideration to be paid to Northeast Utilities shareholders pursuant to the merger agreement and the current market value of Northeast Utilities common stock, expenditures in connection with regulatory approvals and lost business opportunities. Pursuant to the merger agreement, Con Edison agreed to acquire Northeast Utilities for $26.00 per share (an estimated aggregate of not more than $3.9 billion) plus $0.0034 per share for each day after August 5, 2000 through the day prior to the completion of the transaction, payable 50 percent in cash and 50 percent in stock.
Con Edison believes that Northeast Utilities has materially breached the merger agreement and that Con Edison has not materially breached the merger agreement and is not obligated to acquire Northeast Utilities because Northeast Utilities does not meet the merger agreement's conditions that Northeast Utilities perform all of its obligations under the merger agreement, including the obligation that it carry on its businesses in the ordinary course consistent with past practice; that the representations and warranties made by it in the merger agreement were true and correct when made and remain true and correct; and that there be no material adverse change with respect to Northeast Utilities. Con Edison is unable to predict whether or not any Northeast Utilities-related lawsuits or other actions will have a material adverse effect on Con Edison's financial position, results of operations or liquidity.
Note E - Derivative Instruments and Hedging Activities
As of January 2001, Con Edison adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities — an amendment of FASB Statement No. 133" (collectively, SFAS No. 133).
Energy Price Hedging
Con Edison's subsidiaries use derivative financial instruments to hedge market price fluctuations in related underlying transactions for the physical purchase or sale of electricity and gas (Hedges).
Con Edison's utility subsidiaries, pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71), defer recognition in income of gains and losses on a Hedge until the underlying transaction is completed. Pursuant to rate provisions that permit the recovery of the cost of purchased power and gas, Con Edison's utility subsidiaries credit or charge to their customers gains or losses on Hedges and related transaction costs. See "Recoverable Energy Costs" in Note A to the company's financial statements included in Item 8 of the Form 10-K. To the extent SFAS No. 71 does not allow deferred recognition in income, Con Edison's utility subsidiaries have elected special hedge
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accounting pursuant to SFAS No. 133 (Cash Flow Hedge Accounting). Consolidated Edison Solutions, Inc., a wholly-owned subsidiary of Con Edison (which provides competitive gas and electric supply and energy-related products and services), has also elected Cash Flow Hedge Accounting.
Pursuant to Cash Flow Hedge Accounting, except as described in the following paragraph, the mark-to-market unrealized gain or loss on each Hedge is recorded in other comprehensive income and reclassified to income at the time the underlying transaction is completed. Upon adoption of SFAS No. 133, Con Edison's subsidiaries recognized after-tax transition gains of $1.6 million in other comprehensive income and $0.4 million in income. For the quarter and nine month period ended September 30, 2001, the company reclassified to income from accumulated other comprehensive income after-tax net losses relating to Hedges of $8.4 million and $8.9 million, respectively. These losses, which were recognized in net income as fuel or purchased power costs, were largely offset by inverse changes in the market value of the underlying commodities.
Under Cash Flow Hedge Accounting, any gain or loss relating to any portion of the Hedge determined to be "ineffective" is recognized in income in the period in which such determination is made. As a result, changes in value of a Hedge may be recognized in income in an earlier period than the period in which the underlying transaction is recognized in income. The company expects, however, that these changes in values will be offset, at least in part, when the underlying transactions are recognized in income. For the quarter and nine-month periods ended September 30, 2001, Con Edison Solutions recognized in income mark-to-market unrealized pre-tax net losses of $1.1 million and $11.0 million, respectively, relating primarily to derivative transactions that were determined to be "ineffective."
As of September 30, 2001, the subsidiaries' Hedges for which Cash Flow Hedge Accounting was used were for a term of less than two years and $7.5 million of losses relating to such Hedges were expected to be reclassified from accumulated other comprehensive income to income within the next 12 months.
Consolidated Edison Energy, Inc., a wholly-owned subsidiary of Con Edison (which markets specialized energy supply services to wholesale customers), enters into over-the-counter and exchange traded contracts for the purchase and sale of electricity, and installed capacity gas or oil (which may provide for either physical or financial settlement) and is considered an "energy trading organization" required to account for such trading activities in accordance with FASB Emerging Issues Task Force Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities". With respect to such contracts, the company recognized in income unrealized mark-to-market pre-tax net losses of $2.4 million and $0.8 million in the quarter and nine month period ended September 30, 2001, respectively. Con Edison Energy has also entered into transactions for another subsidiary of Con Edison, as to which the company recognized in income an unrealized mark-to-market pre-tax net loss of $1.8 million in the quarter and an unrealized mark-to-market pre-tax net gain of $5.8 million in the nine month period ended September 30, 2001.
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Interest Rate Hedging
O&R and Consolidated Edison Development, Inc., a wholly-owned subsidiary of Con Edison (which invests in and manages energy infrastructure projects), use Cash Flow Hedge Accounting for their interest rate swap agreements.
In connection with its $55 million promissory note issued to the New York State Energy Research and Development Authority for the net proceeds of the Authority's variable rate Pollution Control Refunding Revenue Bonds, 1994 Series A (the 1994 Bonds), O&R has a swap agreement pursuant to which it pays interest at a fixed rate of 6.09 percent and is paid interest at the same variable rate as is paid on the 1994 Bonds. Upon adoption of SFAS No. 133, the company recognized after-tax transition adjustment losses relating to the swap agreement of $8.1 million in other comprehensive income. In the quarter and nine-month period ended September 30, 2001, the company reclassified $0.3 million and $0.8 million, respectively, of such losses from accumulated other comprehensive income to income. As of September 30, 2001, $1.2 million of losses relating to the swap agreement were expected to be reclassified from accumulated other comprehensive income to income within the next 12 months. If the swap agreement had been terminated on September 30, 2001, O&R would have been required to pay approximately $16.2 million.
In connection with $95 million of variable rate loans undertaken relating to the Lakewood electric generating plant, Con Edison Development has swap agreements pursuant to which it pays interest at a fixed rate of 6.68 percent and is paid interest at a variable rate equal to the three-month London Interbank Offered Rate. Upon adoption of SFAS No. 133, the company recognized after-tax transition adjustment losses relating to the swap agreements of $1.6 million in other comprehensive income. In the quarter and nine-month period ended September 30, 2001, the company reclassified $0.4 million and $0.6 million, respectively, of such losses from accumulated other comprehensive income to income. As of September 30, 2001, $1.7 million of losses relating to the swap agreements were expected to be reclassified from accumulated other comprehensive income to income within the next 12 months. If these swap agreements had been terminated on September 30, 2001, Con Edison Development would have been required to pay approximately $7.6 million.
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Comprehensive Income
Unrealized market-to-market gains/(losses) on derivatives included in accumulated other comprehensive income was as follows:
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Note F - Financial Information by Business Segment
Consolidated Edison, Inc. SEGMENT FINANCIAL INFORMATION $000's
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Consolidated Edison Company of New York, Inc. CONSOLIDATED BALANCE SHEET (Unaudited)
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Consolidated Edison Company of New York, Inc. CONSOLIDATED INCOME STATEMENT
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Consolidated Edison Company of New York, Inc. CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)
Consolidated Edison Company of New York, Inc. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
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Consolidated Edison Company of New York, Inc. CONSOLIDATED STATEMENT OF CASH FLOWS
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NOTES TO FINANCIAL STATEMENTS - CON EDISON OF NEW YORK
These footnotes accompany and form an integral part of the interim consolidated financial statements of Consolidated Edison Company of New York, Inc. (Con Edison of New York) and its subsidiaries. Consolidated Edison, Inc. (Con Edison) owns all of the outstanding common stock of Con Edison of New York. These financial statements are unaudited but, in the opinion of Con Edison of New York's management, reflect all adjustments (which include only normally recurring adjustments) necessary for a fair statement of the results for the interim periods presented. These financial statements should be read together with the audited Con Edison of New York financial statements (including the notes thereto) included in the combined Con Edison, Con Edison of New York and Orange and Rockland Utilities, Inc. Annual Reports on Form 10-K for the year ended December 31, 2000 (the Form 10-K).
Reference is made to Note A to the Con Edison financial statements included in Part 1, Item 1 of this report for a description of four new accounting standards that the Financial Accounting Standards Board has issued in 2001. The company has not yet determined the impact the new accounting standards will have on its financial statements.
Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or generated in the course of operations of Con Edison of New York and may be present in its facilities and equipment.
At September 30, 2001, Con Edison of New York had accrued $92.4 million as its best estimate of its liability for sites as to which it has received process or notice alleging that hazardous substances generated by the company and, in most instances, other potentially responsible parties) were deposited. There will be additional liability at these sites and other sites, the amount of which is not presently determinable but may be material to the company's financial position, results of operations or liquidity.
Under Con Edison of New York's current electric, gas and steam rate agreements, site investigation and remediation costs in excess of $5 million annually incurred with respect to hazardous waste for which it is responsible are to be deferred and subsequently reflected in rates. At September 30, 2001, $20.5 million of such costs had been deferred as regulatory assets.
Suits have been brought in New York State and federal courts against Con Edison of New York 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
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the company. Many of these suits have been disposed of without any payment by the company, or for immaterial amounts. The amounts specified in all the remaining suits total billions of dollars but the company believes that these amounts are greatly exaggerated, as were the claims already disposed of. Based on the information and relevant circumstances known to the company at this time, it does not believe that these suits will have a material adverse effect on its financial position, results of operations or liquidity.
In September 2001, the sale of Con Edison of New York's nuclear generating unit and related assets, and the transfer to the buyer of the company's nuclear decommissioning trust funds, was completed. The net after-tax loss from the sale, which has been deferred as a regulatory asset, was $166.5 million. The loss on the sale is recoverable from customers pursuant to the agreements covering the company's electric rates, which provide that the company "will be given a reasonable opportunity to recover stranded and strandable costs remaining at March 31, 2005, including a reasonable return on investments, under the parameters and during the time periods set forth therein." See "Rate and Restructuring Agreements" in Note A to the Con Edison of New York financial statements included in Item 8 of the Form 10-K.
The New York State Public Service Commission (PSC) is investigating the February 2000 to January 2001 outage of the nuclear generating unit, its causes and the prudence of the company's actions regarding the operation and maintenance of the generating unit. An appeal is pending in the United States Court of Appeals for the Second Circuit of the October 2000 decision by the United States District Court for the Northern District of New York, in an action entitled Consolidated Edison Company of New York, Inc. v. Pataki, et al., in which the court determined that the law that directed the PSC to prohibit the company from recovering replacement power costs for the outage from customers was unconstitutional and granted the company's motion for a permanent injunction to prevent its implementation. The company is unable to predict whether or not any proceedings, lawsuits, legislation or other actions relating to the nuclear generating unit will have a material adverse effect on its financial position, results of operations or liquidity. For additional information, see Note G to Con Edison of New York's financial statements included in Item 8 of the Form 10-K.
Note D - Derivative Instruments and Hedging Activities
As of January 2001, Con Edison of New York adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities — an amendment of FASB Statement No. 133" (collectively, SFAS No. 133).
Con Edison of New York uses derivative financial instruments to hedge market price fluctuations in related underlying transactions for the physical purchase or sale of electricity and gas (Hedges).
Pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," the company defers recognition in income of gains and losses on a Hedge until the underlying transaction is completed. Pursuant to rate provisions that permit the recovery of the cost of purchased power and gas, the company credits or charges to its customers gains or losses on Hedges and related transaction costs.
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See "Recoverable Energy Costs" in Note A to the company's financial statements included in Item 8 of the Form 10-K. To the extent SFAS No. 71 does not allow deferred recognition in income, the company has elected special hedge accounting pursuant to SFAS No. 133 (Cash Flow Hedge Accounting).
Pursuant to Cash Flow Hedge Accounting, the mark-to-market unrealized gain or loss on each Hedge is recorded in other comprehensive income and reclassified to income at the time the underlying transaction is completed (except that any gain or loss relating to any portion of the Hedge determined to be "ineffective" is recognized in income in the period in which such determination is made).
Upon adoption of SFAS No. 133, the company had no transition adjustments to recognize in other comprehensive income. For the quarter and nine month period ended September 30, 2001, the company reclassified to income from accumulated other comprehensive income after-tax net losses relating to Hedges of $2.2 million and $2.7 million, respectively. These losses, which were recognized in net income as purchased power costs, were largely offset by inverse changes in the market value of the underlying commodity. As of September 30, 2001, Hedges for which Cash Flow Hedge Accounting was used were for a term of less than 12 months and $0.3 million of losses relating to such Hedges were expected to be reclassified from accumulated other comprehensive income to income within the next 12 months.
Unrealized mark-to-market gains/(losses) on derivatives included in accumulated other comprehensive income was as follows:
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Note E - Financial Information by Business Segment
Consolidated Edison Company of New York, Inc. SEGMENT FINANCIAL INFORMATION $000's
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Orange and Rockland Utilities, Inc. CONSOLIDATED BALANCE SHEET (Unaudited)
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Orange And Rockland Utilities, Inc. CONSOLIDATED INCOME STATEMENT
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Orange and Rockland Utilities, Inc. CONSOLIDATED INCOME STATEMENT
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Orange and Rockland Utilities, Inc. CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)
Orange and Rockland Utilities, Inc. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
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Orange and Rockland Utilities, Inc. CONSOLIDATED STATEMENT OF CASH FLOWS
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NOTES TO FINANCIAL STATEMENTS - O&R
These footnotes accompany and form an integral part of the interim consolidated financial statements of Orange and Rockland Utilities, Inc. (O&R), a wholly-owned subsidiary of Consolidated Edison, Inc. (Con Edison). These financial statements are unaudited but, in the opinion of O&R's management, reflect all adjustments (which include only normally recurring adjustments) necessary for a fair statement of the results for the interim periods presented. These financial statements should be read together with the audited O&R financial statements (including the notes thereto) included in the combined Con Edison, Consolidated Edison Company of New York, Inc. (Con Edison of New York) and O&R Annual Reports on Form 10-K for the year ended December 31, 2000.
O&R and it's New Jersey utility subsidiary, Rockland Electric Company (RECO), generally recover all of their prudently incurred purchased power and gas costs in accordance with rate provisions approved by their state public utility commissions. At September 30, 2001, RECO had $73.5 million of purchase power costs deferred for charge to customers in the manner and at such time as is to be determined by the New Jersey Board of Public Utilities. See "Rate Regulation" and "Energy Costs" in Note A to the O&R financial statements included in Item 8 of the Form 10-K.
Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or generated in the course of operations of O&R and may be present in its facilities and equipment.
At September 30, 2001, O&R had accrued $38.5 million as its best estimate of its liability for sites as to which it has received process or notice alleging that hazardous substances generated by the company (and, in most instances, other potentially responsible parties) were deposited. There will be additional liability at these sites and other sites, including the costs of investigating and remediating sites where the company or its predecessors manufactured gas. The total amount of liability is not presently determinable but may be material to the company's financial position, results of operations or liquidity.
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Under O&R's current gas rate agreement, O&R may defer for subsequent recovery through rates the cost of investigating and remediating manufactured gas sites. At September 30, 2001, $40.1 million of such costs had been deferred as a regulatory asset.
Suits have been brought in New York State and federal courts against O&R 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 company. Many of these suits have been disposed of without any payment by O&R, or for immaterial amounts. The amounts specified in all the remaining suits total billions of dollars but the company believes that these amounts are greatly exaggerated, as were the claims already disposed of. Based on the information and relevant circumstances known to the company at this time, it does not believe that these suits will have a material adverse effect on its financial position, results of operations or liquidity.
In May 2000, the New York State Department of Environmental Conservation (DEC) issued notices of violation to O&R and four other companies that have operated coal — fired electric generating facilities in New York State. The notices allege violations of the federal Clean Air Act and the New York State Environmental Conservation law resulting from the alleged failure of the companies to obtain DEC permits for physical modifications to their generating facilities and to install pollution control equipment that would have reduced harmful emissions. The notice of violation received by O&R relates to the Lovett Generating Station that it sold in June 1999. O&R is unable to predict whether or not the alleged violations will have a material adverse effect on its financial position, results of operations or liquidity.
Note C - Related Party Transactions
O&R is invoiced monthly by Con Edison and its affiliates for the cost of any services they render to the company. These services, provided primarily by Con Edison of New York, include substantially all administrative support operations such as corporate directorship and associated ministerial duties, accounting, treasury, investor relations, information resources, legal, human resources, fuel supply and energy management services. The cost of these services totaled $10.4 million during the first nine months of 2001. In addition, O&R purchased $114.8 million of gas and $26.5 million of electricity (including the cost of energy price hedging) from Con Edison of New York during this period. See Note D for information about energy price hedging which Con Edison of New York entered into on behalf of O&R.
O&R provides certain recurring services to Con Edison of New York on a monthly basis, including cash receipts processing and certain other services. The cost of these services totaled $8.2 million during the first nine months of 2001.
As of January 2001, O&R adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities —an amendment of FASB Statement No. 133" (collectively, SFAS No. 133).
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O&R uses derivative financial instruments to hedge market price fluctuations in related underlying transactions for the physical purchase or sale of electricity and gas (Hedges).
Pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation", the company defers recognition in income of gains and losses on a Hedge until the underlying transaction is completed. Pursuant to rate provisions that permit the recovery of the cost of purchased power and gas, the company credits or charges to its customers gains or losses on Hedges and related transaction costs. See "Rate Regulation" and "Energy Costs" in Note A to the company's financial statements included in Item 8 of the Form 10-K. Upon adoption of SFAS No. 133, the company had no transition adjustments relating to Hedges to recognize in other comprehensive income.
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Orange and Rockland Utilities, Inc. SEGMENT FINANCIAL INFORMATION $000's
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CON EDISON
Consolidated Edison, Inc. (Con Edison) is a holding company that operates only through its subsidiaries and has no material assets other than the stock of its subsidiaries. Con Edison's principal subsidiaries are regulated utilities: Consolidated Edison Company of New York, Inc. (Con Edison of New York) and Orange and Rockland Utilities, Inc. (O&R). Con Edison also has several unregulated subsidiaries.
The following discussion and analysis, which relates to the interim consolidated financial statements of Con Edison and its subsidiaries (including Con Edison of New York and O&R) included in Part I, Item 1 of this report, should be read in conjunction with Con Edison's Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of the combined Con Edison, Con Edison of New York and O&R Annual Reports on Form 10-K for the year ended December 31, 2000 (File Nos. 1-14514, 1-1217 and 1-4315, the Form 10-K) and Con Edison's Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of the combined Con Edison, Con Edison of New York and O&R Quarterly Reports on Form 10-Q for the quarterly period ended March 31, 2001 and June 30, 2001. Reference is also made to the notes to the Con Edison financial statements in Part I, Item 1 of this report, which notes are incorporated herein by reference.
Liquidity and Capital Resources
Cash and temporary cash investments and outstanding notes payable (principally commercial paper) at September 30, 2001 and December 31, 2000 were:
The increase in cash and temporary cash investments at September 30, 2001 compared with December 31, 2000 reflects primarily the net cash flows from the sales of the company's nuclear generating unit and its interest in another generating plant.
Cash Flows from Operating Activities
Net cash flows from operating activities during the first nine months of 2001 increased $83.3 million compared with the first nine months of 2000, reflecting principally increased net income and decreased accounts receivable and recoverable energy costs, offset in part by increased accrued pension credits and decreased accounts payable.
Customer accounts receivable, less allowance for uncollectible accounts, was $46.7 million lower at September 30, 2001 than at year-end 2000, due primarily to lower customer billings by Con Edison's non-utility subsidiaries, reflecting reduced gas volumes in September 2001 as compared to December 2000 and lower energy costs, offset in part by the timing of customer payments. Con Edison of New York's equivalent number of days of revenue outstanding (ENDRO) of customer accounts receivable was 29.8 days at September 30, 2001 compared with 29.7 days at December 31, 2000. For O&R, the ENDRO was 52.8 days at September 30, 2001 and 35.4 days at December 31, 2000. The O&R
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ENDRO at September 30, 2001 reflects amounts due from a major customer that were paid in October 2001; excluding this customer O&R's ENDRO at September 30, 2001 would have been 46.2 days.
Prepayments include cumulative credits to pension expense for Con Edison of New York amounting to $615.5 million at September 30, 2001 compared with $366.7 million at December 31, 2000. Pension credits, which result primarily from favorable performance by the company's pension fund in past years, increase net income but do not provide cash for the company's operations. See Note D to the Con Edison financial statements included in Item 8 of the Form 10-K.
The regulatory asset for deferred recoverable energy costs decreased $146.4 million at September 30, 2001 compared with December 31, 2000, due primarily to the ongoing recovery of previously deferred amounts, offset in part by the deferral for future recovery of additional purchased power and gas costs. See "Recoverable Energy Costs" in Note A to the Con Edison financial statements included in Part I, Item 1 of this report.
In September 2001, Con Edison of New York completed the sale of its nuclear generating unit and related assets, and the transfer to the buyer of its nuclear decommissioning trust funds. The resulting loss of $166.5 million has been deferred as a regulatory asset for future recovery under the terms of the agreements covering the company's electric rates. In addition the regulatory asset for future federal income tax was reduced by $89.0 million to reflect the loss. See Note C to the Con Edison financial statements included in Part I, Item 1 of this report.
The regulatory asset for World Trade Center incident is for the company's non-capital costs relating to the September 11, 2001 attack. See "World Trade Center Attack", below.
The accumulated provision for injuries and damages increased $16.4 million at September 30, 2001 compared with year-end 2000, due primarily to increased workers' compensation claims.
Unfunded pension and other post-employment benefit (OPEB) obligations (shown as pension and benefit reserve on the balance sheet) increased $31.8 million at September 30, 2001 compared with year-end 2000. Con Edison of New York's policy is to fund its pension and OPEB costs to the extent deductible under current tax regulations. O&R's policy is to fund the amounts recovered in rates for its pension and OPEB costs to the extent those contributions are tax deductible. The reserve also includes a minimum liability for supplemental executive retirement programs, a portion of which liability has been included in other comprehensive income. See Note E to the Con Edison financial statements included in Item 8 of the Form 10-K.
Accounts payable decreased $283.9 million at September 30, 2001 compared with year-end 2000, due primarily to lower energy purchases in September 2001 as compared to December 2000, offset in part by higher energy costs.
Accrued taxes increased $71.6 million at September 30, 2001 compared with year-end 2000, due principally to timing differences.
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Regulatory liabilities increased $39.6 million at September 30, 2001 compared with year-end 2000, reflecting the deferral pending future disposition by the New York State Public Service Commission (PSC) of a $77.6 million refund from the New York Independent System Operator resulting from bill reconciliations. This increase was offset in part by a reduction of $18.2 million of previously deferred gas credits and other provisions of the gas rate agreement approved by the PSC in November 2000. The decrease of $16.7 million in NYPA revenue deficiency represents the amortization of the New York Power Authority revenue deficiency pursuant to the terms of the agreements covering the company's electric rates.
Other deferred credits increased $16.1 million at September 30, 2001 compared with year-end 2000, reflecting $23.8 million of interest rate swap agreements related to O&R and Con Edison Development. If the swaps had been terminated on September 30, 2001, O&R and Con Edison Development would have been required to pay approximately $16.2 million and $7.6 million, respectively. See Note E to the Con Edison financial statements included in Part I, Item 1 of this report.
Cash Flows Used in Investing and Financing Activities
Cash flows used in investing activities during the first nine months of 2001 decreased $720.4 million compared with the first nine months of 2000, reflecting the receipt of proceeds from the sale of the company's nuclear generating unit and related assets ($553.7 million, net of federal income tax), and the sale of the company's 480 MW interest in the Roseton generating station in January 2001 ($100.0 million, net of federal income tax) and decreased investment in non-utility plant ($205.4 million). The proceeds from the sales were partially offset by additional payments made to the nuclear decommissioning trust funds in connection with their transfer to the buyer of the nuclear generating unit ($73.8 million) and increased construction expenditures ($88.2 million). Construction expenditures increased principally to meet load growth on Con Edison of New York's electric distribution system. Cash used in investment in non-utility plant decreased in the 2001 period, primarily because the 2000 period included the $96.3 million purchase of an 80 percent interest in a 200 MW electric generating unit in Lakewood, New Jersey.
Cash flows used in financing activities during the first nine months of 2001 increased $54.1 million compared with the first nine months of 2000. The company issued $246.5 million of long-term debt, net of retirements, in the 2001 period compared with $463.7 million in the 2000 period.
In June 2001 Con Edison of New York issued $400 million of 7.5 percent 40-year debentures. In addition, Con Edison of New York issued $224.6 million of variable rate 35-year tax-exempt debt (with an initial weekly rate of 2.25 percent) through the New York State Energy Research and Development Authority (NYSERDA), the proceeds of which (along with other funds of the company) were used in July 2001 to redeem, in advance of maturity, $228.2 million of tax-exempt debt with a weighted average interest rate of 7.2 percent.
World Trade Center Attack
Con Edison of New York estimates that it will incur approximately $400 million of costs for emergency response, temporary restoration and permanent replacement of electric, gas and steam transmission and
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distribution facilities damaged as a result of the September 11, 2001 attack on the World Trade Center. Most of the costs are expected to be capital in nature. The company estimates that its insurers will cover approximately $65 million of the costs. The company is seeking Federal reimbursement of the remaining costs. At September 30, 2001, the company had capitalized $12 million of such costs as utility plant and deferred $35.6 million of such costs as a regulatory asset.
A number of buildings to which Con Edison of New York supplied utility service were destroyed or severely damaged as a result of the attack. Annual net after-tax revenues in 2000 for electric, gas and steam services to these buildings were approximately $15 million.
Capital Resources
Con Edison's ratio of earnings to fixed charges (for the 12 months ended on the date indicated) and common equity ratio (as of the date indicated) were:
* Common shareholders' equity as a percentage of total capitalization
Con Edison's ratio of earnings to fixed charges increased for the 12-month period ending September 30, 2001 compared to the 12-month period ending December 31, 2000 as a result of increased earnings, offset in part by increased interest expense. Excluding charges of $130 million for replacement power costs related to an outage of the company's nuclear generating unit (which it sold in September 2001; see Note C to the Con Edison financial statements included in Part I, Item 1 of this report and Note G to the Con Edison financial statements included in Item 8 of the Form 10-K) and a $36 million charge for merger-related expenses (see Note P to the Con Edison financial statements included in Item 8 of the Form 10-K), Con Edison's ratio of earnings to fixed charges would have been 3.48 and 3.47 for the 12-month periods ended September 30, 2001 and December 31, 2000, respectively.
FERC RTO Order
In July 2001, the Federal Energy Regulatory Commission (FERC) concluded that the three independent system operators in the Northeastern United States, including the New York Independent System Operator (NYISO), should combine to form one regional transmission organization (RTO) and initiated a process with respect to issues associated with its formation. The terms and conditions pursuant to which an RTO for the Northeastern United States would be formed and operate have not been determined. FERC has, however, indicated that an RTO should have certain characteristics, including independence from market participants and operational authority for all transmission assets under its control, and perform certain functions, including tariff administration and design, congestion management, market monitoring, planning and expansion and interregional coordination. Con Edison of New York's transmission facilities, other than those located underground, and O&R's transmission facilities are controlled and operated by the NYISO. For a description of the transmission facilities, see Item 2 of the Form 10-K.
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Market Risks
Reference is made to "Financial Market Risks" in the Con Edison Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of the Form 10-K and to Note E to the Con Edison financial statements included in Part I, Item 1 of this report. At September 30, 2001 neither the fair value of derivatives outstanding nor potential derivative losses from reasonably possible near-term changes in market prices were material to the financial position, results of operations or liquidity of the company.
Environmental Matters
For information concerning potential liabilities of the company arising from laws and regulations protecting the environment, including the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (Superfund), see the notes to Con Edison's financial statements included in Part I, Item 1 of this report.
Results of Operations
Third Quarter of 2001 Compared with Third Quarter of 2000
Con Edison's net income for common stock for the third quarter of 2001 was $277.3 million or $1.31 a share (based upon an average of 212.2 million common shares outstanding) compared with $279.9 million or $1.32 a share (based upon an average of 212.0 million common shares outstanding) for the third quarter of 2000. On a diluted basis Con Edison's earnings per share for the third quarter were $1.30 a share. The decrease in the company's net income reflects electric rate reductions in the 2001 period, offset in part by higher sales volumes and increased pension credits, as well as non-recurring charges relating to Con Edison of New York's nuclear replacement power costs in the 2000 period (see Note C to the Con Edison financial statements included in Part I, Item 1 of this report and Note G to the Con Edison financial statements included in Item 8 of the Form 10-K). The September 11, 2001 attack on the World Trade Center did not significantly affect the company's results of operations for the 2001 period. See "Liquidity and Capital Resources-World Trade Center Attack," above.
Earnings for the quarters ended September 30, 2001 and 2000 were as follows:
* Includes parent company expenses, goodwill amortization and inter-company eliminations.
A comparison of the results of operations of Con Edison for the third quarter of 2001 with the results for the third quarter of 2000 follows.
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Three Months Ended September 30, 2001 Compared With Three Months Ended September 30, 2000
A discussion of Con Edison's operating revenues and operating income by business segment follows. Con Edison's principal business segments are its regulated electric, gas and steam utility businesses. For additional information about the segments, see Note F to the Con Edison financial statements included in Part I, Item 1 of this report.
Electric
Con Edison's electric operating revenues in the third quarter of 2001 decreased $80.9 million compared with the third quarter of 2000, reflecting lower purchased power costs (discussed below) and rate reductions of approximately $89.2 million in the 2001 period, partially offset by higher sales volume in the 2001 period. See "Recoverable Energy Costs" and "Rate and Restructuring Agreements" in Note A to the Con Edison financial statements included in Item 8 of the Form 10-K.
Electricity sales volumes for Con Edison's utility subsidiaries increased 6.0 percent in the third quarter of 2001 compared with the third quarter of 2000. The increase in sales volume reflects the warmer 2001 weather compared to the 2000 period and continued sales growth. Con Edison of New York and O&R electric sales volumes for these periods are shown at the bottom of their consolidated income statements included in Part I, Item 1 of this report. After adjusting for variations, principally weather and billing days, in each period, electricity sales volumes for Con Edison of New York and O&R increased 3.3 percent and decreased 0.4 percent, respectively, in the 2001 period. Weather-adjusted sales represent an estimate of the sales that would have been made if historical average weather conditions had prevailed.
Purchased power costs decreased $88.4 million in the third quarter of 2001 compared with the third quarter of 2000, due to a decrease in purchased volumes resulting from the availability the company's nuclear generating unit in the 2001 period (prior to the completion of its sale in September 2001). Fuel costs decreased $2.6 million as a result of a decrease in the unit cost of fuel, offset in part by increased generation. In general, Con Edison's utility subsidiaries recover prudently incurred purchased power
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costs pursuant to rate provisions approved by the relevant state public utility commission. See "Recoverable Energy Costs" in Note A to the Con Edison financial statements included in Part I, Item 1 of this report.
Con Edison's electric operating income increased $5.4 million for the third quarter of 2001 compared with the third quarter of 2000. The principal components of this increase were an increase in net revenues (operating revenues less fuel and purchased power costs) of $10.1 million, decreased other operations and maintenance expenses ($15.0 million) and decreased depreciation and amortization expense ($16.5 million), offset in part by increased property taxes ($12.5 million) and increased income tax. The income tax increase reflects a change in New York law that effectively transferred the tax liability from a revenue-based tax to a net income tax. Other operations and maintenance expenses in the 2001 period reflect decreased transmission expenses ($10.2 million) and lower expenses relating to the company's nuclear generating unit ($13.7 million), offset in part by higher charges ("System Benefits Charges") for research and development energy efficiency and other programs that are recoverable from customers under the agreements covering the company's electric rates ($9.8 million).
Gas
Con Edison's gas operating revenues decreased $11.3 million and gas operating income in decreased $1.8 million in the third quarter of 2001 compared with the third quarter of 2000. The lower revenues reflect reduced sales to gas customers. The decrease in operating income of $1.8 million reflects primarily a decrease in net revenues (operating revenues less gas purchased for resale) of $3.1 million, increased property tax expense ($3.8 million) and increased distribution expenses attributable to the relocation of Company facilities to avoid interference with municipal infrastructure projects ($1.9 million), offset in part by decreased inquiries and damages expense ($1.0 million) and decreased income tax expense.
Firm gas sales and transportation volumes for Con Edison's utility subsidiaries decreased 3.4 percent in the third quarter of 2001 compared with the third quarter of 2000. Con Edison of New York and O&R gas sales and transportation volumes for these periods are shown at the bottom of their consolidated income statements included in Part I, Item 1 of this report. After adjusting for variations, principally weather and billing days, in each period, firm gas sales and transportation volumes in the 2001 period decreased 2.7 percent for Con Edison of New York and decreased 3.5 percent for O&R. Weather-adjusted sales represent an estimate of the sales that would have been made if historical average weather conditions had prevailed.
A weather-normalization provision that applies to the gas business of Con Edison's utility subsidiaries operating in New York moderates, but does not eliminate, the effect of weather-related changes on gas operating income.
Steam
Con Edison of New York's steam operating revenues decreased $4.1 million and steam operating income increased $5.0 million for the third quarter of 2001 compared with the third quarter of 2000. The lower revenues reflect lower purchased power costs, offset by an October 2000 rate increase and increased sales
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volumes. The increase in operating income reflects the rate increase and increased sales volumes. See "Rate and Restructuring Agreements" and "Recoverable Energy Costs" in Note A to the Con Edison financial statements included in Item 8 of the Form 10-K.
Con Edison of New York's steam sales volume (see bottom of the company's consolidated income statement included in Part I, Item 1 of this report) increased 6.3 percent in the 2001 period compared with the 2000 period. After adjusting for variations, principally weather and billing days, in each period, steam sales volume decreased 2.8 percent.
Other Income
Other income decreased $4.3 million in the 2001 period compared with the 2000 period principally because the 2000 period includes an increase in the market value of the investments of a company (in which Con Edison of New York has an interest) that invests in New York City related businesses. The decrease also reflects unrealized losses relating to an unregulated subsidiary's commodity hedges entered into in connection with transactions for the sale of electricity and gas, and decreased income tax. In accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), the company recognizes in income unrealized mark-to-market change in the value of these hedging instruments. The company expects that gains or losses on these instruments will be offset, at least in part, by the value of the related sales transactions. See Note E to the Con Edison financial statements included in Part I, Item 1 of this report. The decrease in income tax is due to deductions for merger-related expenses (see Note D to the Con Edison financial statements included in Part I, Item 1 of this report and Note P to the Con Edison financial statements included in Item 8 of the Form 10-K) and New York State income tax benefits recorded in year 2001.
Net Interest Charges
Net interest charges decreased $0.4 million in the 2001 period compared with the 2000 period, reflecting a $2.4 million decrease in interest related to short-term borrowings and a $3.9 million charge in 2000 for interest accrued on a deferred gain on generation divestiture, offset in part by a $5.9 million increase in interest on long-term debt balances.
Nine Months Ended September 30, 2001 Compared with Nine Months EndedSeptember 30, 2000
Con Edison's net income for common stock for the nine months ended September 30, 2001 was $557.1 million or $2.63 a share (based upon an average of 212.1 million common shares outstanding) compared with $536.8 million or $2.53 a share (based upon an average of 212.2 million common shares outstanding) for the nine months ended September 30, 2000. On a diluted basis Con Edison's earnings per share for the nine months ended September 30, 2001 were $2.62 a share. The increase in the company's net income reflects higher sales volumes, increased pension credits and non-recurring charges relating to Con Edison of New York's nuclear replacement power costs in the 2000 period (see Note C to the Con Edison financial statements included in Part I, Item 1 of this report and Note G to the Con Edison financial statements included in Item 8 of the Form 10-K), partially offset by electric rate reductions in the 2001 period.
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Earnings for the nine months ended September 30, 2001 and 2000 were as follows:
A comparison of the results of operations of Con Edison for the nine months ended September 30, 2001 with the results for the nine months ended September 30, 2000 follows.
Nine Months Ended September 30, 2001 Compared With Nine Months Ended September 30, 2000
Con Edison's electric operating revenues in the nine months ended September 30, 2001 increased $114.9 million compared with the nine months ended September 30, 2000 reflecting lower purchased power costs (discussed below) and higher sales, partially offset by rate reductions of approximately $220.2 million in 2001. See "Recoverable Energy Costs" and "Rate and Restructuring Agreements" in Note A to the Con Edison financial statements included in Item 8 of the Form 10-K.
Electricity sales volumes for Con Edison's utility subsidiaries increased 4.1 percent in the nine months ended September 30, 2001 compared with the nine months ended September 30, 2000. The increase in sales volumes reflects the warmer 2001 weather compared to the 2000 period and continued sales growth. Con Edison of New York and O&R electric sales volumes for these periods are shown at the bottom of their consolidated income statements included in Part I, Item 1 of this report. After adjusting for
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variations, principally weather and billing days, in each period, electricity sales volumes for Con Edison of New York and O&R increased 3.0 percent and 2.7 percent, respectively, in the 2001 period. Weather-adjusted sales represent an estimate of the sales that would have been made if historical average weather conditions had prevailed.
Purchased power costs increased $45.6 million in the nine months ended September 30, 2001 compared with the nine months ended September 30, 2000, due to an increase in the cost of purchased power, offset in part by a decrease in purchased volumes resulting from the availability of the company's nuclear generating unit in the 2001 period. Fuel costs increased $26.9 million as a result of increased generation, offset in part by a decrease in the unit cost of fuel. In general, Con Edison's utility subsidiaries recover prudently incurred purchased power costs pursuant to rate provisions approved by the relevant state public utility commission. See "Recoverable Energy Costs" in Note A to the Con Edison financial statements included in Part I, Item 1 of this report.
Con Edison's electric operating income increased $33.8 million for the nine months ended September 30, 2001 compared with the nine months ended September 30, 2000. The principal components of this increase were decreased other operations expenses ($57.0 million) and depreciation and amortization expense ($38.9 million), offset in part by higher property taxes ($37.9 million) and income taxes. Other operations and maintenance expenses in the 2001 period reflect increased pension credits ($49.0 million), decreased transmission expenses ($9.5) and lower expenses relating to the company's nuclear generating unit, which was sold in September 2001 ($42.9 million), offset in part by higher System Benefits Charges ($23.0 million), and increased distribution expenses resulting from 2000-2001 winter weather conditions, relocation of company facilities to avoid interference with municipal infrastructure projects, and preparations for and operations during summer 2001 ($15.0 million). Income taxes increased, and taxes other than income tax decreased, reflecting a change in New York law that effectively transferred the tax liability from a revenue based tax to a net income tax.
Con Edison's gas operating revenues increased $279.4 million and gas operating income decreased $3.3 million in the nine months ended September 30, 2001 compared with the nine months ended September 30, 2000. The higher revenues reflect an increased cost of purchased gas, offset in part by a reduction in customer bills of $20.0 million, reflecting a refund of previously deferred credits and other provisions of the Con Edison of New York gas rate agreement approved by the PSC in November 2000. The decrease in operating income of $3.3 million reflects primarily increased depreciation and amortization expense ($2.2 million), increased transportation and distribution expenses ($2.2 million), increased income tax expense ($12.9 million) offset in part by an increase in net revenues (operating revenues less gas purchased for resale of 9.4 million). Income taxes increased, and taxes, other than income tax decreased reflecting a change in New York law that effectively transferred the tax liability from a revenue based tax to a net income tax.
Firm gas sales and transportation volumes for Con Edison's utility subsidiaries increased 4.2 percent in the nine months ended September 30, 2001 compared with the nine months ended September 30, 2000. Con Edison of New York and O&R gas sales and transportation volumes for these periods are shown at
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the bottom of their consolidated income statements included in Part I, Item 1 of this report. After adjusting for variations, principally weather and billing days, in each period, firm gas sales and transportation volumes in the 2001 period increased 2.1 percent for Con Edison of New York and decreased 1.3 percent for O&R. Weather-adjusted sales represent an estimate of the sales that would have been made if historical average weather conditions had prevailed.
Con Edison of New York's steam operating revenues increased $98.9 million and steam operating income increased $13.1 million for the nine months ended September 30, 2001 compared with the nine months ended September 30, 2000, reflecting an October 2000 rate increase and increased sales volumes. The higher revenues also reflect increased fuel and purchased power costs. See "Rate and Restructuring Agreements" and "Recoverable Energy Costs" in Note A to the company's financial statements included in Item 8 of the Form 10-K.
Con Edison of New York's steam sales volume (see bottom of the company's consolidated income statement included in Part I, Item 1 of this report) increased 3.2 percent in the 2001 period compared with the 2000 period. After adjusting for variations, principally weather and billing days, in each period, steam sales volume decreased 2.2 percent.
Other income decreased $8.0 million in the 2001 period compared with the 2000 period principally because the 2000 period includes an increase in the market value of the investments of a company (in which Con Edison of New York has an interest) that invests in New York City related businesses. The decrease also reflects unrealized losses relating to an unregulated subsidiary's commodity hedges entered into in connection with transactions for the sale of electricity and gas and decreased income tax. In accordance with SFAS 133, the company has recognized in income a portion of the unrealized mark-to-market change in the value of these hedging instruments. The company expects that gains or losses on these instruments will be offset, at least in part, by the value of the related sales transactions. See Note E to the Con Edison financial statements included in Part I, Item 1 of this report. The decrease in income tax is due to deductions for merger-related expenses (see Note D to the Con Edison financial statements included in Part I, Item 1 of this report and Note P to the Con Edison financial statements included in Item 8 of the Form 10-K) and New York State income tax benefits recorded in year 2001.
Net interest charges increased $21.3 million in the 2001 period compared with the 2000 period, reflecting $26.1 million of interest on increased long-term debt balances and $5.9 million of interest expense of an unregulated subsidiary, offset in part by a $5.9 million decrease in interest related to short-term borrowings and an $8.0 million charge in 2000 for interest accrued on a deferred gain on generation divestiture.
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Con Edison of New York
Consolidated Edison Company of New York, Inc. (Con Edison of New York) is a regulated utility that provides electric service to over three million customers and gas service to over one million customers in New York City and Westchester County. It also provides steam service in parts of Manhattan. All of the common stock of Con Edison of New York is owned by Consolidated Edison, Inc. (Con Edison).
This discussion and analysis should be read in conjunction with Con Edison of New York's Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of the combined Con Edison, Con Edison of New York and Orange and Rockland Utilities, Inc. (O&R) Annual Reports on Form 10-K for the year ended December 31, 2000 (File Nos. 1-14514, 1-1217 and 1-4315, the Form 10-K) and Con Edison of New York's Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of the combined Con Edison, Con Edison of New York and O&R Quarterly Reports on Form 10-Q for the quarterly periods ending March 31, 2001 and June 30, 2001. Reference is also made to the notes to the financial statements in Part I, Item 1 of this report, which notes are incorporated herein by reference.
Cash and temporary cash investments and outstanding commercial paper (shown as notes payable on the balance sheet) at September 30, 2001 and December 31, 2000 were:
Net cash flows from operating activities during the first nine months of 2001 increased $35.4 million compared with the first nine months of 2000, reflecting principally increased net income and decreased recoverable energy costs, offset in part by increased accrued pension credits and decreased accounts payable.
Con Edison of New York's customer accounts receivable, less allowance for uncollectible accounts, was $11.8 million lower at September 30, 2001 than at year-end 2000, due primarily to lower customer billings reflecting lower energy costs, offset in part by the timing of customer payments. The company's equivalent number of days of revenue outstanding (ENDRO) of customer accounts receivable was 29.8 days at September 30, 2001 compared with 29.7 days at December 31, 2000.
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Prepayments include cumulative credits to pension expense amounting to $615.5 million at September 30, 2001 compared with $366.7 million at December 31, 2000. Pension credits, which result primarily from favorable performance by the company's pension fund in past years, increase net income but do not provide cash for the company's operations. See Note D to the Con Edison of New York financial statements included in Item 8 of the Form 10-K.
The regulatory asset for deferred recoverable energy costs decreased $165.5 million at September 30, 2001 compared with December 31, 2000, due primarily to the recovery of previously deferred amounts, offset in part by the deferral for future recovery of additional purchased power and gas costs. See "Recoverable Energy Costs" in Note A to the Con Edison of New York financial statements included in Item 8 of the Form 10-K.
Other regulatory assets increased $3.3 million at September 30, 2001 compared with year-end 2000, in part reflecting unrealized mark-to-market losses on transactions entered into hedge purchases of electricity and gas against adverse market price fluctuations. The company refunds to or collects from its customers its hedging gains or losses, pursuant to rate provisions that permit recovery of the cost of purchased power and gas. See "Recoverable Energy Costs" in Note A to the Con Edison of New York financial statements included in Item 8 of the Form 10-K and Note D to the Con Edison of New York financial statements included in Part I, Item 1 of this report.
In September 2001, Con Edison of New York completed the sale of its nuclear generating unit and related assets, and the transfer to the buyer of its nuclear decommissioning trust funds. The resulting loss of $166.5 million has been deferred as a regulatory asset for future recovery under the terms of the agreements covering the company's electric rates. In addition, the regulatory asset for future federal income tax was reduced by $89.0 million to reflect the loss. See Note C to the Con Edison of New York financial statements included in Part I, Item 1 of this report.
The regulatory asset for World Trade Center incident is for the company's non-capital costs relating to the September 11, 2001 attack. See "World Trade Center Attack," below.
The accumulated provision for injuries and damages increased $16.7 million at September 30, 2001 compared with year-end 2000, due primarily to increased workers' compensation claims.
Unfunded pension and other post-employment benefit (OPEB) obligations (shown as pension and benefit reserve on the balance sheet) increased $19.9 million at September 30, 2001 compared with year-end 2000. The company's policy is to fund its pension and OPEB costs to the extent deductible under current tax regulations. The reserve also includes a minimum liability for the company's supplemental executive retirement program, a portion of which has been included in other comprehensive income. See Note E to the Con Edison of New York financial statements included in Item 8 of the Form 10-K.
Accounts payable decreased $257.4 million at September 30, 2001 compared with year-end 2000, due primarily to lower energy purchases in September 2001 as compared to December 2000, offset in part by higher energy costs and the accrual of a liability for unrealized losses on energy price hedging transactions for which, as discussed above, an other regulatory asset was established.
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Regulatory liabilities increased $50.5 million at September 30, 2001 compared with year-end 2000, reflecting the deferral, pending future disposition by the New York State Public Service Commission (PSC), of a $77.6 million refund from the New York Independent System Operator resulting from bill reconciliations. This increase was offset, in part by a reduction of $18.2 million of previously deferred credits and other provisions of the gas rate agreement approved by the PSC in November 2000. The decrease of $16.7 million in NYPA revenue increase represents the amortization of the New York Power Authority revenue deficiency pursuant to terms of the agreements covering the company's electric rates.
Cash flows used in investing activities during the first nine months of 2001 decreased $517.2 million compared with the first nine months of 2000, reflecting the receipt of proceeds from the sale of the company's nuclear generating unit and related assets ($553.7 million, net of federal income tax), and the sale of the company's 480 MW interest in the Roseton generating station in January 2001 ($100.0 million, net of federal income tax). The proceeds from the sales were partially offset by additional payments made to the nuclear decommissioning trust funds in connection with their transfer to the buyer of the nuclear generating unit ($73.8 million) and increased construction expenditures ($84.2 million). Construction expenditures increased principally to meet load growth on the company's electric distribution system.
Cash flows used in financing activities during the first nine months of 2001 decreased $97.7 million compared with the first nine months of 2000, primarily because the company increased short-term debt in December 1999 in anticipation of its January 2000 cash requirements but financed its January 2001 cash requirements in January 2001. In addition, the company issued $246.5 million of long-term debt, net of retirements, in the 2001 period compared with $350 million in the 2000 period.
In June 2001 the company issued $400 million of 7.5 percent 40-year debentures. In addition, the company issued $224.6 million of variable rate 35-year tax-exempt debt (with an initial weekly rate of 2.25 percent) through the New York State Energy Research and Development Authority (NYSERDA), the proceeds of which (along with other funds of the company) were used in July 2001 to redeem, in advance of maturity, $228.2 million of tax-exempt debt with a weighted average interest rate of 7.2 percent.
Con Edison of New York estimates that it will incur approximately $400 million of costs for emergency response, temporary restoration and permanent replacement of electric, gas and steam transmission and distribution facilities damaged as a result of the September 11, 2001 attack on the World Trade Center. Most of the costs are expected to be capital in nature. The company estimates that its insurers will cover approximately $65 million of the costs. The company is seeking Federal reimbursement of the remaining costs. At September 30, 2001, the company had capitalized $12 million of such cost as utility plant and deferred $35.6 million of such costs as a regulatory asset.
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Con Edison of New York's ratio of earnings to fixed charges (for the 12 months ended on the date indicated) and common equity ratio (as of the date indicated) were:
* Common shareholder's equity as a percentage of total capitalization
Con Edison of New York's ratio of earnings to fixed charges increased for the 12-month period ending September 30, 2001 compared to the 12-month period ending December 31, 2000 as a result of increased earnings, offset in part by increased interest expense. Excluding charges of $130 million for replacement power costs related to an outage of the company's nuclear generating unit (which it sold in September 2001; see Note C to the Con Edison of New York financial statements included in Part I, Item 1 of this report and Note G to the Con Edison of New York financial statements included in Item 8 of the Form 10-K). Con Edison of New York's ratio of earnings to fixed charges would have been 3.65 and 3.56 for the 12-month periods ended September 30, 2001 and December 31, 2000, respectively.
In July 2001, the Federal Energy Regulatory Commission (FERC) concluded that the three independent system operators in the Northeastern United States, including the New York Independent System Operator (NYISO), should combine to form one regional transmission organization (RTO) and initiated a process with respect to issues associated with its formation. The terms and conditions pursuant to which an RTO for the Northeastern United States would be formed and operate have not been determined. FERC has, however, indicated that an RTO should have certain characteristics, including independence from market participants and operational authority for all transmission assets under its control, and perform certain functions, including tariff administration and design, congestion management, market monitoring, planning and expansion and interregional coordination. Con Edison of New York's transmission facilities, other than those located underground, are controlled and operated by the NYISO. For a description of the transmission facilities, see Item 2 of the Form 10-K.
Reference is made to "Financial Market Risks" in the Con Edison of New York Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of the Form 10-K and to Note D to the Con Edison of New York financial statements included in Part I, Item 1 of this report. At September 30, 2001 neither the fair value of derivatives outstanding nor potential derivative losses from reasonably possible near-term changes in market prices were material to the financial position, results of operations or liquidity of the company.
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For information concerning potential liabilities of Con Edison of New York arising from laws and regulations protecting the environment, including the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (Superfund), see the notes to the Con Edison of New York financial statements included in Part I, Item 1 of this report.
Con Edison of New York's net income for common stock for the third quarter of 2001 was $269.0 million compared with $266.3 million for the third quarter of 2000. The increase in the company's net income reflects higher sales volumes and increased pension credits, partially offset by electric rate reductions in the 2001 period, as well as non-recurring charges relating to nuclear replacement power costs in the 2000 period (see Note C to the Con Edison of New York financial statements included in Part I, Item 1 of this report and Note G to the Con Edison of New York financial statements included in Item 8 of the Form 10-K). The September 11, 2001 attack on the World Trade Center did not significantly affect the company's results of operations for the 2001 period. See "Liquidity and Capital Resources—World Trade Center Attack," above.
A comparison of the results of operations of Con Edison of New York for the third quarter of 2001 with the results for the third quarter of 2000 follows.
A discussion of Con Edison of New York's operating revenues and operating income by business segment follows. Con Edison of New York's principal business segments are its regulated electric, gas and steam utility businesses. For additional information about the segments, see Note E to the Con Edison of New York financial statements included in Part I, Item 1 of this report.
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Con Edison of New York's electric operating revenues in the third quarter of 2001 decreased $87.0 million compared with the third quarter of 2000. The decrease reflects rate reductions of approximately $88.4 million and lower purchased power costs (discussed below), partially offset by higher sales volume in the 2001 period. See "Recoverable Energy Costs" and "Rate and Restructuring Agreements" in Note A to the Con Edison of New York financial statements included in Item 8 of the Form 10-K.
Con Edison of New York's electric sales, excluding off-system sales, for the third quarter of 2001 compared with the third quarter of 2000 were:
Electricity sales volume in Con Edison of New York's service territory increased 6.3 percent in the third quarter of 2001 compared with the third quarter of 2000. The increase in sales volume reflects the warmer 2001 weather compared to the 2000 period and continued sales growth. After adjusting for variations, principally weather and billing days, in each period, electricity sales volume in the service territory increased 3.3 percent in the 2001 period. Weather-adjusted sales represent an estimate of the sales that would have been made if historical average weather conditions had prevailed.
Con Edison of New York's purchased power costs decreased $88.3 million in the third quarter of 2001 compared with the third quarter of 2000, due to a decrease in the price of purchased power and decreased purchased volumes resulting from the availability of the company's nuclear generating unit in the 2001 period (prior to the completion of its sale in September 2001). Fuel costs decreased $2.6 million as a result of a decrease in the unit cost of fuel, offset in part by increased generation. In general, Con Edison of New York recovers prudently incurred purchased power costs pursuant to rate provisions approved by the PSC. See "Recoverable Energy Costs" in Note A to the Con Edison of New York financial statements included in Item 8 of the Form 10-K.
Con Edison of New York's electric operating income increased $5.1 million in the third quarter of 2001 compared with the third quarter of 2000. The principal components of the increase were an increase in net revenues (operating revenues less fuel and purchased power costs) of $4.0 million, decreased other operations and maintenance expenses ($15.4 million) and decreased depreciation and amortization expense ($17.8 million), offset in part by increased property taxes ($12.3 million) and increased income tax. The increase in state income tax reflects the decrease in Gross Receipts Tax, due to a tax law change
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in New York that effectively transferred the tax liability from a revenue-based tax to a net income tax. The amounts applicable to old tax laws will continue to be collected through base rates and tariff surcharges until the PSC directs otherwise, with differences between those collections and the tax expense under the new law to be deferred. Other operations and maintenance expenses in the 2001 period reflect decreased transmission expenses ($8.9 million) and lower expenses relating to the company's nuclear generating unit ($13.7 million), offset in part by higher charges ("System Benefits Charges") for research and development energy efficiency and other programs that are recoverable from customers under the agreements covering the company's electric rates ($9.8 million), and higher distribution expenses ($0.5 million).
Con Edison of New York's gas operating revenues decreased $10.5 million and gas operating income decreased $3.4 million in the third quarter of 2001 compared with the third quarter of 2000. The lower revenues reflect reduced sales to gas customers. The decrease in operating income of $3.4 million reflects primarily a decrease in net revenues (operating revenues less gas purchased for resale) of $3.2 million, increased depreciation and amortization expenses ($1.0 million), increased meter reading expenses ($1.3 million), increased property tax expense ($3.6 million) and increased distribution expenses attributable to the relocation of company facilities to avoid interference with municipal infrastructure projects ($1.9 million), offset in part by decreased injuries and damages expense ($1.0 million) and decreased income tax expense.
Con Edison of New York's gas sales and transportation volumes for firm customers (see bottom of the company's consolidated income statement included in Part I, Item 1 of this report) decreased 2.6 percent in the third quarter of 2001 compared with the 2000 period. After adjusting for variations, principally weather and billing days, in each period, firm gas sales and transportation volumes in the company's service territory decreased 2.7 percent in the 2001 period. Weather-adjusted sales represent an estimate of the sales that would have been made if historical average weather conditions had prevailed.
A weather-normalization provision that applies to Con Edison of New York's gas business moderates, but does not eliminate, the effect of weather-related changes on gas operating income.
Con Edison of New York's steam operating revenues decreased $4.1 million and steam operating income increased $5.0 million for the third quarter of 2001 compared with the third quarter of 2000. The lower revenues reflect lower purchased power costs, offset by an October 2000 rate increase and increased sales volumes. The increase in operating income reflects the rate increase and increased sales volumes. See "Rate and Restructuring Agreements" and "Recoverable Energy Costs" in Note A to the company's financial statements included in Item 8 of the Form 10-K.
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Other income decreased $3.3 million in the 2001 period compared to the 2000 period principally because the 2000 period included an increase in the market value of the investments of a company (in which Con Edison of New York has an interest) that invests in New York City related businesses.
Net interest charges increased $0.7 million in the third quarter of 2001 compared to the 2000 period, reflecting principally $6.1 million of interest on increased long-term debt balances, offset in part by a $2.3 million decrease in interest related to short-term borrowings and a $3.9 million charge in 2000 for interest accrued on a deferred gain on generation divestiture.
Con Edison of New York's net income for common stock for the nine months ended September 30, 2001 was $543.7 million compared with $515.7 million for the nine months ended September 30, 2000. The increase in the company's net income reflects higher sales volumes and increased pension credits, and non-recurring charges for nuclear replacement power costs in the 2000 period (see Note C to the Con Edison of New York financial statements included in Part I, Item 1 of this report and Note G to the Con Edison of New York financial statements included in Item 8 of the Form 10-K), partially offset by electric rate reductions in the 2001 period.
A comparison of the results of operations of Con Edison of New York for the nine months ended September 30, 2001 with the results for the nine months ended September 30, 2000 follows.
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Con Edison of New York's electric operating revenues in the nine months ended September 30, 2001 increased $40.0 million compared with the nine months ended September 30, 2000. The increase reflects increased recoverable purchased power costs, higher sales and $58.0 million of replacement power costs for the nuclear generating unit that were not recovered from customers in the 2000 period, partially offset by rate reductions of $218.1 million. See "Recoverable Energy Costs" and "Rate and Restructuring Agreements" in Note A to the Con Edison of New York financial statements included in Item 8 of the Form 10-K.
Con Edison of New York's electric sales, excluding off-system sales, for the nine months ended September 30, 2001 compared with the nine months ended September 30, 2000 were:
Electricity sales volume in Con Edison of New York's service territory increased 4.1 percent in the nine months ended September 30, 2001 compared with the nine months ended September 30, 2000. The increase in sales volume reflects the continued sales growth and warmer summer weather in 2001 compared to the 2000 period. After adjusting for variations, principally weather and billing days, in each period, electricity sales volume in the service territory increased 3.0 percent in the 2001 period. Weather-adjusted sales represent an estimate of the sales that would have been made if historical average weather conditions had prevailed.
Con Edison of New York's purchased power costs increased $9.6 million in the nine months ended September 30, 2001 compared with the nine months ended September 30, 2000, due primarily to an increase in the price of purchased power, offset in part by decreased purchased volumes resulting from the availability of the company's nuclear generating unit in the 2001 period. Fuel costs increased $26.9 million as a result of increased generation, offset in part by a decrease in the unit cost of fuel. In general, Con Edison of New York recovers prudently incurred purchased power costs pursuant to rate provisions approved by the PSC. See "Recoverable Energy Costs" in Note A to the Con Edison of New York financial statements included in Item 8 of the Form 10-K.
Con Edison of New York's electric operating income increased $31.9 million in the nine months ended September 30, 2001 compared with the nine months ended September 30, 2000. The principal components of the increase were decreased other operations expenses ($61.5 million) and depreciation and
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amortization expense ($42.4 million), offset in part by higher property taxes ($37.6 million) and income taxes. Other operations and maintenance expenses in the 2001 period reflect increased pension credits ($49.0 million), decreased transmission expenses ($8.6 million) and lower expenses relating to the company's nuclear generating unit ($42.9 million), offset in part by higher System Benefits Charges ($23.0 million) and increased distribution expenses resulting from 2000-2001 winter weather conditions, relocation of company facilities to avoid interference with municipal infrastructure projects, and preparations for and operations during summer 2001 ($14.3 million). Income taxes increased, and taxes, other than income tax decreased, reflecting a change in New York law that effectively transferred the tax liability from a revenue-based tax to a net income tax.
Con Edison of New York's gas operating revenues increased $245.2 million and gas operating income decreased $6.0 million in the nine months ended September 30, 2001 compared with the nine months ended September 30, 2000. The higher revenues reflect an increased cost of purchased gas, offset in part by a reduction in customer bills of $20.0 million, reflecting a refund of previously deferred credits and other provisions of the gas rate agreement approved by the PSC in November 2000. The decrease in operating income of $6.0 million reflects primarily increased transmission and distribution expenses ($2.2 million), increased uncollectible accounts ($1.2 million), increased depreciation and amortization expense ($3.0 million) and, increased state income tax and gross receipts tax ($17.7 million), offset in part by an increase in net revenues (operating revenues less gas purchased for resale) of $4.2 million and increased pension credits ($9.4 million).
Con Edison of New York's gas sales and transportation volumes for firm customers (see bottom of the company's consolidated income statement included in Part I, Item 1 of this report) increased 5.3 percent in the nine months ended September 30, 2001 compared with the 2000 period. After adjusting for variations, principally weather and billing days, in each period, firm gas sales and transportation volumes in the company's service territory increased 2.1 percent in the 2001 period. Weather-adjusted sales represent an estimate of the sales that would have been made if historical average weather conditions had prevailed.
Con Edison of New York's steam sales volume (see bottom of the company's consolidated income statement included in Part I, Item 1 of this report) increased 3.2 percent in the 2001 period compared
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with the 2000 period. After adjusting for variations, principally weather and billing days, in each period, steam sales volume decreased 2.2 percent.
Other income increased $2.4 million due principally to a decrease in Federal income tax of $7.9 million, offset in part because the 2000 period included an increase in the market value of the investments of a company (in which Con Edison of New York has an interest) that invests in New York City related businesses. The decrease in Federal income tax reflects principally the recognition in the 2001 period of approximately $4.0 million of deferred Federal income tax credits relating to the Roseton generating plant sale and decreased income taxes reflected to lower other income.
Net interest charges increased $13.4 million in the nine months ended September 30, 2001 compared to the 2000 period, reflecting principally $26.7 million of interest on increased long-term debt balances, offset by a $6.2 million decrease in interest related to short-term borrowings and an $8.0 million charge in 2000 for interest accrued on a deferred gain on generation divestiture.
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O&R Management's Narrative Analysis of the Results of Operations
Orange and Rockland Utilities, Inc. (O&R), a wholly-owned subsidiary of Consolidated Edison, Inc. (Con Edison), meets the conditions specified in General Instruction H to Form 10-Q and is permitted to use the reduced disclosure format for wholly-owned subsidiaries of companies, such as Con Edison, that are reporting companies under the Securities Exchange Act of 1934. Accordingly, this O&R Management's Narrative Analysis of the Results of Operations is included in this report, and O&R has omitted from this report the information called for by Part I, Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations).
O&R's net income for common stock for the nine-month period ended September 30, 2001 was $33.7 million, $1.4 million higher than the corresponding 2000 period. This increase was due primarily to a 4.1 percent increase in the volume of electric sales and the recognition in income in the 2001 period of $6.0 million of previously deferred credits pursuant to its New York gas rate agreement, offset in part by $2.1 million of electric rate reductions in the 2001 period pursuant to its New Jersey subsidiary's electric restructuring plan. In addition, the operating results for 2000 included a non-recurring after-tax gain of $2.4 million from the sale of assets of a non-utility subsidiary that was winding down operations. See "Rate Regulation" in Note A to the O&R financial statements in Item 8 of the combined O&R, Con Edison and Consolidated Edison Company of New York, Inc. Annual Reports on Form 10-K for the year ended December 31, 2000 (File Nos. 1-4315, 1-14514 and 1-1217, the Form 10-K).
A comparison of the results of operations of O&R for the nine months ended September 30, 2001 to the nine months ended September 30, 2000, follows.
A discussion of O&R's operating revenues by business segment follows. O&R's principal business segments are its electric and gas utility businesses. For additional information about O&R's business segments, see the notes to the O&R financial statements included in Part I, Item 1 of this report.
Electric operating revenues increased $47.4 million during the nine months ended September 30, 2001 compared to the 2000 period. This increase was attributable primarily to an increase in sales volume and the billing to customers of higher purchased power costs in the 2001 period.
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Electric sales volumes for the 2001 and 2000 periods are shown at the bottom of O&R's consolidated income statement for those periods included in Part I, Item 1 of this report. Electric sales volumes in the nine months ended September 30, 2001 increased 4.1 percent compared to the 2000 period. After adjusting for weather variations, electricity sales volumes were 2.6 percent higher in the 2001 period. Weather-adjusted sales represent an estimate of the sales that would have been made if historical average weather conditions had prevailed.
Purchased power costs increased $35.8 million for the nine months ended September 30, 2001 compared to the 2000 period, reflecting increases in the cost of purchased power and higher customer sales. O&R and its New Jersey utility subsidiary recover all of their prudently incurred purchased power costs in accordance with rate provisions approved by their state public utility commissions. For O&R's New York operations, the difference between the actual purchased power costs for a given month and the amount billed to customers for that month is deferred for recovery from, or refund to, customers during the next billing cycle (normally within one to two months). For O&R's New Jersey utility subsidiary, differences between actual and billed electricity costs (which amounted to a cumulative excess of actual over billed costs of $73.5 million including interest at September 30, 2001) are deferred for future charge or refund to customers, as the case may be. For O&R's Pennsylvania utility subsidiary; Pike County Light & Power Company (Pike), recovery of purchased power costs is limited to a predetermined fixed price. Pike incurred $1.1 million of purchased power costs in each of the 2001 and 2000 periods that it was not permitted to charge to customers. In October 2001, an administrative law judge recommended that the Pennsylvania Public Utility Commission (PaPUC) approve Pike's requested $1.4 million electric rate increase. The PaPUC is scheduled to address this request prior to the end of 2001.
Gas operating revenues increased $31.2 million in the 2001 period, compared to the 2000 period. The increase was due primarily to recovery from customers of higher gas costs in the 2001 period. Gas sales volumes for the 2001 and 2000 periods are shown at the bottom of O&R's consolidated income statement for those periods included in Part I, Item 1 of this report. Firm gas sales volumes in the nine months ended September 30, 2001 decreased 0.4 percent compared to the 2000 period. O&R's revenues from gas sales in New York are subject to a weather normalization clause that moderates, but does not eliminate, the effect of weather-related changes on net income. After adjusting for weather variations in each period, firm sales and transportation volumes were 1.3 percent lower for the 2001 period compared to the 2000 period. Interruptible gas sales and transportation volumes were down 10.4%. After adjusting for weather variations in each period, interruptible sales and transportation volumes were 11.3 percent lower for the 2001 period, compared to the 2000 period. Interruptible sales are dependent upon the availability and price competitiveness of alternative fuel sources and, as a result of applicable tariff regulations, do not have a substantial impact on earnings.
The cost of gas purchased for resale increased $29.3 million in the 2001 period compared to the 2000 period, due to higher unit costs.
Non-utility operating revenues decreased in the 2001 period compared to the corresponding 2000 period, primarily as a result of a $2.4 million after-tax gain which was realized last year from the sale of assets by a non-utility subsidiary of O&R that was winding down its business.
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Book depreciation expense increased by $2.6 million in the 2001 period compared to the 2000 period due to higher average plant balances in the 2001 period.
Taxes other than income tax decreased by $2.4 million in the 2001 period compared to the 2000 period. State income taxes increased by a like amount, reflecting a change in New York law that effectively transferred the tax liability from a revenue based tax to a net income tax.
Income tax increased $7.4 million in the 2001 period compared to the 2000 period due to the change in New York law and higher income from operations.
Other income decreased $2.1 million in the 2001 period compared to the 2000 period. The 2000 period included a market gain of $2.9 million in relation to O&R's supplemental employee retirement plan. Excluding the impact of the gain, investment income decreased $0.8 million, due primarily to lower short-term investment balances, offset by a decrease in income tax.
Interest charges decreased by $1.2 million in the 2001 period compared to the 2000 period, reflecting lower average debt balances and a lower average interest rate in the 2001 period, offset in part by an increase in the allowance for borrowed funds used during construction $0.6 million.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Con Edison
For information about Con Edison's primary market risks associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments, see "Market Risks" in Con Edison's Management's Discussion and Analysis of Financial Condition and Results of Operations in Part 1, Item 2 of this report and Item 7A of the combined Con Edison, Con Edison of New York and O&R Annual Report on Form 10-K for the year ended December 31, 2000 (the Form 10-K), which information is incorporated herein by reference.
For information about Con Edison of New York's primary market risks associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments, see "Market Risks" in Con Edison of New York's Management's Discussion and Analysis of Financial Condition and Results of Operations in Part 1, Item 2 of this report and Item 7A of the Form 10-K, which information is incorporated herein by reference.
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Northeast Utilities Litigation
For information about legal proceedings relating to Con Edison's October 1999 agreement to acquire Northeast Utilities, see Note D to the Con Edison financial statements included in Part 1, Item 1 of this report (which information is incorporated herein by reference).
Employee Class Action
Reference is made to "Employee Class Action" in Part I, Item 3, Legal Proceedings of the Form 10-K. In October 2001, the court preliminarily approved a new settlement agreement which is substantially similar to the settlement agreement that the court disapproved in December 2000 other than with respect to how the $10 million to be paid by the company will be distributed.
Washington Heights Power Outage
Reference is made to "Washington Heights Power Outage" in Part I, Item 3, Legal Proceedings of the Form 10-K. Plaintiffs' have discontinued their lawsuits for damages and injunctive relief and their appeal of the court's denial of their motion to certify a class action.
O&R
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Con Edison, along with Con Edison of New York, filed a combined Current Report on Form 8-K, dated September 17, 2001, furnishing (under Item 9) certain material pursuant to Regulation FD. Con Edison filed no other Current Reports on Form 8-K during the quarter ended September 30, 2001.
Con Edison, along with Con Edison of New York, filed a combined Current Report on Form 8-K, dated October 18, 2001, reporting (under Item 5) unaudited net income for common stock for the three and twelve month periods ended September 30, 2001 and 2000 and information with respect to the World Trade Center attack.
During the quarter ended September 30, 2001 and through the date of this filing, Con Edison of New York filed no Current Reports on Form 8-K other than the combined Current Reports on Form 8-K discussed above under "Con Edison."
O&R filed no Current Reports on Form 8-K during the quarter ended September 30, 2001.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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