UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission
File Number
Exact name of registrant as specified in its charter
and principal office address and telephone number
State of
Incorporation
1-14514
Consolidated Edison, Inc.
4 Irving Place, New York, New York 10003
(212) 460-4600
1-1217
Consolidated Edison Company of New York, Inc.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
As of April 29, 2009, Con Edison had outstanding 274,401,924 Common Shares ($.10 par value). All of the outstanding common equity of Con Edison of New York is held by Con Edison.
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Filing Format
This Quarterly Report on Form 10-Q is a combined report being filed separately by two different registrants: Consolidated Edison, Inc. (Con Edison) and Consolidated Edison Company of New York, Inc. (Con Edison of New York). Con Edison of New York is a subsidiary of Con Edison and, as such, the information in this report about Con Edison of New York also applies to Con Edison. As used in this report, the term the “Companies” refers to Con Edison and Con Edison of New York. However, Con Edison of New York makes no representation as to the information contained in this report relating to Con Edison or the subsidiaries of Con Edison other than itself.
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TABLE OF CONTENTS
Glossary of Terms
PART I—Financial Information
ITEM 1
Financial Statements (Unaudited)
Con Edison
Consolidated Balance Sheet
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Common Shareholders’ Equity
Consolidated Statement of Cash Flows
Con Edison of New York
Consolidated Statement of Common Shareholder’s Equity
Notes to Financial Statements (Unaudited)
ITEM 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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ITEM 3
Quantitative and Qualitative Disclosures About Market Risk
ITEM 4
Controls and Procedures
ITEM 4T
PART II—Other Information
Legal Proceedings
ITEM 1A
Risk Factors
ITEM 6
Exhibits
Signatures
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GLOSSARY OF TERMS
The following is a glossary of frequently used abbreviations or acronyms that are found in the Companies’ SEC reports:
Con Edison Companies
Con Edison Communications
Con Edison Communications, LLC
Con Edison Development
Consolidated Edison Development, Inc.
Con Edison Energy
Consolidated Edison Energy, Inc.
Con Edison Solutions
Consolidated Edison Solutions, Inc.
O&R
Orange and Rockland Utilities, Inc.
Pike
Pike County Light & Power Company
RECO
Rockland Electric Company
The Companies
Con Edison and Con Edison of New York
The Utilities
Con Edison of New York and O&R
Regulatory and State Agencies
ALJs
Administrative Law Judges
DEC
New York State Department of Environmental Conservation
EPA
Environmental Protection Agency
FERC
Federal Energy Regulatory Commission
IRS
Internal Revenue Service
ISO-NE
ISO New England
NJBPU
New Jersey Board of Public Utilities
NJDEP
New Jersey Department of Environmental Protection
NYAG
New York Attorney General
NYISO
New York Independent System Operator
NYPA
New York Power Authority
NYSERDA
New York State Energy Research and Development Authority
NYSRC
New York State Reliability Council
PJM
PJM Interconnection
PSC
New York State Public Service Commission
PPUC
Pennsylvania Public Utility Commission
SEC
Securities and Exchange Commission
Other
ABO
Accumulated Benefit Obligation
APB
Accounting Principles Board
AFDC
Allowance for funds used during construction
CO2
Carbon dioxide
COSO
DIG
Derivatives Implementation Group
District Court
dths
Dekatherms
EITF
Emerging Issues Task Force
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EMF
Electric and magnetic fields
ERRP
East River Repowering Project
FASB
Financial Accounting Standards Board
FIN
FASB Interpretation No.
First Quarter Form 10-Q
Fitch
Fitch Ratings
Form 10-K
FSP
FASB Staff Position
GHG
Greenhouse gases
kV
Kilovolts
kWh
Kilowatt-hour
LILO
Lease In/Lease Out
LTIP
Long Term Incentive Plan
MD&A
mdths
Thousand dekatherms
MGP Sites
Manufactured gas plant sites
mmlbs
Million pounds
Moody’s
Moody’s Investors Service
MVA
Megavolt amperes
MW
Megawatts or thousand kilowatts
MWH
Megawatt hour
Net T&D Revenues
NUGs
Non-utility generators
OCI
Other Comprehensive Income
PCBs
Polychlorinated biphenyls
PPA
Power purchase agreement
PRP
Potentially responsible party
S&P
Standard & Poor’s Rating Services
SFAS
Statement of Financial Accounting Standards
SO2
Sulfur dioxide
SSCM
Simplified service cost method
Superfund
VaR
Value-at-Risk
VIE
Variable interest entity
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CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
UTILITY PLANT, AT ORIGINAL COST
Electric
Gas
Steam
General
TOTAL
Less: Accumulated depreciation
Net
Construction work in progress
NET UTILITY PLANT
NON-UTILITY PLANT
Non-utility property, less accumulated depreciation of $42 and $40 in 2009 and 2008, respectively
NET PLANT
CURRENT ASSETS
Cash and temporary cash investments
Accounts receivable—customers, less allowance for uncollectible accounts of $65 and $58 in 2009 and 2008, respectively
Accrued unbilled revenue
Other receivables, less allowance for uncollectible accounts of $5 and $6 in 2009 and 2008, respectively
Fuel oil, at average cost
Gas in storage, at average cost
Materials and supplies, at average cost
Prepayments
Fair value of derivative assets
Recoverable energy costs
Deferred derivative losses
Other current assets
TOTAL CURRENT ASSETS
INVESTMENTS
DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENTASSETS
Goodwill
Intangible assets, less accumulated amortization of $2 in 2009 and 2008
Regulatory assets
Other deferred charges and noncurrent assets
TOTAL DEFERRED CHARGES, REGULATORYASSETS AND NONCURRENT ASSETS
TOTAL ASSETS
The accompanying notes are an integral part of these financial statements.
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CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shareholders’ equity (See Statement of Common Shareholders’ Equity)
Preferred stock of subsidiary
Long-term debt
TOTAL CAPITALIZATION
NONCURRENT LIABILITIES
Obligations under capital leases
Provision for injuries and damages
Pensions and retiree benefits
Superfund and other environmental costs
Uncertain income taxes
Asset retirement obligations
Fair value of derivative liabilities
Other noncurrent liabilities
TOTAL NONCURRENT LIABILITIES
CURRENT LIABILITIES
Long-term debt due within one year
Notes payable
Accounts payable
Customer deposits
Accrued taxes
Accrued interest
Accrued wages
Deferred derivative gains
Deferred income taxes - recoverable energy costs
Other current liabilities
TOTAL CURRENT LIABILITIES
DEFERRED CREDITS AND REGULATORY LIABILITIES
Deferred income taxes and investment tax credits
Regulatory liabilities
Other deferred credits
TOTAL DEFERRED CREDITS ANDREGULATORY LIABILITIES
TOTAL CAPITALIZATION ANDLIABILITIES
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CONSOLIDATED INCOME STATEMENT
For the Three Months
Ended March 31,
OPERATING REVENUES
Non-utility
TOTAL OPERATING REVENUES
OPERATING EXPENSES
Purchased power
Fuel
Gas purchased for resale
Other operations and maintenance
Depreciation and amortization
Taxes, other than income taxes
Income taxes
TOTAL OPERATING EXPENSES
OPERATING INCOME
OTHER INCOME (DEDUCTIONS)
Investment and other income
Allowance for equity funds used during construction
Other deductions
TOTAL OTHER INCOME(DEDUCTIONS)
INTEREST EXPENSE
Interest on long-term debt
Other interest
Allowance for borrowed funds used during construction
NET INTEREST EXPENSE
INCOME FROM CONTINUING OPERATIONS
INCOME FROM DISCONTINUED OPERATIONS(NET OF INCOME TAX EXPENSE)
NET INCOME
Preferred stock dividend requirements of subsidiary
NET INCOME FOR COMMON STOCK
EARNINGS PER COMMON SHARE - BASIC
Continuing operations
Discontinued operations
Net income for common stock
EARNINGS PER COMMON SHARE - DILUTED
DIVIDENDS DECLARED PER SHAREOF COMMON STOCK
AVERAGE NUMBER OF SHARESOUTSTANDING - BASIC (IN MILLIONS)
AVERAGE NUMBER OF SHARESOUTSTANDING - DILUTED (IN MILLIONS)
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CONSOLIDATED STATEMENT OFCOMPREHENSIVE INCOME
OTHER COMPREHENSIVE INCOME, NET OFTAXES
Pension plan liability adjustments, net of $1 taxes in 2009
Unrealized losses on derivatives qualified as cash flow hedges, net of $(1) taxes in 2008
Less: Reclassification adjustment for gains included in net income, net of $1 taxes in 2009
Less: Reclassification adjustment for unrealized losses included in regulatory assets, net of $(5) taxes in 2008
TOTAL OTHER COMPREHENSIVE INCOME,NET OF TAXES
COMPREHENSIVE INCOME
COMPREHENSIVE INCOME FOR COMMONSTOCK
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CONSOLIDATED STATEMENT OFCOMMON SHAREHOLDERS’ EQUITY
BALANCE AS OFDECEMBER 31, 2007
Common stock dividends
Issuance of common shares—dividend reinvestment and employee stock plans
Other comprehensive income
Adjustment for adoption of FASB Statement No. 157
BALANCE AS OFMARCH 31, 2008
BALANCE AS OFDECEMBER 31, 2008
BALANCE AS OFMARCH 31, 2009
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CONSOLIDATED STATEMENT OFCASH FLOWS
OPERATING ACTIVITIES
Net Income
PRINCIPAL NON-CASH CHARGES/(CREDITS) TOINCOME
Deferred income taxes
Rate case amortization and accruals
Net transmission and distribution reconciliation
Common equity component of allowance for funds used during construction
Net derivative losses
Other non-cash items (net)
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable—customers, less allowance for uncollectibles
Materials and supplies, including fuel oil and gas in storage
Other receivables and other current assets
Deferred charges and other regulatory assets
Deferred credits and other regulatory liabilities
Other assets
Other liabilities
NET CASH FLOWS FROMOPERATING ACTIVITIES
INVESTING ACTIVITIES
Utility construction expenditures
Cost of removal less salvage
Non-utility construction expenditures
Restricted cash
Purchase of ownership interest in Newington SCS
NET CASH FLOWS USED ININVESTING ACTIVITIES
FINANCING ACTIVITIES
Net proceeds from / (payments of) short-term debt
Retirement of long-term debt
Issuance of long-term debt
Issuance of common stock
Debt issuance costs
NET CASH FLOWS FROM/(USEDIN) FINANCING ACTIVITIES
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD
BALANCE AT BEGINNING OFPERIOD
BALANCE AT END OF PERIOD
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest
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UTILITY PLANT AT ORIGINAL COST
NON-UTILITY PROPERTY
Non-utility property, less accumulated depreciation of $20 and $19 in 2009 and 2008, respectively
Accounts receivable - customers, less allowance for uncollectible accounts of $60 and $52 in 2009 and 2008, respectively
Other receivables, less allowance for uncollectible accounts of $3 and $4 in 2009 and 2008, respectively
Accounts receivable from affiliated companies
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Common shareholder’s equity (See Statement of Common Shareholder’s Equity)
Preferred stock
Accounts payable to affiliated companies
Accrued taxes to affiliated companies
Deferred income taxes—recoverable energy costs
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PREFERRED STOCK DIVIDENDREQUIREMENTS
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OTHER COMPREHENSIVE INCOME, NETOF TAXES
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CONSOLIDATED STATEMENT OFCOMMON SHAREHOLDER’S EQUITY
BALANCE AS OF DECEMBER 31, 2007
Net income
Common stock dividend to parent
Capital contribution by parent
Cumulative preferred dividends
BALANCE AS OF MARCH 31, 2008
BALANCE AS OF DECEMBER 31, 2008
BALANCE AS OF MARCH 31, 2009
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Loan to affiliate
Dividend to parent
Preferred stock dividends
NET CASH FLOWS FROMFINANCING ACTIVITIES
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NOTES TO THE FINANCIALSTATEMENTS (UNAUDITED)
These combined notes accompany and form an integral part of the separate consolidated financial statements of each of the two separate registrants: Consolidated Edison, Inc. and its subsidiaries (Con Edison) and Consolidated Edison Company of New York, Inc. and its subsidiaries (Con Edison of New York). Con Edison of New York is a subsidiary of Con Edison and as such its financial condition and results of operations and cash flows, which are presented separately in the Con Edison of New York consolidated financial statements, are also consolidated, along with those of Con Edison’s other utility subsidiary, Orange and Rockland Utilities, Inc. (O&R), and Con Edison’s competitive energy businesses (discussed below) in Con Edison’s consolidated financial statements. The term “Utilities” is used in these notes to refer to Con Edison of New York and O&R.
As used in these notes, the term “Companies” refers to Con Edison and Con Edison of New York and, except as otherwise noted, the information in these combined notes relates to each of the Companies. However, Con Edison of New York makes no representation as to information relating to Con Edison or the subsidiaries of Con Edison other than itself.
The separate interim consolidated financial statements of each of the Companies are unaudited but, in the opinion of their respective managements, reflect all adjustments (which include only normally recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The Companies’ separate interim consolidated financial statements should be read together with their separate audited financial statements (including the combined notes thereto) included in Item 8 of their combined Annual Report on Form 10-K for the year ended December 31, 2008 (the Form 10-K). Information in the notes to the consolidated financial statements in the Form 10-K referred to in these notes is incorporated by reference herein. The use of terms such as “see” or “refer to” shall be deemed to incorporate by reference into these notes the information to which reference is made. Certain prior period amounts have been reclassified to conform to the current period presentation. Results for interim periods are not necessarily indicative of results for the entire fiscal year.
Con Edison has two regulated utility subsidiaries: Con Edison of New York and O&R. Con Edison of New York provides electric service and gas service in New York City and Westchester County. The company also provides steam service in parts of Manhattan. O&R, along with its regulated utility subsidiaries, provides electric service in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service in southeastern New York and adjacent areas of eastern Pennsylvania. Con Edison has the following competitive energy businesses: Consolidated Edison Solutions, Inc. (Con Edison Solutions), a retail energy services company that sells electricity and also offers energy-related services; Consolidated Edison Energy, Inc. (Con Edison Energy), a wholesale energy supply company; and Consolidated Edison Development, Inc. (Con Edison Development), a
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NOTES TO THE FINANCIALSTATEMENTS (UNAUDITED) — CONTINUED
company that participates in infrastructure projects. During the second quarter of 2008, Con Edison Development and its subsidiary, CED/SCS Newington, LLC, completed the sale of their ownership interests in power generating projects with an aggregate capacity of approximately 1,706 megawatts. See Note V to the financial statements included in Item 8 of the Form 10-K.
Note A - Summary of Significant Accounting Policies Revenues
The Utilities and Con Edison Solutions recognize revenues for electric, gas and steam service on a monthly billing cycle basis. The Utilities defer over a 12-month period net interruptible gas revenues, other than those authorized by the New York State Public Service Commission (PSC) to be retained by the Utilities, for refund to firm gas sales and transportation customers. O&R and Con Edison Solutions accrue revenues at the end of each month for estimated energy service not yet billed to customers. Unbilled revenues included in Con Edison’s balance sheet for O&R and Con Edison Solutions at March 31, 2009 and December 31, 2008 were $125 million and $131 million, respectively.
Prior to March 31, 2009, Con Edison of New York did not accrue revenues for estimated energy service not yet billed to customers except for certain unbilled gas revenues accrued in 1989. Effective March 31, 2009, the PSC authorized Con Edison of New York to accrue unbilled electric, gas and steam revenues. At March 31, 2009, Con Edison of New York deferred the net margin on the unbilled revenues for the future benefit of customers by accruing an asset of $304 million for unbilled revenues, establishing refundable energy cost regulatory liabilities for $162 million for the costs of fuel and purchased power related to services provided but not yet billed, and establishing regulatory liabilities of $142 million for the difference between the unbilled revenues and energy cost liabilities. In accordance with the order, $33 million of the regulatory asset established in 1989 for unbilled gas revenues was offset against the unbilled revenue regulatory liability. The adoption of this accounting for unbilled revenues had no effect on net income.
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Earnings Per Common Share
Reference is made to “Earnings Per Common Share” in Note A to the financial statements included in Item 8 of the Form 10-K. For the three months ended March 31, 2009 and 2008, Con Edison’s basic and diluted EPS are calculated as follows:
Income for common stock from continuing operations
Income for common stock from discontinued operations, net of tax
Weighted average common shares outstanding – Basic
Add: Incremental shares attributable to effect of potentially dilutive securities
Adjusted weighted average common shares outstanding – Diluted
EARNINGS PER COMMON SHARE – BASIC
EARNINGS PER COMMON SHARE – DILUTED
Note B - Regulatory Matters
Reference is made to “Accounting Policies” in Note A and “Rate Agreements” in Note B to the financial statements included in Item 8 of the Form 10-K.
Rate Agreements
Con Edison of New York – Electric
In April 2009, the PSC adopted an order granting Con Edison of New York an electric rate increase, effective April 6, 2009, of $523 million. The PSC ruling reflects the following major items:
A return on common equity of 10.0 percent, based on certain assumptions, including a common equity ratio of 48 percent and achievement by the company of unspecified austerity measures required by the PSC that would result in avoided revenue requirements of $60 million (as to which, if not achieved despite the company’s best efforts, the company may, after March 31, 2010, petition the PSC for deferral of the costs related to up to $30 million of revenue requirements);
continuation of the revenue decoupling mechanism;
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reconciliation of the actual amount of pension and other postretirement benefit costs, environmental remediation expenses, property taxes and the cost of long-term debt to amounts reflected in rates;
if actual generation, transmission, distribution and shared service plant expenditures (other than removal costs) and capital costs incurred to relocate facilities to accommodate government projects are less than amounts reflected in rates for the respective category of expenditures, the company will accrue a regulatory liability and reduce its revenues by the revenue requirement impact of the difference (i.e., return on investment, depreciation and income taxes);
collection of a surcharge (in addition to the electric rate increase) from customers in connection with an increase (estimated at $198 million), effective April 2009, in a New York State assessment;
continuation of provisions for potential operations penalties of up to $152 million annually if certain customer service and system reliability performance targets are not met;
continuation of the collection of a portion (increased, to reflect higher capital costs, from $237 million collected in the rate year ended March 2009 to $254 million for the rate year ending March 2010) of the April 2008 rate increase subject to potential refund to customers following further PSC review and completion of an investigation by the PSC staff of the $1.6 billion of capital expenditures during the April 2005 through March 2008 period covered by the 2005 electric rate agreement for transmission and distribution utility plant that were above the amounts of such expenditures reflected in rates. The portion collected would also be subject to refund in the event the PSC determined that some disallowance of costs the company has recovered is warranted to address potential impacts of alleged unlawful conduct by arrested employees and contractors (see “Investigation of Contractor Payments” in Note H). The company is unable to estimate the amount, if any, of any refund that might be required and, accordingly, has not established a regulatory liability for a refund; and
continuation of the rate provisions pursuant to which the company recovers its purchased power and fuel costs from customers.
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Regulatory Assets and Liabilities
Regulatory assets and liabilities at March 31, 2009 and December 31, 2008 were comprised of the following items:
Unrecognized pension and other postretirement costs
Future federal income tax
Environmental remediation costs
Deferred derivative losses – long-term
World Trade Center restoration costs
Pension and other postretirement benefits deferrals
Revenue taxes
Electric property tax petition
O&R transition bond charges
Workers’ compensation
Gas rate plan deferral
Net electric deferrals
Other retirement program costs
Unbilled gas revenue
Asbestos-related costs
Deferred derivative losses – current
Recoverable energy costs – current
Total Regulatory Assets
Allowance for cost of removal less salvage
Net unbilled revenue deferrals
Refundable energy costs
Refundable energy costs – unbilled
Rate case amortizations
Gain on sale of First Avenue properties
EPA SO2 allowance proceeds – electric and steam
Deferred derivative gains – current
Total Regulatory Liabilities
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Note C - Long-Term Debt
Reference is made to Note C to the financial statements in Item 8 of the Form 10-K.
In March 2009, Con Edison of New York issued $275 million aggregate principal amount of 5.55 percent Debentures, Series 2009 A, due 2014, and $475 million aggregate principal amount of 6.65 percent Debentures, Series 2009 B, due 2019.
At March 31, 2009, $49 million of the $55 million of O&R’s weekly-rate, tax-exempt debt insured by Financial Guaranty Insurance Company (Series 1994A Debt), and $16 million of the $44 million of O&R’s weekly-rate, tax-exempt debt insured by Ambac Assurance Company (Series 1995A Debt), had been tendered by bondholders. The tendered bonds were purchased with funds drawn under letters of credit maintained as liquidity facilities for the tax-exempt debt. O&R reimbursed the bank for the funds used to purchase its tendered bonds, together with interest thereon. In April 2009, the tendered Series 1995A Debt was remarketed and the proceeds from the remarketing were used to pay short-term borrowings that funded the purchased tendered bonds.
Note D - Short-Term Borrowing
Reference is made to Note D to the financial statements in Item 8 of the Form 10-K.
At March 31, 2009, Con Edison had $222 million of commercial paper outstanding, none of which was outstanding under Con Edison of New York’s program. The weighted average interest rate was 0.6 percent for Con Edison. At December 31, 2008, Con Edison had $363 million of commercial paper outstanding of which $253 million was outstanding under Con Edison of New York’s program. The weighted average interest rate was 2.4 percent and 3.2 percent for Con Edison and Con Edison of New York, respectively. At March 31, 2009 and December 31, 2008, no loans were outstanding under the Companies’ credit agreements and $375 million (including $141 million for Con Edison of New York) and $316 million (including $107 million for Con Edison of New York) of letters of credit were outstanding, respectively.
Note E - Pension Benefits
Reference is made to Note E to the financial statements in Item 8 of the Form 10-K.
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Net Periodic Benefit Cost
The components of the Companies’ net periodic benefit costs for the three months ended March 31, 2009 and 2008 were as follows:
Service cost – including administrative expenses
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of net actuarial loss
Amortization of prior service costs
NET PERIODIC BENEFIT COST
Amortization of regulatory asset*
TOTAL PERIODIC BENEFIT COST
Cost capitalized
Cost deferred
Cost charged to operating expenses
In the first quarter of 2009, in accordance with Statement of Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of Financial Accounting Standards Board (FASB) Statements No. 87, 88, 106 and 132(R)” (SFAS No. 158) and based on the final actuarial valuation as of December 31, 2008, Con Edison adjusted the estimated amounts recorded in accordance with SFAS No. 158 by decreasing its pension liability by $17 million and related regulatory asset by $19 million and recognizing a charge of $1 million (net of taxes) to other comprehensive income (OCI). Con Edison of New York recorded a decrease to the pension liability of $27 million and a decrease to the regulatory asset of $27 million.
Expected Contributions
Based on current estimates, the Companies are not required under funding regulations and laws to make any contributions to the pension plan during 2009. The Companies’ policy is to fund their accounting cost to the extent tax deductible, therefore, Con Edison and Con Edison of New York expect to make discretionary contributions to the pension plan of $281 million and $244 million, respectively, of which Con Edison of New York contributed $92 million in the first quarter of 2009. The Companies’ 2009 funding level for the non-qualified supplemental pension plans has not yet been determined. The Companies are continuing to monitor changes to funding and tax laws that may impact future pension plan funding requirements.
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Note F - Other Postretirement Benefits
Reference is made to Note F to the financial statements in Item 8 of the Form 10-K.
The components of the Companies’ net periodic postretirement benefit costs for the three months ended March 31, 2009 and 2008 were as follows:
Service cost
Interest cost on accumulated other postretirement benefit obligation
Amortization of prior service cost
Amortization of transition obligation
NET PERIODIC POSTRETIREMENT BENEFIT COST
In the first quarter of 2009, in accordance with SFAS No. 158 and based on the final actuarial valuation as of December 31, 2008, Con Edison adjusted the estimated amounts recorded in accordance with SFAS No. 158 by increasing its liability for other postretirement benefits by $4 million and the related regulatory asset by $5 million and recognizing a charge of $1 million (net of taxes) to OCI. Con Edison of New York recorded an additional liability for other postretirement benefits of $11 million and an additional regulatory asset of $11 million.
Based on current estimates, Con Edison and Con Edison of New York expect to make contributions of $86 million and $73 million, respectively, to the other postretirement benefit plans in 2009.
Note G - Environmental Matters
Superfund Sites
Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or generated in the course of operations of the Utilities and their predecessors and are present at sites and in facilities and equipment they currently or previously owned, including sites at which gas was manufactured or stored.
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The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes (Superfund) impose joint and several liability, regardless of fault, upon generators of hazardous substances for investigation and remediation costs (which include costs of demolition, removal, disposal, storage, replacement, containment, and monitoring) and environmental damages. Liability under these laws can be material and may be imposed for contamination from past acts, even though such past acts may have been lawful at the time they occurred. The sites at which the Utilities have been asserted to have liability under these laws, including their manufactured gas plant sites and any neighboring areas to which contamination may have migrated, are referred to herein as “Superfund Sites.”
For Superfund Sites where there are other potentially responsible parties and the Utilities are not managing the site investigation and remediation, the accrued liability represents an estimate of the amount the Utilities will need to pay to discharge their related obligations. For Superfund Sites (including the manufactured gas plant sites) for which one of the Utilities is managing the investigation and remediation, the accrued liability represents an estimate of the company’s share of undiscounted cost to investigate the sites and, for sites that have been investigated in whole or in part, the cost to remediate the sites. Remediation costs are estimated in light of the information available, applicable remediation standards, and experience with similar sites.
The accrued liabilities and regulatory assets related to Superfund Sites at March 31, 2009 and December 31, 2008 were as follows:
Accrued Liabilities:
Other Superfund Sites
Total
Most of the accrued Superfund Site liability relates to sites that have been investigated, in whole or in part. As investigations progress on these and other sites, the Utilities expect that additional liability will be accrued, the amount of which is not presently determinable but may be material. Under their current rate agreements, the Utilities are permitted to recover or defer as regulatory assets (for subsequent recovery through rates) certain site investigation and remediation costs.
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There were no insurance recoveries received related to Superfund Sites for the three months ended March 31, 2009 and 2008. Environmental remediation costs incurred related to Superfund Sites during the three months ended March 31, 2009 and 2008 were as follows:
Remediation costs incurred
In 2006, Con Edison of New York estimated that for its manufactured gas plant sites, its aggregate undiscounted potential liability for the investigation and remediation of coal tar and/or other manufactured gas plant-related environmental contaminants could range up to $1.1 billion. In 2007, O&R estimated that for its manufactured gas plant sites, each of which has been investigated, the aggregate undiscounted potential liability for the remediation of such contaminants could range up to $115 million. These estimates were based on the assumption that there is contamination at the sites that have not yet been investigated and additional assumptions about these and the other sites regarding the extent of contamination and the type and extent of remediation that may be required. Actual experience may be materially different.
Asbestos Proceedings
Suits have been brought in New York State and federal courts against the Utilities and many other defendants, wherein a large number of plaintiffs sought large amounts of compensatory and punitive damages for deaths and injuries allegedly caused by exposure to asbestos at various premises of the Utilities. The suits that have been resolved, which are many, have been resolved without any payment by the Utilities, or for amounts that were not, in the aggregate, material to them. The amounts specified in all the remaining thousands of suits total billions of dollars; however, the Utilities believe that these amounts are greatly exaggerated, based on the disposition of previous claims. In 2008, Con Edison of New York estimated that its aggregate undiscounted potential liability for these suits and additional suits that may be brought over the next 15 years is $9 million. The estimate was based upon a combination of modeling, historical data analysis and risk factor assessment. Actual experience may be materially different. In addition, certain current and former employees have claimed or are claiming workers’ compensation benefits based on alleged disability from exposure to asbestos. Under its current rate agreements, Con Edison of New York is permitted to defer as regulatory assets (for subsequent recovery through rates) costs incurred for its asbestos lawsuits and workers’ compensation claims. The
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accrued liability for asbestos suits and workers’ compensation proceedings (including those related to asbestos exposure) and the amounts deferred as regulatory assets for the Companies at March 31, 2009 and December 31, 2008 were as follows:
Accrued liability – asbestos suits
Regulatory assets – asbestos suits
Accrued liability – workers’ compensation
Regulatory assets – workers’ compensation
Note H - Other Material Contingencies
Manhattan Steam Main Rupture
In July 2007, a Con Edison of New York steam main located in midtown Manhattan ruptured. It has been reported that one person died and others were injured as a result of the incident. Several buildings in the area were damaged. Debris from the incident included dirt and mud containing asbestos. The response to the incident required the closing of several buildings and streets for various periods. Over ninety suits are pending against the company seeking generally unspecified compensatory and, in some cases, punitive damages, for personal injury, property damage and business interruption. The company has not accrued a liability for the suits. The company has notified its insurers of the incident and believes that the policies in force at the time of the incident will cover most of the company’s costs, which the company is unable to estimate, but which could be substantial, to satisfy its liability to others in connection with the incident.
Investigation of Contractor Payments
In January 2009, Con Edison of New York commenced an internal investigation relating to the arrests of certain employees and retired employees for accepting kickbacks from contractors that performed construction work for the company. The company has retained a law firm, which has retained an accounting firm, to assist in the company’s investigation. The company is providing information to governmental authorities in connection with their investigation of the arrested employees and contractors. The company has terminated its employment of the arrested employees and its contracts with the contractors. In February 2009, the PSC commenced a proceeding that, among other things, will examine the prudence of certain of the company’s expenditures relating to the arrests and consider whether additional expenditures should also be examined. The company, based upon its evaluation of its internal controls for 2008 and previous years, believes that the controls were effective to provide reasonable assurance that its financial statements have been fairly presented, in all material respects, in
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conformity with generally accepted accounting principles. Because the company’s investigation is in its early stages, the company is unable to predict the impact of any of the employees’ unlawful conduct on the company’s internal controls, business, results of operations or financial position.
Permit Non-Compliance and Pollution Discharges
In March 2009, the New York State Department of Environmental Conservation (DEC) issued a proposed Administrative Order on Consent to Con Edison of New York with respect to non-compliance with certain laws, regulations and permit conditions and discharges of pollutants at the company’s steam generating facilities. The proposed order effectively institutes a civil enforcement proceeding against the company. In the proposed order, the DEC is seeking, among other things, the company’s agreement to pay a penalty in an amount the DEC has not yet specified, retain an independent consultant to conduct a comprehensive audit of the company’s generating facilities to determine compliance with federal and New York State environmental laws and regulations and recommend best practices, remove all equipment containing polychlorinated biphenyls from the company’s steam and electric facilities, remediate polychlorinated biphenyl contamination, install certain wastewater treatment facilities, and comply with additional sampling, monitoring, and training requirements. The company will seek to resolve this proceeding through a negotiated settlement with the DEC. It is unable to predict the impact of the proceeding on the company’s operations or the amount of the penalty and the additional costs, which could be substantial, to comply with the requirements resulting from this proceeding.
Lease In/Lease Out Transactions
In each of 1997 and 1999, Con Edison Development entered into a transaction in which it leased property and then immediately subleased it back to the lessor (termed “Lease In/Lease Out,” or LILO transactions). The transactions respectively involve electric generating and gas distribution facilities in the Netherlands, with a total investment of $259 million. The transactions were financed with $93 million of equity and $166 million of non-recourse, long-term debt secured by the underlying assets. In accordance with SFAS No. 13, “Accounting for Leases,” Con Edison is accounting for the two LILO transactions as leveraged leases. Accordingly, the company’s investment in these leases, net of non-recourse debt, is carried as a single amount in Con Edison’s consolidated balance sheet and income is recognized pursuant to a method that incorporates a level rate of return for those years when net investment in the lease is positive, based upon the after-tax cash flows projected at the inception of the leveraged leases. The company’s net investment in these leveraged leases was $(12) million at March 31, 2009 and $(8) million at December 31, 2008 and is comprised of a $235 million gross investment less $247 million of deferred tax liabilities at March 31, 2009 and $235 million gross investment less $243 million of deferred tax liabilities at December 31, 2008.
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On audit of Con Edison’s tax return for 1997, the Internal Revenue Service (IRS) disallowed the tax losses in connection with the 1997 LILO transaction. In December 2005, Con Edison paid a $0.3 million income tax deficiency asserted by the IRS for the tax year 1997 with respect to the 1997 LILO transaction. In April 2006, the company paid interest of $0.2 million associated with the deficiency and commenced an action in the United States Court of Federal Claims, entitled Consolidated Edison Company of New York, Inc. v. United States, to obtain a refund of this tax payment and interest. A trial was completed in November 2007, post trial briefs have been filed and oral argument took place on August 13, 2008. A decision is expected later this year.
Two cases involving LILO and sale in/lease out transactions have been decided in other courts, each of which was decided in favor of the government and one of which has been affirmed on appeal. See, BB&T Corp. v. United States, 523 F.3d 461 (4th Cir. 2008), and AWG Leasing Trust v. United States, 1:07-CV-857 (N.D. Ohio May 28, 2008). The court before which Con Edison stands, the Court of Federal Claims, has not previously rendered a decision with respect to such transactions and is not bound by these cases. Con Edison believes its tax deductions are proper and that its transaction is distinguishable on a number of grounds. For example, the two cases recently decided involved investments by banks in industrial assets, Swedish wood pulp mill equipment and a German waste-to-energy disposal facility respectively. In contrast, the facts surrounding Con Edison’s investment are quite different. Its investment was made in the context of the deregulation of the electric energy industry in New York. It involved an acquisition by Con Edison Development of a leasehold interest in an electric generating power plant in the Netherlands. The asset is consistent with Con Edison Development’s plan at the time to invest in a variety of international infrastructure projects. Moreover, in both BB&T and AWG the United States, as defendant, successfully argued that the counterparties in those cases were certain to exercise their early purchase options and, therefore, that those transactions did not qualify as leases. In contrast, Con Edison produced evidence that it is unclear whether the counterparty will exercise its early purchase option.
In a third LILO case, a jury verdict was rendered, partially favorable to the taxpayer and partially favorable to the government. See, Fifth Third Bancorp & Subsidiaries v. United States, 1:05-CV-350 (S.D. Ohio April 18, 2008). In December 2008, this case was conditionally dismissed without prejudice to the parties until June 2, 2009, for the purpose of pursuing a settlement. In the event a settlement is not reached, the case will be reinstated to the Court calendar.
In connection with its audit of Con Edison’s federal income tax return for the tax years 2007 and 2006, the IRS disallowed $41 million and $43 million of net tax deductions taken with respect to both of the LILO transactions for the tax years. Con Edison plans to file an appeal of the 2007 audit level
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disallowance and has filed an appeal of the 2006 audit level disallowance with the Appeals Office of the IRS. In connection with its audit of Con Edison’s federal income tax returns for the tax years 1998 through 2005, the IRS indicated that it intends to disallow $332 million of net tax deductions taken with respect to both of the LILO transactions for the tax years. If and when these audit level disallowances become appealable, Con Edison intends to file appeals of the disallowances with the Appeals Office of the IRS.
Con Edison believes that its LILO transactions have been correctly reported, and has not recorded any reserve with respect to the disallowance of tax losses, or related interest, in connection with its LILO transactions. Con Edison’s estimated tax savings, reflected in its financial statements, from the two LILO transactions through March 31, 2009, in the aggregate, was $201 million. If Con Edison were required to repay all or a portion of these amounts, it would also be required to pay interest of up to $82 million at March 31, 2009.
In July 2006, the FASB issued FASB Staff Position (FSP) No. FASB Statement (FAS) 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,” which became effective for fiscal years beginning after December 15, 2006. This FSP requires the expected timing of income tax cash flows generated by Con Edison’s LILO transactions to be reviewed at least annually. If the expected timing of the cash flows is revised, the rate of return and the allocation of income would be recalculated from the inception of the LILO transactions, and the company would be required to recalculate the accounting effect of the LILO transactions, which would result in a charge to earnings that could have a material adverse effect on the company’s results of operations.
Guarantees
Con Edison and its subsidiaries enter into various agreements providing financial or performance assurance primarily to third parties on behalf of their subsidiaries. Maximum amounts guaranteed by Con Edison totaled $1.7 billion and $1.6 billion at March 31, 2009 and December 31, 2008, respectively.
A summary, by type and term, of Con Edison’s total guarantees at March 31, 2009 is as follows:
Commodity transactions
Affordable housing program
Intra-company guarantees
Other guarantees
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For a description of guarantee types, see Note H to the financial statements in Item 8 of the Form 10-K.
Note I - Financial Information by Business Segment
Reference is made to Note N to the financial statements in Item 8 of the Form 10-K.
The financial data for the business segments are as follows:
Operating
revenues
income
Consolidation adjustments
Total Con Edison of New York
Total O&R
Competitive energy businesses
Other*
Total Con Edison
Note J - Derivative Instruments and Hedging Activities
Derivative instruments and hedging activities are accounted for in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS No. 133). Under SFAS No. 133, derivatives are recognized on the balance sheet at fair value, unless an exception is available under the standard. Certain qualifying derivative contracts have been designated as normal purchases or normal sales contracts. These contracts are not reported at fair value under SFAS No. 133.
Effective January 1, 2009, the Companies adopted SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS No. 161). SFAS No. 161 amends and expands the disclosure requirements of Statement 133 with the intent to provide users of financial statements with enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related
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interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements.
Energy Price Hedging
Con Edison’s subsidiaries hedge market price fluctuations associated with physical purchases and sales of electricity, natural gas, and steam by using derivative instruments including futures, forwards, basis swaps, options, transmission congestion contracts and financial transmission rights contracts. The fair values of these derivative instruments at March 31, 2009 and December 31, 2008 were as follows:
Con Edison of
New York
Fair value of net derivative assets/(liabilities) - gross
Impact of netting of cash collateral
Fair value of net derivative assets/(liabilities) - net
Credit Exposure
The Companies are exposed to credit risk related to transactions entered into primarily for the various energy supply and hedging activities by the Utilities and the competitive energy businesses. The Companies use credit policies to manage this risk, including an established credit approval process, monitoring of counterparty limits, netting provisions within agreements, collateral or prepayment arrangements, credit insurance and credit default swaps.
At March 31, 2009, Con Edison and Con Edison of New York had $349 million and $47 million of credit exposure in connection with energy supply and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $246 million with investment-grade counterparties and $103 million primarily with commodity exchange brokers or independent system operators. Con Edison of New York’s entire net credit exposure was with commodity exchange brokers.
Economic Hedges
The Companies enter into derivative instruments that do not qualify or are not designated as hedges under SFAS No. 133. However, management believes these instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices.
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The fair values of the Companies commodity derivatives at March 31, 2009 were:
Current
Long term
Total assets derivatives
Impact of netting
Net assets derivatives
Total liability derivatives
Net liability derivatives
The Utilities generally recover all of their prudently incurred fuel, purchased power and gas cost, including hedging gains and losses, in accordance with rate provisions approved by the applicable state utility commissions. See “Recoverable Energy Costs” in Note A to the financial statements in Item 8 of the Form 10-K. In accordance with SFAS No. 71, the Utilities record a regulatory asset or liability to defer recognition of unrealized gains and losses on their electric and gas derivatives. As gains and losses are realized in future periods, they will be recognized as purchased power, gas and fuel costs in the Companies’ consolidated income statements. Con Edison’s competitive energy businesses record realized and unrealized gains and losses on their derivative contracts in earnings in the reporting period in which they occur.
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The following table presents the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the three months ended March 31, 2009:
Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a)
Deferred or Recognized in Income for the Three Months Ended March 31, 2009
Pre-tax gains/(losses) deferred in accordance with FAS71:
Total deferred gains
Total deferred losses
Net deferred losses
Pre-tax gain/(loss) recognized in income
Total pre-tax gain/(loss) recognized in income
As of March 31, 2009, Con Edison had 988 contracts, including 377 Con Edison of New York contracts, which were considered to be derivatives under SFAS No. 133 (excluding qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts). The following table presents the number of contracts by commodity type:
The Companies also enter into electric congestion and gas basis swap contracts to hedge the congestion and transportation charges which are associated with electric and gas contracts and hedged volumes.
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The collateral requirements associated with, and settlement of, derivative transactions are included in net cash flows from operating activities in the Companies’ consolidated statement of cash flows. Most derivative instrument contracts contain provisions that may require the Companies to provide collateral on derivative instruments in net liability positions. The amount of collateral to be provided will depend on the fair value of the derivative instruments and the Companies’ credit ratings.
The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position and collateral posted at March 31, 2009, and the additional collateral that would have been required to be posted had the lowest applicable credit rating been reduced one level and to below investment grade were:
Aggregate fair value – net liability
Collateral posted
Current credit ratings(c)
Additional Collateral(e) (downgrade one level)
Additional Collateral(e) (downgrade to below investment grade)
Interest Rate Swaps
In May 2008, Con Edison Development’s interest rate swaps that were designated as cash flow hedges under SFAS No. 133 were sold. The losses were classified to income/(loss) from discontinued operations for the year ended December 31, 2008 and were immaterial to Con Edison’s results of operations.
O&R has an interest rate swap related to its Series 1994A Debt. See Note C. O&R pays a fixed-rate of 6.09 percent and receives a LIBOR-based variable rate. The fair value of this interest rate swap at March 31, 2009 was an unrealized loss of $14 million, which has been included in Con Edison’s consolidated balance sheet as a noncurrent liability/fair value of derivative liabilities and a regulatory
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asset. The increase in the fair value of the swap for the three months ended March 31, 2009 was $1 million. In the event O&R’s credit rating was downgraded to BBB-/Baa3 or lower, the swap counterparty could elect to terminate the agreement and O&R would be required to settle immediately.
Note K - Fair Value Measurements
Reference is made to Note P to the financial statements in Item 8 of the Form 10-K.
FASB Statement No. 157, “Fair Value Measurements” (SFAS No. 157) defines fair value, establishes a framework for measuring fair value and expands the disclosures about fair value measurements.
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2009 are summarized below under the three-level hierarchy established by SFAS No. 157. SFAS No. 157 defines the levels within the hierarchy as follows:
Level 1 – Consists of assets or liabilities whose value is based on unadjusted quoted prices in active markets at the measurement date.
Level 2 – Consists of assets or liabilities valued using industry standard models and based on prices, other than quoted prices within Level 1, that are either directly or indirectly observable as of the measurement date.
Level 3 – Consists of assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date.
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2009 are summarized below:
Netting
Adjustments (4)
Derivative assets:
Energy (1)
Other assets (3)
Derivative liabilities:
Financial & other (2)
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Assets and liabilities measured at fair value on a recurring basis as of December 31, 2008 are summarized below:
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The table listed below provides a reconciliation of the beginning and ending net balances for assets and liabilities measured at fair value as of March 31, 2009 and classified as Level 3 in the fair value hierarchy:
Total Gains/(Losses) –
Realized and Unrealized
Derivatives:
Energy
Financial & other
The table listed below provides a reconciliation of the beginning and ending net balances for assets and liabilities measured at fair value as of March 31, 2008 and classified as Level 3 in the fair value hierarchy:
For the Utilities, realized gains and losses on Level 3 energy derivative assets and liabilities are reported as part of purchased power and gas costs. The Utilities generally recover these costs in accordance with rate provisions approved by the applicable state public utilities commissions. See Note A to the
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financial statements in Item 8 of the Form 10-K. Unrealized gains and losses for energy derivatives are generally deferred on the consolidated balance sheet in accordance with SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.”
For the competitive energy businesses, realized and unrealized gains and losses on Level 3 energy derivative assets and liabilities are reported in non-utility revenues ($14 million loss and $31 million loss) and purchased power costs ($1 million loss and $1 million gain) on the consolidated income statement for the three months ended March 31, 2009 and 2008, respectively. The change in unrealized gains or losses relating to assets still held at March 31, 2009, included in non-utility revenues for the three months ended March 31, 2009, is a $15 million loss. The change in unrealized gains or losses relating to assets still held at March 31, 2008, included in non-utility revenues and purchased power costs is $(30) million and $1 million, respectively.
For the Utilities, realized and unrealized gains and losses on Level 3 other assets of $(2) million and $(2) million are reported in investment and other income on the consolidated income statement for the three months ended March 31, 2009 and 2008, respectively.
Note L - New Financial Accounting Standards
Reference is made to Note T to the financial statements in Item 8 of the Form 10-K.
In April 2009, the FASB issued FSP FAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly.” This FSP provides additional guidance on how fair value measurements might be determined in an inactive market. The FSP provides factors for determining whether a market is active and subsequently whether a transaction is distressed. Additionally, this FSP requires an entity to disclose a change in valuation technique (and the related inputs) resulting from the application of the FSP and to quantify its effects, if practicable. This FSP applies to all fair value measurements when appropriate and is effective for interim and annual periods ending after June 15, 2009; early adoption is permitted for periods ending after March 15, 2009. The application of this FSP is not expected to have a material impact on the Companies’ financial position, results of operations and liquidity.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” This FSP amends the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of an impairment charge to be recorded in earnings. Under the FSP, an entity must assess the likelihood of selling the security prior to recovering its cost basis to determine whether an other-than-temporary impairment exists. This FSP is effective for interim and annual periods ending after June 15, 2009; early adoption is
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permitted for periods ending after March 15, 2009. The application of this FSP is not expected to have a material impact on the Companies’ financial position, results of operations and liquidity.
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) 28-1 “Interim Disclosures about Fair Value of Financial Instruments.” This FSP applies to all financial instruments within the scope of FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments,” and requires entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements. This FSP is effective for interim and annual periods ending after June 15, 2009; early adoption is permitted for periods ending after March 15, 2009. The application of this FSP is not expected to have a material impact on the Companies’ financial position, results of operations and liquidity.
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This combined management’s discussion and analysis of financial condition and results of operations (MD&A) relates to the consolidated financial statements (the First Quarter Financial Statements) included in this report of two separate registrants: Consolidated Edison, Inc. (Con Edison) and Consolidated Edison Company of New York, Inc. (Con Edison of New York) and should be read in conjunction with the financial statements and the notes thereto. As used in this report, the term the “Companies” refers to Con Edison and Con Edison of New York. Con Edison of New York is a subsidiary of Con Edison and, as such, information in this MD&A about Con Edison of New York applies to Con Edison.
This MD&A should be read in conjunction with the First Quarter Financial Statements and the notes thereto and the MD&A in Item 7 of the Companies’ combined Annual Report on Form 10-K for the year ended December 31, 2008 (File Nos. 1-14514 and 1-1217, the Form 10-K).
Information in the notes to the consolidated financial statements referred to in this discussion and analysis is incorporated by reference herein. The use of terms such as “see” or “refer to” shall be deemed to incorporate by reference into this discussion and analysis the information to which reference is made.
Corporate Overview
Con Edison’s principal business operations are those of its utility companies, Con Edison of New York and Orange and Rockland Utilities, Inc. (O&R), together known as the “Utilities.” Con Edison also has competitive energy businesses (see “Competitive Energy Businesses,” below). Certain financial data of Con Edison’s businesses is presented below:
Total Utilities
Con Edison Development (a)
Con Edison Energy (a)
Con Edison Solutions (a)
Other (b)
MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS(COMBINED FOR CON EDISON AND CON EDISON OF
NEW YORK) — CONTINUED
Con Edison’s net income for common stock for the three months ended March 31, 2009 was $180 million or $0.66 a share compared with earnings of $303 million or $1.11 a share for the three months ended March 31, 2008. See “Results of Operations – Summary,” below.
Regulated Utilities
Con Edison of New York provides electric service to approximately 3.3 million customers and gas service to approximately 1.1 million customers in New York City and Westchester County. The company also provides steam service in parts of Manhattan. O&R, along with its regulated utility businesses, provides electric service to approximately 0.3 million customers in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service to over 0.1 million customers in southeastern New York and adjacent areas of eastern Pennsylvania.
The Utilities are primarily “wires and pipes” energy delivery businesses that deliver energy in their service areas subject to extensive federal and state regulation. The Utilities’ customers buy this energy from the Utilities, or from other suppliers through the Utilities’ retail access programs. The Utilities purchase substantially all of the energy they sell to customers pursuant to firm contracts or through wholesale energy markets, and recover (generally on a current basis) the cost of the energy sold, pursuant to approved rate plans.
Con Edison anticipates that the Utilities will continue to provide substantially all of its earnings over the next few years. The Utilities’ earnings will depend on various factors including demand for utility service and the Utilities’ ability to charge rates for their services that reflect the costs of service, including a return on invested equity capital.
Because the energy delivery infrastructure must be adequate to meet demand in peak periods with a high level of reliability, the Utilities’ capital investment plans reflect in great part past actual electric peak demand adjusted to summer design weather conditions, as well as forecast growth in peak usage. The factors affecting demand for utility service include growth of customer demand, weather, market prices for energy, economic conditions and measures that promote energy efficiency. Demand for electric service peaks during the summer air conditioning season. Demand for gas and steam service peaks during the winter heating season.
The weather during the summer of 2008 was cooler than design conditions. The highest peak electric demand reached in 2008 was 12,987 MW for Con Edison of New York and 1,530 MW for O&R. Both peaks occurred on June 10, 2008. The Companies have continued to monitor the effects of the
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ongoing global financial turmoil on the local economy and have reduced their outlook for customer demand. The Utilities currently estimate that, under design weather conditions, the 2009 peak electric demand in their respective service areas will be 13,750 MW for Con Edison of New York and 1,650 MW for O&R. The average annual growth rate of the peak electric demand over the next five years at design conditions is estimated to be approximately 0.6 percent for Con Edison of New York and 2.1 percent for O&R. The Con Edison of New York forecasted peak demand includes the impact of permanent demand reduction programs. The Companies anticipate an ongoing need for substantial capital investment in order to meet this growth in peak usage with the high level of reliability that they currently provide (see “Liquidity and Capital Resources—Capital Requirements,” below).
The Utilities have rate plans approved by state utility regulators that cover the rates they can charge their customers. Con Edison of New York’s electric, gas and steam rate plans are effective through April 2010, September 30, 2010 and September 30, 2010, respectively. In April 2009, the New York State Public Service Commission (PSC) adopted an order granting Con Edison of New York an electric rate increase, retroactive to April 6, 2009. In May 2009, Con Edison of New York expects to file a request for a new electric rate plan to be effective April 2010. O&R’s rate plans for its electric and gas service in New York and its subsidiary’s electric service in New Jersey extend through June 30, 2011, October 31, 2009 and March 31, 2010, respectively. Pursuant to the Utilities’ multi-year rate plans, charges to customers generally may not be changed during the respective terms of the rate plans other than for recovery of the costs incurred for energy supply, for specified increases provided in the rate plans and for limited other exceptions. The New York rate plans for Con Edison of New York’s gas and steam operations as well as O&R’s electric and gas operations generally require the Utilities to share with customers earnings in excess of specified rates of return on common equity capital. Under the revenue decoupling mechanisms in Con Edison of New York’s current electric and gas rate plans and O&R’s electric rate plan, the Utilities’ revenues will generally not be affected by changes in delivery volumes from levels assumed when rates were approved. See “Regulatory Matters” below, “Recoverable Energy Costs” and “Rate Agreements” in Notes A and B, respectively, to the financial statements in Item 8 of the Form 10-K and Notes A and B to the First Quarter Financial Statements.
Accounting rules and regulations for public utilities include Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation,” pursuant to which the economic effects of rate regulation are reflected in financial statements. See “Application of Critical Accounting Policies” in Item 7 of the Form 10-K.
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Competitive Energy Businesses
Con Edison’s competitive energy businesses participate in segments of the electricity industry that are less comprehensively regulated than the Utilities. These segments include the sales and related hedging of electricity to wholesale and retail customers and sales of certain energy-related products and services. At March 31, 2009, Con Edison’s equity investment in its competitive energy businesses was $201 million and their assets amounted to $866 million. Con Edison is evaluating additional opportunities to invest in electric and gas-related businesses.
Consolidated Edison Solutions, Inc. (Con Edison Solutions) sells electricity directly to delivery-service customers of utilities primarily in the Northeast and Mid-Atlantic regions (including some of the Utilities’ customers) and also offers energy-related services. Con Edison Solutions does not sell electricity to the Utilities. The company sold approximately 2.7 million MWHs of electricity to customers over the three-month period ended March 31, 2009.
Consolidated Edison Development, Inc. (Con Edison Development) participates in infrastructure projects. In 2008, Con Edison Development and its subsidiary, CED/SCS Newington, LLC, completed the sale of their ownership interests in power generating projects with an aggregate capacity of approximately 1,706 MW. See Note V to the financial statements in Item 8 of the Form 10-K.
Consolidated Edison Energy, Inc. (Con Edison Energy) procures electric energy and capacity for Con Edison Solutions and fuel for other companies. It sells the electric capacity and energy produced by plants owned, leased or operated by others. The company also provides energy risk management services to Con Edison Solutions, offers these services to others and enters into wholesale supply transactions.
Discontinued Operations
In 2008, Con Edison Development and its subsidiary, CED/SCS Newington, LLC, completed the sale of their ownership interests in power generating projects with an aggregate capacity of approximately 1,706 MW. See Note V to the financial statements in Item 8 of the Form 10-K.
Results of Operations—Summary
Con Edison’s earnings per share for the three months ended March 31, 2009 were $0.66 (basic and diluted basis) compared with $1.11 (basic and diluted basis) for the 2008 period.
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Net income for common stock for the three months ended March 31, 2009 and 2008 was as follows:
Competitive energy businesses (a)
Total continuing operations
Discontinued operations (c)
CON EDISON
Con Edison’s results of operations for the three months ended March 31, 2009, as compared with the 2008 period, reflect changes in the Utilities’ rate plans (including lower allowed returns on equity and additional revenues designed to recover increases in certain operations and maintenance expenses, depreciation and property taxes, and interest charges), and the operating results of the competitive energy businesses (including net mark-to-market effects). Operations and maintenance expenses were higher in the three months ended March 31, 2009 compared with the 2008 period reflecting primarily higher costs, which are generally reflected in rates, such as pension and other post-retirement benefits, the support and maintenance of company underground facilities to accommodate municipal projects, the write-off of uncollectible accounts and additional operating programs. Depreciation and property taxes were higher in the three months ended March 31, 2009 compared with the 2008 period reflecting primarily the impact from increased capital expenditures. Results of operations for Con Edison in the 2008 period include the resolution of litigation with Northeast Utilities and the impact of discontinued operations.
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The following table presents the estimated effect on earnings per share and net income for common stock for the three months ended March 31, 2009 as compared with the 2008 period, resulting from these and other major factors:
Rate plans
Operations and maintenance expense
Long Island City power outage reserve in 2008
Depreciation, property taxes and other tax matters
Net interest expense
Orange and Rockland Utilities
Earnings excluding net mark-to-market effects and discontinued operations
Net mark-to-market effects
Total Competitive energy businesses
Northeast Utilities litigation settlement
Other, including parent company expenses
See “Results of Operations” below for further discussion and analysis of results of operations.
The Companies’ businesses are influenced by many factors that are difficult to predict, and that involve uncertainties that may materially affect actual operating results, cash flows and financial condition. The factors include those described under “Risk Factors” in Item 7 of the Form 10-K.
Forward-Looking Statements
This report includes forward-looking statements intended to qualify for the safe-harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements of future expectation and not facts. Words such as “expects,” “estimates,” “anticipates,” “intends,” “believes,” “plans,” “will” and similar expressions identify forward-looking statements. Forward-looking statements are based on information available at the time the statements are made, and accordingly speak only as of that time. Actual results or developments might differ materially from those included in the forward-looking
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statements because of various factors such as those discussed under “Risk Factors” in Item 7 of the Form 10-K.
Application of Critical Accounting Policies
The Companies’ financial statements reflect the application of their accounting policies, which conform to accounting principles generally accepted in the United States of America. The Companies’ critical accounting policies include industry-specific accounting applicable to regulated public utilities and accounting for pensions and other postretirement benefits, contingencies, long-lived assets, derivative instruments, goodwill and leases. See “Application of Critical Accounting Policies” in Item 7 of the Form 10-K.
Liquidity and Capital Resources
The Companies’ liquidity reflects cash flows from operating, investing and financing activities, as shown on their respective consolidated statement of cash flows and as discussed below. See “Liquidity and Capital Resources” in Item 7 of the Form 10-K. Changes in the Companies’ cash and temporary cash investments resulting from operating, investing and financing activities for the three months ended March 31, 2009 and 2008 are summarized as follows:
Operating activities
Investing activities
Financing activities
Net change
Balance at beginning of period
Balance at end of period
Cash Flows from Operating Activities
The Utilities’ cash flows from operating activities reflect principally their energy sales and deliveries and cost of operations. The volume of energy sales and deliveries is dependent primarily on factors external to the Utilities, such as growth of customer demand, weather, market prices for energy, economic conditions and measures that promote energy efficiency. Under the revenue decoupling mechanisms in Con Edison of New York’s electric and gas rate plans and O&R’s electric rate plan, changes in delivery volumes from levels assumed when rates were approved may affect the timing of cash flows but not net income. See Note B to the financial statements in Item 8 of the Form 10-K and Note B to the First Quarter Financial Statements. The prices at which the Utilities provide energy to
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their customers are determined in accordance with their rate agreements. In general, changes in the Utilities’ cost of purchased power, fuel and gas may affect the timing of cash flows but not net income because the costs are recovered in accordance with rate agreements. See “Recoverable Energy Costs” in Note A to the financial statements in Item 8 of the Form 10-K.
Net income is the result of cash and non-cash (or accrual) transactions. Only cash transactions affect the Companies’ cash flows from operating activities. Principal non-cash charges include depreciation and deferred income tax expense. Principal non-cash credits include amortizations of certain net regulatory liabilities. Non-cash charges or credits may also be accrued under the revenue decoupling mechanisms in Con Edison of New York’s current electric and gas rate plans and O&R’s electric rate plan. See “Application of Critical Accounting Policies – Accounting for Pensions and Other Postretirement Benefits” in Item 7 of the Form 10-K and Notes B, E and F to the First Quarter Financial Statements.
In March 2009, Con Edison of New York adopted unbilled revenue accounting which had the non-cash effect of increasing an accrued unbilled revenue receivable and regulatory liabilities. See Note A to the First Quarter Financial Statements.
Net cash flows from operating activities for the three months ended March 31, 2009 for Con Edison and Con Edison of New York were $82 million and $279 million higher, respectively, than in the 2008 period. The increases in net cash flows reflect the January 2008 semi-annual payment of Con Edison of New York’s New York City property taxes, with no comparable semi-annual payment in the 2009 period. The Company achieved a 1.5 percent reduction in its City property taxes for the fiscal year ending June 30, 2009 by prepaying the annual tax amount. For Con Edison, the increase was offset in part by increased cash collateral paid to brokers and counterparties on lower commodity prices on derivative transactions.
The change in net cash flows also reflects the timing of payments for and recovery of energy costs. This timing issue is reflected within changes to accounts receivable – customers, recoverable energy costs and accounts payable balances.
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Cash Flows used in Investing Activities
Net cash flows used in investing activities for Con Edison and Con Edison of New York were $43 million and $82 million lower, respectively, for the three months ended March 31, 2009 than in the 2008 period. The decreases for the Companies reflect primarily decreased utility construction expenditures and for Con Edison of New York, the repayment of loans by O&R. See Note S to the financial statements in Item 8 of the Form 10-K.
Cash Flows from Financing Activities
Net cash flows from financing activities for Con Edison and Con Edison of New York increased $513 million and $285 million, respectively, in the three months ended March 31, 2009 compared with the 2008 period.
Cash flows from financing activities for the three months ended March 31, 2009 and 2008 reflect the issuance of Con Edison common shares through its dividend reinvestment and employee stock plans (2009: 532,408 shares for $6 million, 2008: 480,707 shares for $12 million). In addition, as a result of the stock plan issuances, cash used to pay common stock dividends was reduced by $12 million in 2009 and $11 million in 2008.
In March 2009, Con Edison of New York issued $275 million 5.55% 5-year debentures and $475 million 6.65% 10-year debentures.
Cash flows from financing activities of the Companies also reflect commercial paper issuance (included on the consolidated balance sheets as “Notes payable”). The commercial paper amounts outstanding at March 31, 2009 and December 31, 2008 and the average daily balances for 2009 and 2008 for Con Edison and Con Edison of New York were as follows:
(Millions of Dollars,
except Weighted Average Yield)
Weighted average yield
Common stock issuances and external borrowings are sources of liquidity that could be affected by changes in credit ratings, financial performance and capital market conditions. For information about the Companies’ credit ratings and certain financial ratios, see “Capital Resources” in Item 7 of the Form 10-K.
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Other Changes in Assets and Liabilities
The following table shows changes in certain assets and liabilities at March 31, 2009, compared with December 31, 2008.
Con Edison of New York2009 vs. 2008
Variance
Assets
Fair value of derivative assets – current
Gas in storage
Liabilities
Regulatory liability – Net unbilled revenue deferrals
Regulatory liability – Refundable energy costs-unbilled
Fair value of derivative liabilities – current
Pension and retiree benefits
Accrued Unbilled Revenue Asset and Regulatory Liabilities
In March 2009, Con Edison of New York began recording unbilled electric, gas and steam revenues in accordance with a PSC Order. See Note A to the First Quarter Financial Statements.
Fair Value of Derivative Assets/Liabilities and Deferred Derivative Gains/Losses
Fair value of derivative assets increased $38 million for Con Edison and decreased $14 million for Con Edison of New York at March 31, 2009 compared with December 31, 2008. The change for Con Edison is due primarily to the impact of lower electric commodity prices on the fair value of wholesale supply transactions at Con Edison Energy. In addition, fair value of derivative liabilities increased $66 million for Con Edison and decreased $2 million for Con Edison of New York at March 31, 2009 compared with December 31, 2008. The change for Con Edison is due primarily to the impact of lower electric and gas commodity prices on the hedging portfolios of the Utilities and competitive energy businesses from year-end 2008 and the timing of entering into new positions, offset in part by the maturity of certain contract positions and cash collateral.
Deferred derivative losses increased $36 million and $23 million for Con Edison and Con Edison of New York, respectively, at March 31, 2009 compared with December 31, 2008. The change for Con Edison is due primarily to the impact of lower electric and gas commodity prices on the hedging portfolios of the Utilities from year-end 2008 and the timing of entering into new positions, offset in part, by the maturity of certain contract positions.
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For the Utilities, mark-to-market activity had no effect on net income as the amounts were deferred as regulatory assets/liabilities (deferred derivative losses/gains). In accordance with provisions approved by state regulators, the Utilities generally recover from customers their energy supply costs, including gains and losses on derivative instruments used to hedge energy purchases. The mark-to-market accounting for Con Edison’s competitive energy businesses resulted in a net increase in the fair value of derivative assets and liabilities, due to higher levels of collateral. The competitive energy businesses record mark-to-market gains and losses on derivative instruments in earnings in the reporting period in which such changes occur. For the Companies, changes in fair value of derivative instruments may lead to collateral payments made to or received from counterparties or brokers that are reflected in the fair value of derivative assets and liabilities. See Note J to the First Quarter Financial Statements.
Gas in Storage
The decrease in gas in storage is due primarily to the withdrawal of gas from storage during the winter heating season when firm demand for gas in the Utilities’ service areas peaks.
Pension and Retiree Benefits
The decrease in pension and retiree benefits reflects the first quarter amortization of accounting costs, funding of the plan and the reconciliation of the underfunding of the pension and other retiree benefit plans as measured at December 31, 2008.
Capital Resources
At March 31, 2009, there was no material change in the Companies’ capital resources compared to those disclosed under “Capital Resources” in Item 7 of the Form 10-K, other than as described below and in “Regulatory Matters” below.
For each of the Companies, the ratio of earnings to fixed charges (Securities and Exchange Commission basis) for the three months ended March 31, 2009, the 12 months ended December 31, 2008 and the three months ended March 31, 2008 was:
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For each of the Companies, the common equity ratio at March 31, 2009 and December 31, 2008 was:
Con Edison of New York has $636 million of tax-exempt debt for which the interest rates are determined pursuant to periodic auctions. Of this amount, $391 million is insured by Ambac Assurance Corporation and $245 million is insured by Syncora Guarantee Inc. (formerly XL Capital Assurance Inc.). Credit rating agencies have downgraded the ratings of these insurers from AAA to lower levels. The weighted average annual interest rate on this tax-exempt debt was 1.22 percent for the three months ended March 31, 2009. The weighted average interest rate was 3.94 percent, 3.77 percent and 3.45 percent for the years 2008, 2007 and 2006, respectively. Under Con Edison of New York’s current electric and steam rate orders, variations in auction rate debt interest expense are reconciled to the levels set in rates.
Con Edison of New York has $225 million of uninsured tax-exempt debt and O&R has $99 million of insured tax-exempt debt that currently bear interest at rates determined weekly and is subject to tender by bondholders for purchase by the company. Bondholders have tendered portions of the O&R debt for purchase (see Note C to the First Quarter Financial Statements). Of the $99 million of O&R debt, $55 million is insured by Financial Guaranty Insurance Company and $44 million is insured by Ambac Assurance Corporation (see Note C to the First Quarter Financial Statements). Downgrades in the credit ratings of these insurers have resulted in interest rates on this O&R debt that are significantly higher than the interest rates borne by Con Edison of New York’s $225 million of uninsured weekly rate tender bonds. As of March 31, 2009, the weighted average annual interest rate on the O&R insured weekly rate tender bonds outstanding with bondholders, excluding the effects of an interest rate swap agreement (see “Interest Rate Swaps” in Note J to the First Quarter Financial Statements), was 6.00 percent and the rate on the Con Edison of New York weekly rate tender bonds was 0.50 percent. Under O&R’s current New York electric rate order, variations in variable rate tax-exempt debt interest expense are reconciled to the level set in rates. O&R is evaluating alternatives with respect to its weekly rate tender bonds and termination of its interest rate swap agreement.
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Capital Requirements
At March 31, 2009, there was no material change in the Companies’ capital requirements compared to those discussed under “Capital Requirements” in Item 7 of the Form 10-K and in “Regulatory Matters” below.
Contractual Obligations
At March 31, 2009, there were no material changes in the Companies’ aggregate obligation to make payments pursuant to contracts compared to those discussed under “Contractual Obligations” in Item 7 of the Form 10-K.
Electric Power Requirements
At March 31, 2009, there were no material changes in the Companies’ electric power requirements compared to those disclosed under “Electric Power Requirements” in Item 7 of the Form 10-K.
Regulatory Matters
At March 31, 2009, there were no material changes in the Companies’ regulatory matters compared to those disclosed under “Regulatory Matters” in Item 7 of the Form 10-K and “Rate Agreements” in Note B to the financial statements in Item 8 of the Form 10-K, other than as described in Note B to the First Quarter Financial Statements.
In April 2009, the PSC ordered a $523 million increase in Con Edison of New York’s electric delivery rates. See Note B to the First Quarter Financial Statements. The rate increase reflects a 10 percent return on common equity assuming the company reduces its revenue requirements by $60 million during the rate year ending March 31, 2010 through unspecified austerity measures. The company estimates that its rate of return on equity would be lower by approximately 50 basis points if it were unable to achieve the assumed revenue requirement reductions. The PSC directed the company to file its plan with respect to the austerity measures with the PSC in May 2009. The company is considering its alternatives with respect to the austerity measures.
Financial and Commodity Market Risks
The Companies are subject to various risks and uncertainties associated with financial and commodity markets. The most significant market risks include interest rate risk, commodity price risk, credit risk and investment risk. At March 31, 2009, there were no material changes in the Companies’ financial and commodity market risks compared to those discussed under “Financial and Commodity Market Risks” in Item 7 of the Form 10-K, other than as described below and in Note J to the First Quarter Financial Statements.
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Interest Rate Risk
The interest rate risk relates primarily to variable rate debt and to new debt financing needed to fund capital requirements, including the construction expenditures of the Utilities and maturing debt securities. Con Edison and its businesses manage interest rate risk through the issuance of mostly fixed-rate debt with varying maturities and through opportunistic refinancing of debt. The Companies estimate that at March 31, 2009, each 10 percent variation in interest rates applicable to Con Edison of New York’s variable rate debt and commercial paper would result in a change in annual interest expense of $1 million. Under Con Edison of New York’s current electric and steam rate orders, variations in auction rate debt interest expense are reconciled to the levels set in rates. Under O&R’s current New York electric rate order, variations in variable rate tax-exempt debt interest expense are reconciled to the level set in rates.
In addition, from time to time, Con Edison and its businesses enter into derivative financial instruments to hedge interest rate risk on certain debt securities. See “Interest Rate Swaps” in Note J to the First Quarter Financial Statements.
Commodity Price Risk
Con Edison’s commodity price risk relates primarily to the purchase and sale of electricity, gas and related derivative instruments. The Utilities and Con Edison’s competitive energy businesses have risk management strategies to mitigate their related exposures. See Note J to the First Quarter Financial Statements.
Con Edison estimates that, as of March 31, 2009, a 10 percent decline in market prices would result in a decline in fair value of $90 million for the derivative instruments used by the Utilities to hedge purchases of electricity and gas, of which $68 million is for Con Edison of New York and $22 million is for O&R. Con Edison expects that any such change in fair value would be largely offset by directionally opposite changes in the cost of the electricity and gas purchased. In accordance with provisions approved by state regulators, the Utilities generally recover from customers the costs they incur for energy purchased for their customers, including gains and losses on certain derivative instruments used to hedge energy purchased and related costs. See “Recoverable Energy Costs” in Note A to the financial statements in Item 8 of the Form 10-K.
Con Edison’s competitive energy businesses use a value-at-risk (VaR) model to assess the market risk of their electricity and gas commodity fixed-price purchase and sales commitments, physical forward contracts and commodity derivative instruments. VaR represents the potential change in fair value of
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instruments or the portfolio due to changes in market factors, for a specified time period and confidence level. These businesses estimate VaR across their electricity and natural gas commodity businesses using a delta-normal variance/covariance model with a 95 percent confidence level. Since the VaR calculation involves complex methodologies and estimates and assumptions that are based on past experience, it is not necessarily indicative of future results. VaR for transactions associated with hedges on generating assets and commodity contracts, assuming a one-day holding period, for the three months ended March 31, 2009, and for the year ended December 31, 2008, was as follows:
Average for the period
High
Low
Credit Risk
The Companies are exposed to credit risk related to transactions entered into primarily for the various energy supply and hedging activities by the Utilities and the competitive energy businesses. Credit risk relates to the loss that may result from a counterparty’s nonperformance. The Companies use credit policies to manage this risk, including an established credit approval process, monitoring of counterparty limits, netting provisions within agreements and collateral or prepayment arrangements, credit insurance and credit default swaps. The Companies measure credit risk exposure as the replacement cost for open energy commodity and derivative positions plus amounts owed from counterparties for settled transactions. The replacement cost of open positions represents unrealized gains, net of any unrealized losses where the company has a legally enforceable right of setoff.
Con Edison of New York had $47 million of credit exposure in connection with energy supply and hedging activities, net of collateral, at March 31, 2009. The entire amount was with commodity exchange brokers.
Con Edison’s competitive energy businesses had $302 million of credit exposure in connection with energy supply and hedging activities, net of collateral, at March 31, 2009, of which $246 million was with investment grade counterparties and $56 million was with commodity exchange brokers or independent system operators.
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Environmental Matters
At March 31, 2009, there were no material changes in the Companies’ environmental matters compared to those referenced under “Environmental Matters” in Item 7 of the Form 10-K, other than as described in Note G and under “Permit Non-Compliance and Pollution Discharges” in Note H to the First Quarter Financial Statements and as described below.
In March 2009, New York State regulations implementing the New Source Review (NSR) provisions of the Clean Air Act became effective. Under NSR regulations, an owner of a large generating facility, including Con Edison of New York’s steam and steam-electric generating facilities, is required to obtain a permit before making modifications to the facility, other than routine maintenance, repair, or replacement, that increase emissions of pollutants from the facility above specified thresholds. To obtain a permit, the facility owner could be required to install additional pollution controls or otherwise limit emissions from the facility. The New York State NSR regulations differ in some respects from the existing federal requirements. The company reviews on an on-going basis its planned modifications to its generating facilities to determine the potential applicability of NSR and similar regulations. For information about the company’s generating facilities, see Item 2 of the Form 10-K. The company is unable to predict the impact of these regulations on its operations or the additional costs, which could be substantial, it could incur to comply with the regulations.
Material Contingencies
For information concerning potential liabilities arising from the Companies’ material contingencies, see “Application of Critical Accounting Policies – Accounting for Contingencies,” in Item 7 of the Form 10-K and Notes B, G and H to the First Quarter Financial Statements.
Results of Operations
Results of operations reflect, among other things, the Companies’ accounting policies (see “Application of Critical Accounting Policies” in Item 7 of the Form 10-K) and rate plans that cover the rates the Utilities can charge their customers (see “Regulatory Matters” in Item 7 of the Form 10-K). Under the revenue decoupling mechanisms currently applicable to Con Edison of New York’s electric and gas businesses and O&R’s electric business in New York, the Utilities’ revenues will generally not be affected by changes in delivery volumes from levels assumed when rates were approved. Revenues for Con Edison of New York’s steam business and O&R’s other utility businesses are affected by changes in delivery volumes resulting from weather, economic conditions and other factors. See Note B to the First Quarter Financial Statements.
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Con Edison’s results of operations for the three months ended March 31, 2009, as compared with the 2008 period, reflect changes in the Utilities’ rate plans (including lower allowed returns on equity and additional revenues designed to recover increases in certain operations and maintenance expenses, depreciation and property taxes, and interest charges), and the operating results of the competitive energy businesses (including net mark-to-market effects). Operations and maintenance expenses were higher in the three months ended March 31, 2009 compared with the 2008 period reflecting primarily higher costs, which are generally reflected in rates, such as pension and other post-retirement benefits, the support and maintenance of company underground facilities to accommodate municipal projects, the write-off of uncollectible accounts and additional operating programs. Depreciation and property taxes were higher in the three months ended March 31, 2009 compared with the 2008 period reflecting primarily the impact from increased capital expenditures. Results of operations for Con Edison in the 2008 period include the resolution of litigation with Northeast Utilities and the impact of discontinued operations. For additional information about major factors affecting earnings, see “Results of Operations – Summary,” above.
In general, the Utilities recover on a current basis the fuel, gas purchased for resale and purchased power costs they incur in supplying energy to their full-service customers (see “Recoverable Energy Costs” in Note A and “Regulatory Matters” in Note B to the financial statements in Item 8 of the Form 10-K). Accordingly, such costs do not generally affect the Companies’ results of operations. Management uses the term “net revenues” (operating revenues less such costs) to identify changes in operating revenues that may affect the Companies’ results of operations. Management believes that, although “net revenues” may not be a measure determined in accordance with accounting principles generally accepted in the United States of America, the measure facilitates the analysis by management and investors of the Companies’ results of operations.
Con Edison’s principal business segments are Con Edison of New York’s regulated electric, gas and steam utility activities, O&R’s regulated electric and gas utility activities and Con Edison’s competitive energy businesses. Con Edison of New York’s principal business segments are its regulated electric, gas and steam utility activities. A discussion of the results of operations by principal business segment for the three months ended March 31, 2009 and 2008 follows. For additional business segment financial information, see Note I to the First Quarter Financial Statements.
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THREE MONTHS ENDED MARCH 31, 2009 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2008
The Companies’ results of operations (which were discussed above under “Results of Operations – Summary”) in 2009 compared with 2008 were:
Operating revenues
Operating revenues less purchased power, fuel and gas purchased for resale (net revenues)
Operating income
Other income less deductions and related federal income tax
Income from continuing operations
Income from discontinued operations, net of tax ***
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Con Edison of New York’s electric sales and deliveries, excluding off-system sales, in the three months ended March 31, 2009 compared with the 2008 period were:
Residential/Religious*
Commercial/Industrial
Retail access customers
NYPA, Municipal Agency and other sales
Other operating revenues
Con Edison of New York’s electric operating revenues decreased $57 million in the three months ended March 31, 2009 compared with the 2008 period due primarily to a decrease in recoverable purchased power costs ($61 million). Effective April 2008, Con Edison of New York’s revenues from electric sales are subject to a revenue decoupling mechanism, as a result of which revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved. Other electric operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the revenue decoupling mechanism and other provisions of the company’s rate plans. See Note B to the First Quarter Financial Statements.
Electric delivery volumes in Con Edison of New York’s service area increased 0.8 percent in the three months ended March 31, 2009 compared with the 2008 period. After adjusting for variations, principally weather and billing days, electric delivery volumes in Con Edison of New York’s service area decreased 0.4 percent in the three months ended March 31, 2009 compared with the 2008 period.
Electric purchased power costs decreased $61 million in the three months ended March 31, 2009 compared with the 2008 period reflecting a decrease in unit costs ($69 million), offset by an increase in purchased volumes ($8 million). Con Edison of New York’s electric fuel costs increased $5 million in the three months ended March 31, 2009 compared with the 2008 period due primarily to higher sendout volumes from the company’s generating facilities ($5 million).
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Con Edison of New York’s electric operating income decreased $38 million in the three months ended March 31, 2009 compared with the 2008 period. The decrease reflects primarily higher operations and maintenance costs ($31 million), depreciation ($25 million), taxes other than income taxes ($4 million, principally state and local taxes on revenue) and lower net revenues ($1 million), offset by lower income taxes ($23 million).
Con Edison of New York’s gas sales and deliveries, excluding off-system sales, in the three months ended March 31, 2009 compared with the 2008 period were:
Residential
Firm transportation
Total firm sales and transportation
Interruptible sales
Generation plants
Con Edison of New York’s gas operating revenues increased $40 million in the three months ended March 31, 2009 compared with the 2008 period due primarily to the gas rate plan ($33 million). Con Edison of New York’s revenues from gas sales are subject to a weather normalization clause and, effective October 2007, a revenue decoupling mechanism as a result of which revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved. Other gas operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the revenue decoupling mechanism and other provisions of the company’s rate plans. See Note B to the First Quarter Financial Statements.
Con Edison of New York’s sales and transportation volumes for firm customers increased 8.2 percent in the three months ended March 31, 2009 compared with the 2008 period, reflecting primarily the impact of the colder winter weather in the 2009 period compared with the 2008 period. After adjusting for variations, principally weather and billing days, firm gas sales and transportation volumes in the
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company’s service area decreased 1.4 percent in the three months ended March 31, 2009 compared with the 2008 period.
Con Edison of New York’s purchased gas cost was the same in the three months ended March 31, 2009 compared with the 2008 period.
Con Edison of New York’s gas operating income increased $17 million in the three months ended March 31, 2009 compared with the 2008 period. The increase reflects primarily higher net revenues ($40 million), offset by higher income taxes ($11 million), operations and maintenance expense ($5 million), taxes other than income taxes ($5 million, principally state and local taxes on revenue) and depreciation ($2 million).
Con Edison of New York’s steam sales and deliveries in the three months ended March 31, 2009 compared with the 2008 period were:
Apartment house
Annual power
Con Edison of New York’s steam operating revenues increased $46 million in the three months ended March 31, 2009 compared with the 2008 period due primarily to the net change in rates under the steam rate plan ($26 million) and the colder weather in the 2009 period ($11 million). Other steam operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plans. See Note B to the First Quarter Financial Statements.
Steam sales and delivery volumes increased 9.9 percent in the three months ended March 31, 2009 compared with the 2008 period, reflecting primarily the impact of weather. After adjusting for variations, principally weather and billing days, steam sales and deliveries decreased 1.3 percent in the three months ended March 31, 2009 compared with the 2008 period.
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Con Edison of New York’s steam fuel costs increased $32 million in the three months ended March 31, 2009 compared with the 2008 period due primarily to higher unit costs ($23 million) and sendout volumes ($9 million). Steam purchased power costs decreased $12 million in the three months ended March 31, 2009 compared with the 2008 period due primarily to lower unit costs ($10 million) and a decrease in purchased volumes ($2 million).
Steam operating income increased $13 million in the three months ended March 31, 2009 compared with the 2008 period. The increase reflects primarily higher net revenues ($26 million), offset by higher income taxes ($8 million), taxes other than income taxes ($3 million, principally property taxes) and operations and maintenance expense ($2 million).
O&R’s electric sales and deliveries, excluding off-system sales, in the three months ended March 31, 2009 compared with the 2008 period were:
Public authorities
O&R’s electric operating revenues decreased $12 million in the three months ended March 31, 2009 compared with the 2008 period due primarily to decreased recoverable purchased power costs ($17 million), offset in part by the impact of the electric rate plan that went into effect July 1, 2008 ($4 million). Effective July 2008, O&R’s revenues from electric sales are subject to a revenue decoupling mechanism, as a result of which, revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved. Other electric operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the revenue decoupling mechanism and other provisions of the company’s electric rate plan. See Note B to the financial statements in Item 8 of the Form 10-K.
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Electric delivery volumes in O&R’s service area increased 1.5 percent in the three months ended March 31, 2009 compared with the 2008 period. After adjusting for weather variations and unbilled volumes, electric delivery volumes in O&R’s service area decreased 0.7 percent in the three months ended March 31, 2009 compared with the 2008 period.
Electric operating income increased by $2 million in the three months ended March 31, 2009 compared with the 2008 period. The increase reflects primarily higher net revenues ($4 million), offset by higher operations and maintenance expense ($2 million).
O&R’s gas sales and deliveries, excluding off-system sales, in the three months ended March 31, 2009 compared with the 2008 period were:
Other gas revenues
O&R’s gas operating revenues increased $1 million in the three months ended March 31, 2009 compared with the 2008 period.
Sales and transportation volumes for firm customers increased 3.8 percent in the three months ended March 31, 2009 compared with the 2008 period, reflecting the impact of the weather in 2009. After adjusting for weather and other variations, total firm sales and transportation volumes decreased 0.7 percent in the three months ended March 31, 2009 compared with the 2008 period. O&R’s revenues from gas sales are subject to a weather normalization clause that moderates, but does not eliminate, the effect of weather-related changes on net income.
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Gas operating income was the same in the three months ended March 31, 2009 compared with the 2008 period.
The competitive energy businesses’ earnings from continuing operations decreased $67 million in the three months ended March 31, 2009 compared with the 2008 period due primarily to mark-to-market losses in the 2009 period versus mark-to-market gains in the 2008 period.
Operating revenues decreased $162 million in the three months ended March 31, 2009 compared with the 2008 period, due primarily to net mark-to-market losses, lower electric wholesale and retail revenues and the sale of Con Edison Development’s generation projects in 2008. Electric wholesale revenues decreased $24 million in the three months ended March 31, 2009 as compared with the 2008 period, due primarily to lower sales volumes ($50 million), partially offset by higher unit prices ($26 million). Electric retail revenues decreased $24 million, due primarily to lower per unit prices ($25 million), partially offset by higher sales volume ($1 million). Electric retail revenues decreased 8 percent in the three months ended March 31, 2009 as compared with the 2008 period while gross margins increased by more than 100 percent, primarily due to the sale of higher margin contracts and lower costs. Net mark-to-market losses increased $113 million in the three months ended March 31, 2009 as compared with the 2008 period due primarily to lower prices on electric and natural gas contracts, which were economic hedges for retail obligations (but were not accounted for as cash flow hedges). The competitive energy businesses no longer have revenue from the sale of electricity from generation projects due to the sale of generation projects in the second quarter of 2008. These revenues were $19 million in the three months ended March 31, 2008 (see Note V to the financial statements in Item 8 of the Form 10-K). Other revenues increased $18 million in the three months ended March 31, 2009 as compared with the 2008 period due primarily to energy services and other wholesale revenues.
Operating expenses excluding income taxes decreased $53 million in the three months ended March 31, 2009 compared with the 2008 period, reflecting decreased purchased power costs ($52 million), fuel costs ($3 million), gas purchased for resale costs ($1 million) and taxes other than income taxes ($1 million), offset by higher other operations and maintenance costs ($4 million).
Income taxes decreased $45 million in the three months ended March 31, 2009 as compared with the 2008 period, due primarily to lower pre-tax income due to mark-to-market losses.
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Net income from discontinued operations decreased $3 million in the three months ended March 31, 2009 compared with the 2008 period. See Note V to the financial statements in Item 8 of the Form 10-K.
For Con Edison, “Other” also includes the receipt of $30 million after-tax for a litigation settlement with Northeast Utilities in the three months ended March 31, 2008 and inter-company eliminations relating to operating revenues and operating expenses.
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ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information about the Companies’ primary market risks associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments, see “Financial and Commodity Market Risks” in Part 1, Item 2 of this report, which information is incorporated herein by reference. Also, see Item 7A of the Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
The Companies maintain disclosure controls and procedures designed to provide reasonable assurance that the information required to be disclosed in the reports that they submit to the Securities and Exchange Commission (SEC) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. For each of the Companies, its management, with the participation of its principal executive officer and principal financial officer, has evaluated its disclosure controls and procedures as of the end of the period covered by this report and, based on such evaluation, has concluded that the controls and procedures are effective to provide such reasonable assurance. Reasonable assurance is not absolute assurance, however, and there can be no assurance that any design of controls or procedures would be effective under all potential future conditions, regardless of how remote.
There was no change in the Companies’ internal control over financial reporting that occurred during the Companies’ most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companies’ internal control over financial reporting.
ITEM 4T. CONTROLS AND PROCEDURES
The information required for Con Edison of New York pursuant to this Item 4T has been included in Item 4 (which information is incorporated herein by reference).
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PART II OTHER INFORMATION
ITEM 1. LEGALPROCEEDINGS
CON EDISON OF NEW YORK
For information about alleged unlawful conduct in connection with contractor payments, see “Investigation of Contractor Payments” in Note H to the financial statements in Part I, Item 1 of this report (which is incorporated herein by reference).
For information about the New York State Department of Environmental Conservation’s proceeding with respect to non-compliance with certain laws, regulations and permit conditions and discharges of pollutants at the company’s steam generating facilities, see “Con Edison of New York – Permit Non-Compliance and Pollution Discharges” in Item 3 of the Form 10-K and “Permit Non-Compliance and Pollution Discharges” in Note H to the financial statements included in Part I, Item 1 of this report (which information is incorporated herein by reference).
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors previously disclosed in the Companies’ Form 10-K.
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ITEM 6. EXHIBITS
Exhibit 12.1
Exhibit 31.1.1
Exhibit 31.1.2
Exhibit 32.1.1
Exhibit 32.1.2
Exhibit 4.2
Exhibit 12.2
Exhibit 31.2.1
Exhibit 31.2.2
Exhibit 32.2.1
Exhibit 32.2.2
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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.
DATE: May 1, 2009
Robert Hoglund
Senior Vice President, Chief Financial Officer and Duly
Authorized Officer
70