UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
OR
For the transition period from to
CommissionFile Number
Exact name of registrant as specified in its charter
and principal office address and telephone number
State ofIncorporation
I.R.S. EmployerID. Number
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 Exchange Act).
As of April 27, 2012, Con Edison had outstanding 292,904,261 Common Shares ($.10 par value). All of the outstanding common equity of CECONY is held by Con Edison.
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. (CECONY). CECONY is a subsidiary of Con Edison and, as such, the information in this report about CECONY also applies to Con Edison. As used in this report, the term the “Companies” refers to Con Edison and CECONY. However, CECONY makes no representation as to the information contained in this report relating to Con Edison or the subsidiaries of Con Edison other than itself.
Glossary of Terms
The following is a glossary of frequently used abbreviations or acronyms that are used in the Companies’ SEC reports:
TABLE OF CONTENTS
Financial Statements (Unaudited)
Con Edison
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Cash Flows
Consolidated Balance Sheet
Consolidated Statement of Common Shareholders’ Equity
CECONY
Consolidated Statement of Common Shareholder’s Equity
Notes to Financial Statements (Unaudited)
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
Legal Proceedings
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Exhibits
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 statements because of various risks, including:
the failure to operate energy facilities safely and reliably could adversely affect the Companies;
the failure to properly complete construction projects could adversely affect the Companies;
the failure of processes and systems and the performance of employees and contractors could adversely affect the Companies;
the Companies are extensively regulated and are subject to penalties;
the Utilities’ rate plans may not provide a reasonable return;
the Companies may be adversely affected by changes to the Utilities’ rate plans;
the Companies are exposed to risks from the environmental consequences of their operations;
a disruption in the wholesale energy markets or failure by an energy supplier could adversely affect the Companies;
the Companies have substantial unfunded pension and other postretirement benefit liabilities;
Con Edison’s ability to pay dividends or interest depends on dividends from its subsidiaries;
the Companies require access to capital markets to satisfy funding requirements;
the Internal Revenue Service has disallowed substantial tax deductions taken by the company;
a cyber attack could adversely affect the Companies; and
the Companies also face other risks that are beyond their control.
CONSOLIDATED INCOME STATEMENT (UNAUDITED)
OPERATING REVENUES
Electric
Gas
Steam
Non-utility
TOTAL OPERATING REVENUES
OPERATING EXPENSES
Purchased power
Fuel
Gas purchased for resale
Operations and maintenance
Depreciation and amortization
Taxes, other than 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)
INCOME BEFORE INTEREST AND INCOME TAX EXPENSE
INTEREST EXPENSE
Interest on long-term debt
Other interest
Allowance for borrowed funds used during construction
NET INTEREST EXPENSE
INCOME BEFORE INCOME TAX EXPENSE
INCOME TAX EXPENSE
NET INCOME
Preferred stock dividend requirements of subsidiary
NET INCOME FOR COMMON STOCK
Net income for common stock per common share – basic
Net income for common stock per common share – diluted
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
AVERAGE NUMBER OF SHARES OUTSTANDING – BASIC (IN MILLIONS)
AVERAGE NUMBER OF SHARES OUTSTANDING – DILUTED (IN MILLIONS)
The accompanying notes are an integral part of these financial statements.
Consolidated Edison, Inc.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES
Pension plan liability adjustments, net of $5 and $2 taxes in 2012 and 2011, respectively
TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES
COMPREHENSIVE INCOME
COMPREHENSIVE INCOME FOR COMMON STOCK
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
OPERATING ACTIVITIES
Net Income
PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME
Deferred income taxes
Rate case amortization and accruals
Common equity component of allowance for funds used during construction
Net derivative losses/(gains)
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
Prepayments
Accounts payable
Pensions and retiree benefits obligations
Pensions and retiree benefits contribution
Accrued taxes
Accrued interest
Deferred charges, noncurrent assets and other regulatory assets
Deferred credits and other regulatory liabilities
Other assets
Other liabilities
NET CASH FLOWS FROM OPERATING ACTIVITIES
INVESTING ACTIVITIES
Utility construction expenditures
Cost of removal less salvage
Non-utility construction expenditures
Proceeds from investment tax credits and grants related to renewable energy investments
Net investment in Pilesgrove solar project and other
Loan to affiliate
NET CASH FLOWS USED IN INVESTING ACTIVITIES
FINANCING ACTIVITIES
Net proceeds from short-term debt
Retirement of long-term debt
Issuance of long-term debt
Issuance of common shares for stock plans, net of repurchases
Debt issuance costs
Common stock dividends
Preferred stock dividends
NET CASH FLOWS FROM FINANCING ACTIVITIES
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD
BALANCE AT BEGINNING OF PERIOD
BALANCE AT END OF PERIOD
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid/(refunded) during the period for:
Interest
Income taxes
CONSOLIDATED BALANCE SHEET (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and temporary cash investments
Accounts receivable – customers, less allowance for uncollectible accounts of $87 in 2012 and 2011
Accrued unbilled revenue
Other receivables, less allowance for uncollectible accounts of $10 in 2012 and 2011
Fuel oil, gas in storage, materials and supplies, at average cost
Deferred tax assets – current
Regulatory assets
Other current assets
TOTAL CURRENT ASSETS
INVESTMENTS
UTILITY PLANT, AT ORIGINAL COST
General
TOTAL
Less: Accumulated depreciation
Net
Construction work in progress
NET UTILITY PLANT
NON-UTILITY PLANT
Non-utility property, less accumulated depreciation of $61 and $59 in 2012 and 2011, respectively
NET PLANT
OTHER NONCURRENT ASSETS
Goodwill
Intangible assets, less accumulated amortization of $3 in 2012 and 2011
Other deferred charges and noncurrent assets
TOTAL OTHER NONCURRENT ASSETS
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Long-term debt due within one year
Customer deposits
Accrued wages
Fair value of derivative liabilities
Regulatory liabilities
Preferred stock redemption
Other current liabilities
TOTAL CURRENT LIABILITIES
NONCURRENT LIABILITIES
Obligations under capital leases
Provision for injuries and damages
Pensions and retiree benefits
Superfund and other environmental costs
Asset retirement obligations
Other noncurrent liabilities
TOTAL NONCURRENT LIABILITIES
DEFERRED CREDITS AND REGULATORY LIABILITIES
Deferred income taxes and investment tax credits
Other deferred credits
TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES
LONG-TERM DEBT
SHAREHOLDERS’ EQUITY
Common shareholders’ equity (See Statement of Common Shareholders’ Equity)
Preferred stock of subsidiary
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS’ EQUITY (UNAUDITED)
Retained
Earnings
CapitalStock
Expense
AccumulatedOtherComprehensive
Income/(Loss)
Total
BALANCE AS OF DECEMBER 31, 2010
Net income for common stock
Issuance of common shares – dividend reinvestment and employee stock plans
Other comprehensive income
BALANCE AS OF MARCH 31, 2011
BALANCE AS OF DECEMBER 31, 2011
BALANCE AS OF MARCH 31, 2012
Preferred stock dividend requirements
Pension plan liability adjustments, net of $— taxes in 2012 and 2011
Net income
Superfund and environmental remediation costs (net)
Dividend to parent
NET CASH FLOWS USED IN FINANCING ACTIVITIES
Accounts receivable – customers, less allowance for uncollectible accounts of $79 in 2012 and 2011
Other receivables, less allowance for uncollectible accounts of $9 in 2012 and 2011
Accounts receivable from affiliated companies
UTILITY PLANT AT ORIGINAL COST
NON-UTILITY PROPERTY
Non-utility property, less accumulated depreciation of $24 in 2012 and 2011
LIABILITIES AND SHAREHOLDER’S EQUITY
Accounts payable to affiliated companies
Accrued taxes to affiliated companies
SHAREHOLDER’S EQUITY
Common shareholder’s equity (See Statement of Common Shareholder’s Equity)
Preferred stock
TOTAL SHAREHOLDER’S EQUITY
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDER’S EQUITY (UNAUDITED)
RepurchasedCon Edison
Stock
Common stock dividend to parent
Cumulative preferred dividends
NOTES TO THE FINANCIAL STATEMENTS (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 (CECONY). CECONY 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 CECONY 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 CECONY and O&R.
As used in these notes, the term “Companies” refers to Con Edison and CECONY and, except as otherwise noted, the information in these combined notes relates to each of the Companies. However, CECONY 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, 2011. Certain prior period amounts have been reclassified to conform to the current period presentation.
Con Edison has two regulated utility subsidiaries: CECONY and O&R. CECONY 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 and services company; and Consolidated Edison Development, Inc. (Con Edison Development), a company that develops and participates in infrastructure projects.
Note A — Summary of Significant Accounting Policies
Earnings Per Common Share
For the three months ended March 31, 2012 and 2011, basic and diluted EPS for Con Edison are calculated as follows:
Weighted average common shares outstanding – Basic
Add: Incremental shares attributable to effect of potentially dilutive securities
Adjusted weighted average common shares outstanding – Diluted
Note B — Regulatory Matters
Rate Agreements
CECONY — Electric
In March 2012, the NYSPSC issued an order requiring that the $134 million surcharge that was to have been collected from customers during the rate year ending March 2013 instead be offset using certain CECONY regulatory liabilities that would have otherwise been refundable to or applied for the benefit of customers after the rate year.
O&R — Electric
On February 24, 2012, O&R, the staff of the NYSPSC and the Utility Intervention Unit of New York State’s Division of Consumer Protection entered into a Joint Proposal with respect to the Company’s rates for electric delivery service rendered in New York. The Joint Proposal, which is subject to NYSPSC approval, covers the three-year period from July 2012 through June 2015. The Joint Proposal provides for electric base rate increases of $19.4 million, $8.8 million and $15.2 million, effective July 2012, 2013 and 2014, respectively, which can be implemented, at the NYSPSC’s option, with increases of $15.2 million effective July 2012 and 2013 and an increase of $13.1 million, together with a surcharge of $2.1 million, effective July 2014. The Joint Proposal reflects the following major items:
a weighted average cost of capital of 7.61 percent, 7.65 percent and 7.48 percent for the rate years ending June 30, 2013, 2014 and 2015, respectively, reflecting:
a return on common equity of 9.4 percent, 9.5 percent and 9.6 percent for the rate years ending June 30, 2013, 2014 and 2015, respectively;
cost of long-term debt of 6.07 percent for each of the rate years ending June 30, 2013 and 2014 and 5.64 percent for the rate year ending June 30 2015;
common equity ratio of 48 percent for each of the rate years ending June 30, 2013, 2014 and 2015; and
average rate base of $671 million, $708 million and $759 million for the rate years ending June 30, 2013, 2014 and 2015, respectively;
sharing with electric customers of any actual earnings, excluding the effects of any penalties and certain other items, above specified percentage returns on common equity (based on the actual average common equity ratio, subject to a 50 percent maximum):
the company will allocate to customers the revenue requirement equivalent of 50 percent, 75 percent and 90 percent of any such earnings for each rate year in excess of 80 basis points, 180 basis points and 280 basis points, respectively, above the return on common equity for that rate year indicated above; and
the earnings sharing allocation between the company and customers will be done on a cumulative basis at the end of rate year three;
continuation of a revenue decoupling mechanism;
continuation of a provision which defers as a regulatory liability for the benefit of customers or, subject to certain limitations, a regulatory asset for recovery from customers, as the case may be, the revenue requirement impact of the amount by which actual average net utility plant for each rate year is different than the average net utility plant reflected in rates ($678 million, $704 million and $753 million for the rate years ending June 30, 2013, 2014 and 2015, respectively);
continuation of the rate provisions pursuant to which the company recovers its purchased power costs from customers;
continuation of rate provisions under which pension and other post-retirement benefit expenses, environmental remediation expenses, tax-exempt debt costs and certain other expenses are reconciled to amounts for those expenses reflected in rates;
provisions under which property taxes are reconciled to amounts reflected in rates; and
continuation of provisions for potential operations penalties of up to $3 million annually if certain customer service and system reliability performance targets are not met.
Other Regulatory Matters
In February 2009, the NYSPSC commenced a proceeding to examine the prudence of certain CECONY expenditures (see “Investigations of Vendor Payments” in Note H). Pursuant to NYSPSC orders, a portion of the company’s revenues (currently, $249 million, $32 million and $6 million on an annual basis for electric, gas and steam service, respectively) is being collected subject to potential refund to customers. At March 31, 2012, the company had collected an estimated $887 million from customers subject to potential refund in connection with this proceeding. In October 2010, a NYSPSC consultant reported its $21 million provisional assessment, which the company has disputed, of potential overcharges for construction work. The potential overcharges related to transactions that involved certain employees who were arrested and a contractor that performed work for the company. The NYSPSC’s consultant is expected to continue to review the company’s expenditures. At March 31, 2012, the company had an $8 million regulatory liability relating to this matter. The company is unable to estimate the amount, if any, by which any refund required by the NYSPSC may exceed this regulatory liability.
In February 2011, the NYSPSC initiated a proceeding to examine the existing mechanisms pursuant to which utilities recover site investigation and remediation costs and possible alternatives. See Note G.
Regulatory Assets and Liabilities
Regulatory assets and liabilities at March 31, 2012 and December 31, 2011 were comprised of the following items:
Unrecognized pension and other postretirement costs
Future income tax
Environmental remediation costs
Pension and other post retirement benefits deferrals
Revenue taxes
Surcharge for New York State assessment
Deferred storm costs
Net electric deferrals
Deferred derivative losses – long-term
O&R transition bond charges
Workers’ compensation
Property tax reconciliation
Recoverable energy costs – long-term
Other
Regulatory assets – long-term
Deferred derivative losses – current
Regulatory assets – current
Total Regulatory Assets
Allowance for cost of removal less salvage
World Trade Center settlement proceeds
Net unbilled revenue deferrals
Long-term interest rate reconciliation
Carrying charges on transmission and distribution net plant
Gas line losses
Expenditure prudence proceeding
Energy efficiency programs
Regulatory liabilities – long-term
Electric surcharge offset
Refundable energy costs – current
Revenue decoupling mechanism
Deferred derivative gains – current
Regulatory liabilities – current
Total Regulatory Liabilities
Note C — Capitalization
In March 2012, CECONY issued $400 million of 4.20 percent 30-year debentures, $239 million of the net proceeds from the sale of which were used to redeem on May 1, 2012 all outstanding shares of its $5 Cumulative Preferred Stock and Cumulative Preferred Stock ($100 par value).
The carrying amounts and fair values of long-term debt are:
Fair
Value
Fair values of long-term debt have been estimated primarily using available market information. For Con Edison, $12,256 million and $636 million of the fair value of long-term debt at March 31, 2012 are classified as Level 2 and Level 3, respectively. For CECONY, $11,121 million and $636 million of the fair value of long-term debt at March 31, 2012 are classified as Level 2 and Level 3, respectively (see Note K).
Note D — Short-Term Borrowing
At March 31, 2012, Con Edison and CECONY had no commercial paper outstanding. The Companies have not borrowed under their October 2011 credit agreement. Con Edison had $183 million of letters of credit outstanding under the credit agreement (including $168 million for CECONY).
Note E — Pension Benefits
Net Periodic Benefit Cost
The components of the Companies’ net periodic benefit costs for the three months ended March 31, 2012 and 2011 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
Cost capitalized
Cost deferred
Cost charged to operating expenses
Expected Contributions
Based on estimates as of March 31, 2012, the Companies expect to make contributions to the pension plan during 2012 of $775 million (of which $721 million is to be contributed by CECONY). During the first quarter of 2012, CECONY contributed $184 million to the pension plan. The Companies expect to fund $12 million for the non-qualified supplemental plans in 2012. The Companies’ policy is to fund their accounting cost to the extent tax deductible.
Note F — Other Postretirement Benefits
The components of the Companies’ net periodic postretirement benefit costs for the three months ended March 31, 2012 and 2011 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
Cost charged
Based on estimates as of March 31, 2012, Con Edison expects to make a contribution of $87 million, including $74 million for CECONY, to the other postretirement benefit plans in 2012.
Note G — Environmental Matters
Superfund Sites
Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or generated in the course of operations of the Utilities and their predecessors and are present at sites and in facilities and equipment they currently or previously owned, including sites at which gas was manufactured or stored.
The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes (Superfund) impose joint and several liability, regardless of fault, upon generators of hazardous substances for investigation and remediation costs (which include costs of demolition, removal, disposal, storage, replacement, containment, and monitoring) and natural resource 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 investigate and, where determinable, 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, if remediation is necessary and if a reasonable estimate of such cost can be made. 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, 2012 and December 31, 2011 were as follows:
Accrued Liabilities:
Manufactured gas plant sites
Other Superfund Sites
Most of the accrued Superfund Site liability relates to sites that have been investigated, in whole or in part. However, for some of the sites, the extent and associated cost of the required remediation has not yet been determined. As investigations progress and information pertaining to the required remediation becomes available, the Utilities expect that additional liability may 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. In February 2011, the NYSPSC initiated a proceeding to examine the existing mechanisms pursuant to which utilities recover such costs and possible alternatives.
Environmental remediation costs incurred and insurance recoveries received related to Superfund Sites for the three months ended March 31, 2012 and 2011, were as follows:
Remediation costs incurred
Insurance recoveries received
In 2010, CECONY 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
$1.9 billion. In 2010, 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 $200 million. These estimates were based on the assumption that there is contamination at all sites, including those that have not yet been fully investigated and additional assumptions about the extent of the contamination and the type and extent of the 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 2010, CECONY estimated that its aggregate undiscounted potential liability for these suits and additional suits that may be brought over the next 15 years is $10 million. The estimate was based upon a combination of modeling, historical data analysis and risk factor assessment. Actual experience may be materially different. In addition, certain current and former employees have claimed or are claiming workers’ compensation benefits based on alleged disability from exposure to asbestos. Under its current rate agreements, CECONY is permitted to defer as regulatory assets (for subsequent recovery through rates) costs incurred for its asbestos lawsuits and workers’ compensation claims. The accrued liability for asbestos suits and workers’ compensation proceedings (including those related to asbestos exposure) and the amounts deferred as regulatory assets for the Companies at March 31, 2012 and December 31, 2011 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 CECONY steam main located in midtown Manhattan ruptured. It has been reported that one person died and others were injured as a result of the incident. Several buildings in the area were damaged. Debris from the incident included dirt and mud containing asbestos. The response to the incident required the closing of several buildings and streets for various periods. Approximately 93 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.
Investigations of Vendor Payments
In January 2009, CECONY commenced an internal investigation relating to the arrests of certain employees and retired employees (all of whom have since been convicted) 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 has provided information to governmental authorities, which consider the company to be a victim of unlawful conduct, 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 NYSPSC commenced a proceeding that, among other things, will examine the prudence of certain of the company’s expenditures relating to the arrests and consider whether additional expenditures should also be examined (see “Other Regulatory Matters” in Note B).
CECONY is also investigating the September 2010 arrest of a retired employee (who has since been convicted of participating in a bribery scheme in which the employee received payments from two companies that supplied materials to the company) and the January 2011 arrest of an employee (for accepting kickbacks from an engineering firm that performed work for the company). CECONY has provided information to governmental authorities in connection with their ongoing investigations of these matters.
The company, based upon its evaluation of its internal controls for 2011 and previous years, believes that the controls were effective to provide reasonable assurance that its financial statements have been fairly presented, in all material respects, in conformity with generally accepted accounting principles. Because the company’s investigations are ongoing, the company is unable to predict the impact of any of the employees’ unlawful conduct on the company’s internal controls, business, results of operations or financial position.
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 the accounting rules 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 investment in these leveraged leases was $(65) million at March 31, 2012 and $(55) million at December 31, 2011 and is comprised of a $228 million gross investment less $293 million of deferred tax liabilities at March 31, 2012 and $234 million gross investment less $289 million of deferred tax liabilities at December 31, 2011.
On audit of Con Edison’s tax return for 1997, the 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. In October 2009, the court issued a decision in favor of the company concluding that the 1997 LILO transaction was, in substance, a true lease that possessed economic substance, the loans relating to the lease constituted bona fide indebtedness, and the deductions for the 1997 LILO transactions claimed by the company in its 1997 federal income tax return are allowable. The IRS appealed the decision in December 2011.
In connection with its audit of Con Edison’s federal income tax returns for 1998 through 2007, the IRS disallowed $416 million of net tax deductions taken with respect to both of the LILO transactions for the tax years. Con Edison is pursuing administrative appeals of these audit level disallowances. In connection with its audit of Con Edison’s federal income tax returns for 2010, 2009 and 2008, the IRS has disallowed $40 million, $41 million and $42 million, respectively, of
net tax deductions taken with respect to both of the LILO transactions. When these audit level disallowances become appealable, Con Edison intends to file an appeal of the disallowances.
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, 2012, in the aggregate, was $240 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 $114 million net of tax at March 31, 2012.
Pursuant to the accounting rules for leveraged lease transactions, the expected timing of income tax cash flows generated by Con Edison’s LILO transactions are required 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 $760 million at March 31, 2012 and December 31, 2011, respectively.
A summary, by type and term, of Con Edison’s total guarantees at March 31, 2012 is as follows:
Energy transactions
Intra-company guarantees
Other guarantees
Energy Transactions — Con Edison guarantees payments on behalf of its competitive energy businesses in order to facilitate physical and financial transactions in gas, pipeline capacity, transportation, oil, electricity and energy services. To the extent that liabilities exist under the contracts subject to these guarantees, such liabilities are included in Con Edison’s consolidated balance sheet.
Intra-company Guarantees — Con Edison guarantees electricity sales made by Con Edison Energy and Con Edison Solutions to O&R and CECONY.
Other Guarantees — Con Edison and Con Edison Development also guarantee the following:
$7 million relates to guarantees issued by Con Edison to CECONY covering a former Con Edison subsidiary’s lease payment to use CECONY’s conduit system in accordance with a tariff approved by the NYSPSC and a guarantee issued by Con Edison to a landlord to guarantee the former subsidiary’s obligations under a building lease. The former subsidiary is obligated to reimburse Con Edison for any payments made under these guarantees. This obligation is fully secured by letters of credit;
$25 million for guarantees provided by Con Edison to Travelers Insurance Company for indemnity agreements for surety bonds in connection with energy service projects performed by Con Edison Solutions;
$5 million for guarantees provided by Con Edison Development to Travelers Insurance Company for indemnity agreements for surety bonds in connection with the construction and operation of solar facilities performed by its subsidiaries; and
Con Edison, on behalf of Con Edison Solutions, as a retail electric provider, issued a guarantee to the Public Utility Commission of Texas with no specified limitation on the amount guaranteed, covering the payment of all obligations of a retail electric provider. Con Edison’s estimate of the maximum potential obligation is $5 million as of March 31, 2012.
Note I — Financial Information by Business Segment
The financial data for the business segments are as follows:
Consolidation adjustments
Total CECONY
O&R
Total O&R
Competitive energy businesses
Other*
Total Con Edison
Note J — Derivative Instruments and Hedging Activities
Under the accounting rules for derivatives and hedging, derivatives are recognized on the balance sheet at fair value, unless an exception is available under the accounting rules. Certain qualifying derivative contracts have been designated as normal purchases or normal sales contracts. These contracts are not reported at fair value under the accounting rules.
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 the Companies’ commodity derivatives at March 31, 2012 and December 31, 2011 were as follows:
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, 2012, Con Edison and CECONY had $121 million and $12 million of credit exposure in connection with energy supply and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $46 million with investment-grade counterparties, $37 million with commodity exchange brokers, $36 million with independent system operators and $2 million with non-rated counterparties. CECONY’s net credit exposure was with commodity exchange brokers.
Economic Hedges
The Companies enter into certain derivative instruments that do not qualify or are not designated as hedges under the accounting rules for derivatives and hedging. However, management believes these instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices.
The fair values of the Companies’ commodity derivatives at March 31, 2012 were:
Fair Value of Commodity Derivatives (a)
Balance Sheet Location
Current
Long-term
Total derivatives asset
Impact of netting
Net derivatives asset
Total derivatives liability
Net derivatives liability
The fair values of the Companies’ commodity derivatives at December 31, 2011 were:
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. In accordance with the accounting rules for regulated operations, 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.
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, 2012:
Realized and Unrealized Gains/(Losses) on Commodity Derivatives (a)
Deferred or Recognized in Income for the Three Months Ended March 31, 2012
Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:
Total deferred gains
Total deferred losses
Net deferred losses
Pre-tax loss recognized in income
Total pre-tax loss recognized in income
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, 2011:
Deferred or Recognized in Income for the Three Months Ended March 31, 2011
Pre-tax gain/(loss) recognized in income
Total pre-tax gain/(loss) recognized in income
As of March 31, 2012, Con Edison had 1,392 contracts, including 582 CECONY contracts, which were considered to be derivatives under the accounting rules for derivatives and hedging (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.
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, 2012, 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 liabilities
Collateral posted
Additional collateral (b) (downgrade one level from current ratings (c))
Additional collateral (b) (downgrade to below investment grade from current ratings (c))
Interest Rate Swaps
O&R has an interest rate swap pursuant to which it 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, 2012 was an unrealized loss of $8 million, which has been included in Con Edison’s consolidated balance sheet as a noncurrent liability/fair value of derivative liabilities and a regulatory asset. The increase in the fair value of the swap for the three months ended March 31, 2012 was immaterial. In the event O&R’s credit rating was downgraded to BBB- or lower by S&P or Baa3 or lower by Moody’s, the swap counterparty could elect to terminate the agreement and, if it did so, the parties would then be required to settle the transaction.
Note K — Fair Value Measurements
The accounting rules for fair value measurements and disclosures define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in a principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets or liabilities. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Companies often make certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, and the risks inherent in the inputs to valuation techniques. The Companies use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
The accounting rules for fair value measurements and disclosures established a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value in three broad levels. The rules require that assets and liabilities be classified in their entirety based on the level of input that is significant to the fair value measurement. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability, and may affect the valuation of the asset or liability and their placement within the fair value hierarchy. The Companies classify fair value balances based on the fair value hierarchy defined by the accounting rules for fair value measurements and disclosures as follows:
Level 1 – Consists of assets or liabilities whose value is based on unadjusted quoted prices in active markets at the measurement date. An active market is one in which transactions for assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis. This category includes contracts traded on active exchange markets valued using unadjusted prices quoted directly from the exchange.
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. The industry standard models consider observable assumptions including time value, volatility factors, and current market and contractual prices for the underlying commodities, in addition to other economic measures. This category includes contracts traded on active exchanges or in over-the-counter markets priced with industry standard models.
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. Unobservable inputs are developed based on the best available information and subject to cost benefit constraints. This category includes contracts priced using models that are internally developed and contracts placed in illiquid markets. It also includes contracts that expire after the period of time for which quoted prices are available and internal models are used to determine a significant portion of the value.
Effective January 1, 2012, the Companies adopted Accounting Standards Update (ASU) No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. The amendments expand existing disclosure requirements for fair value measurements and make other amendments. For fair value measurements in Level 3, this update requires the Companies to provide a description of the valuation process in place, a quantitative disclosure of unobservable inputs and assumptions used in the measurement as well as a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs. The update also requires the Companies to disclose any transfers between Levels 1 and 2 of fair value hierarchy measurements and the reasons for the transfers.
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 are summarized below.
Derivative assets:
Commodity (1)
Other assets (3)
Transfer in (5) (6)
Transfer out (5) (6)
Derivative liabilities:
Interest rate contract (2)
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 are summarized below.
Commodity
Transfer in (5) (6) (7)
Transfer out (5) (6) (7)
The employees in the risk management groups of the Utilities and the competitive energy businesses develop and maintain the Companies’ valuation policies and procedures for, and verify pricing and fair value valuation of, commodity derivatives. Under the Companies’ policies and procedures, multiple independent sources of information are obtained for forward price curves used to value commodity derivatives. Fair value and changes in fair value of commodity derivatives are reported on a monthly basis to the Companies’ risk committees, comprised of officers and employees of the Companies that oversee energy hedging at the Utilities and the competitive energy businesses. The managers of the risk management groups report to the Companies’ Vice President and Treasurer.
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, 2012 and 2011 and classified as Level 3 in the fair value hierarchy:
Ending
Balance as ofMarch 31, 2012
Derivatives:
Interest rate contract
Other assets (1)
Balance as ofMarch 31, 2011
For the Utilities, realized gains and losses on Level 3 commodity derivative assets and liabilities are reported as part of purchased power, gas and fuel 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 financial statements in Item 8 of the Form 10-K. Unrealized gains and losses for commodity derivatives are generally deferred on the consolidated balance sheet in accordance with the accounting rules for regulated operations.
For the competitive energy businesses, realized and unrealized gains and losses on Level 3 commodity derivative assets and liabilities are reported in non-utility revenues ($3 million loss and $12 million loss) and purchased power costs ($43 million loss and $27 million gain) on the consolidated income statement for the three months ended March 31, 2012 and 2011, respectively. The change in fair value relating to Level 3 commodity derivative assets held at March 31, 2012 and 2011 is included in non-utility revenues ($3 million loss and $12 million loss), and purchased power costs ($7 million loss and $29 million gain) on the consolidated income statement for the three months ended March 31, 2012 and 2011, respectively.
The accounting rules for fair value measurements and disclosures require consideration of the impact of nonperformance risk (including credit risk) from a market participant perspective in the measurement of the fair value of assets and liabilities. At March 31, 2012, the Companies determined that nonperformance risk would have no material impact on their financial position or results of operations. To assess nonperformance risk, the Companies considered information such as collateral requirements, master netting arrangements, letters of credit and parent company guarantees, and applied a market-based method by using the counterparty (for an asset) or the Companies’ (for a liability) credit default swaps rates.
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
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. (CECONY). This MD&A 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 CECONY. CECONY is a subsidiary of Con Edison and, as such, information in this management’s discussion and analysis about CECONY 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, 2011 (File Nos. 1-14514 and 1-1217, the Form 10-K).
Information in any item of this report 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.
Con Edison, incorporated in New York State in 1997, is a holding company which owns all of the outstanding common stock of CECONY, Orange and Rockland Utilities, Inc. (O&R) and the competitive energy businesses. As used in this report, the term the “Utilities” refers to CECONY and O&R.
CECONY’s principal business operations are its regulated electric, gas and steam delivery businesses. O&R’s principal business operations are its regulated electric and gas delivery businesses. The competitive energy businesses sell electricity to retail and wholesale customers, provide certain energy-related services, and participate in energy infrastructure projects. Con Edison is evaluating additional opportunities to invest in electric and gas-related businesses.
Con Edison’s strategy is to provide reliable energy services, maintain public and employee safety, promote energy efficiency, and develop cost-effective ways of performing its business. Con Edison seeks to be a responsible steward of the environment and enhance its relationships with customers, regulators and members of the communities it serves.
CECONY provides electric service to approximately 3.3 million customers in all of New York City (except part of Queens) and most of Westchester County, an approximately 660 square mile service area with a population of more than nine million.
CECONY delivers gas to approximately 1.1 million customers in Manhattan, the Bronx and parts of Queens and Westchester County.
CECONY operates the largest steam distribution system in the United States by producing and delivering more than 22,000 MMlbs of steam annually to approximately 1,735 customers in parts of Manhattan.
O&R and its utility subsidiaries, Rockland Electric Company (RECO) and Pike County Light & Power Company (Pike) (together referred to herein as O&R) provide electric service to approximately 0.3 million customers in southeastern New York and in adjacent areas of northern New Jersey and northeastern Pennsylvania, an approximately 1,350 square mile service area.
O&R delivers gas to over 0.1 million customers in southeastern New York and adjacent areas of northeastern Pennsylvania.
Competitive Energy Businesses
Con Edison pursues competitive energy opportunities through three wholly-owned subsidiaries: Con Edison Solutions, Con Edison Energy and Con Edison Development. These businesses include the sales and related hedging of electricity to retail and wholesale customers, sales of certain energy-related products and services, and participation in energy infrastructure projects. At March 31, 2012, Con Edison’s equity investment in its competitive energy businesses was $343 million and their assets amounted to $837 million.
Certain financial data of Con Edison’s businesses is presented below:
Operating
Revenues
Net Income for
Common Stock
Total Utilities
Con Edison Solutions (a)
Con Edison Energy (a)
Con Edison Development
Other (b)
Con Edison’s net income for common stock for the three months ended March 31, 2012 was $277 million or $0.95 a share ($0.94 on a diluted basis) compared with $311 million or $1.07 a share ($1.06 on a diluted basis) for the three months ended March 31, 2011. See “Results of Operations – Summary,” below. For segment financial information, see Note I to the First Quarter Financial Statements and “Results of Operations,” below.
Results of Operations — Summary
Net income for common stock for the three months ended March 31, 2012 and 2011 was as follows:
Competitive energy businesses (a)
The Companies’ results of operations for the three months ended March 31, 2012, as compared with 2011, reflect changes in the Utilities’ rate plans and the effects of the milder winter weather on steam revenues. These rate plans provide for additional revenues to cover expected increases in certain operations and maintenance expenses, and depreciation and property taxes. The results of operations include the operating results of the competitive energy businesses, including net mark-to-market effects.
Operations and maintenance expenses were higher due to pensions, other postretirement benefits and healthcare costs, offset in part by lower operating costs attributable to the milder winter in the 2012 period. Depreciation was higher in the 2012 period reflecting primarily the impact from higher utility plant balances.
The following table presents the estimated effect on earnings per share and net income for common stock for the three months ended 2012 as compared with the 2011 period, resulting from these and other major factors:
Rate plans, primarily to recover increases in certain costs
Operations and maintenance expenses
Depreciation
Other, including parent company expenses
Total variations
See “Results of Operations” below for further discussion and analysis of results of operations.
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. Changes in the Companies’ cash and temporary cash investments resulting from operating, investing and financing activities for the three months ended March 31, 2012 and 2011 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 CECONY’s electric and gas rate plans and O&R’s New York electric and gas rate plans, changes in delivery volumes from levels assumed when rates were approved may affect the timing of cash flows but not net income. The prices at which the Utilities provide energy to 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.
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, deferred income tax expense and net derivative losses. Principal non-cash credits include amortizations of certain net regulatory liabilities. Non-cash charges or credits may also be accrued under the revenue decoupling and cost reconciliation mechanisms in the Utilities’ electric and gas rate plans in New York.
Net cash flows from operating activities for the three months ended March 31, 2012 for Con Edison and CECONY were $40 million and $296 million higher, respectively, than in the 2011 period. The increases in net cash flows reflect primarily the timing of CECONY pension contributions ($184 million in the 2012 period as compared with $491 million in the 2011 period). See Note E to the First Quarter Financial Statements. The increases were offset in part by higher cash collateral paid to brokers and counterparties in the 2012 period ($85 million for Con Edison and $37 million for CECONY).
The change in net cash flows also reflects the timing of payments for and recovery of energy costs. This timing is reflected within changes to accounts receivable – customers, recoverable energy costs and accounts payable balances.
The changes in regulatory assets principally reflect changes in deferred pension costs in accordance with the accounting rules for retirement benefits. See Note B to the First Quarter Financial Statements.
Cash Flows Used in Investing Activities
Net cash flows used in investing activities for Con Edison and CECONY were $6 million lower and $74 million higher, respectively, for the three months ended March 31, 2012 compared with the 2011 period. The changes for Con Edison and CECONY reflect increased utility construction expenditures in 2012. In addition, for Con Edison, the change reflects the return of investment resulting from the receipt of government grant proceeds at the Pilesgrove solar project and lower non-utility construction expenditures.
Cash Flows from Financing Activities
Net cash flows from financing activities for Con Edison and CECONY were $103 million and $69 million lower, respectively, in the three months ended March 31, 2012 compared with the 2011 period.
In March 2012, CECONY issued $400 million of 4.20 percent 30-year debentures, $239 million of the net proceeds from the sale of which were used to redeem on May 1, 2012 all outstanding shares of its $5
Cumulative Preferred Stock and Cumulative Preferred Stock ($100 par value). The Companies had no issuances of long-term debt in 2011.
Cash flows from financing activities of the Companies also reflect commercial paper issuance. The commercial paper amounts outstanding at March 31, 2012 and 2011 and the average daily balances for the three months ended March 31, 2012 and 2011 for Con Edison and CECONY were as follows:
Weighted average yield
Other Changes in Assets and Liabilities
The following table shows changes in certain assets and liabilities at March 31, 2012, compared with December 31, 2011.
2012 vs. 2011
Variance
Assets
Regulatory asset – Unrecognized pension and other postretirement costs
Liabilities
Pension and retiree benefits
The increase in prepayments for Con Edison and CECONY reflects primarily CECONY’s January 2012 payment of its New York City semi-annual property taxes, offset by three months of amortization, while the December 2011 balance reflects the amortization of the previous semi-annual prepayment. See “Cash Flows from Operating Activities,” above.
Regulatory Asset for Unrecognized Pension and Other Postretirement Costs and Noncurrent Liability for Pension and Retiree Benefits
The decrease in the regulatory asset for unrecognized pension and other postretirement costs and the noncurrent liability for pension and retiree benefits reflects the final actuarial valuation of the pension and other retiree benefit plans as measured at December 31, 2011 in accordance with the accounting rules for retirement benefits. The change in the regulatory asset also reflects the year’s amortization of accounting costs. The decrease in the noncurrent liability for pension and retiree benefits reflects in part contributions to the plans made by the Utilities in 2012. See Notes B, E and F to the First Quarter Financial Statements.
Capital Requirements and Resources
As of March 31, 2012, there was no material change in the Companies’ capital requirements, contractual obligations and capital resources compared to those disclosed under “Capital Requirements and Resources” in Item 1 of the Form 10-K other than as described in Note C to the First Quarter Financial Statements.
For each of the Companies, the ratio of earnings to fixed charges (Securities and Exchange Commission basis) for the three months ended March 31, 2012 and 2011 and the twelve months ended December 31, 2011 was:
For each of the Companies, the common equity ratio at March 31, 2012 and December 31, 2011 was:
Common Equity Ratio
(Percent of total capitalization)
Regulatory Matters
CECONY’s current electric rate plan covers the three-year period ending March 31, 2013. Either the company or the New York State Public Service Commission (NYSPSC) can initiate a proceeding for a new rate plan. A new rate plan filed by the company would take effect automatically in approximately 11 months unless prior to such time the NYSPSC adopts a rate plan. CECONY understands that the base rates determined pursuant to the current rate plan and the other provisions of the current rate plan would continue in effect after March 31, 2013 until a new rate plan is effective. CECONY is evaluating when it will request a new rate plan in light of, among other things, the return on common equity that the company estimates it could earn after March 31, 2013 under the current rate plan as compared to under a new rate plan. In either case, CECONY expects that the earned return on common equity of its electric business for the rate year ending March 31, 2014 would be less than for the rate year ending March 31, 2013.
For information about a March 2012 NYSPSC order relating to a surcharge that CECONY was to have collected from customers and O&R’s February 2012 Joint Proposal with respect to its rates for electric service rendered in New York, see Note B to the First Quarter Financial Statements.
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.
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. Con Edison and CECONY estimate that at March 31, 2012, a 10 percent variation in interest rates applicable to its variable rate debt would not result in a material change in annual interest expense. Under CECONY’s current gas, steam and electric rate plans, variations in actual long-term debt interest rates are reconciled to levels reflected in rates. Under O&R’s current New York rate plans, variations in actual 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 apply 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, 2012, a 10 percent decline in market prices would result in a decline in fair value of $47 million for the derivative instruments used by the Utilities to hedge purchases of electricity and gas, of which $39 million is for CECONY and $8 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.
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 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, 2012 and the year ended December 31, 2011, respectively, 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 Companies have a legally enforceable right of setoff. See “Credit Exposure” in Note J to the First Quarter Financial Statements.
Investment Risk
The Companies’ investment risk relates to the investment of plan assets for their pension and other postretirement benefit plans. The Companies’ current investment policy for pension plan assets includes investment targets of 60 percent equities and 40 percent fixed income and other securities. At March 31, 2012, the pension plan investments consisted of 63 percent equity and 37 percent fixed income and other securities.
Material Contingencies
For information concerning potential liabilities arising from the Companies’ material contingencies, see Notes B, G, and H to the First Quarter Financial Statements.
Results of Operations
See “Results of Operations – Summary,” above.
Results of operations reflect, among other things, the Companies’ accounting policies and rate plans that limit the rates the Utilities can charge their customers. Under the revenue decoupling mechanisms currently applicable to CECONY’s electric and gas businesses and O&R’s electric and gas businesses in New York, the Utilities’ delivery revenues generally will not be affected by changes in delivery volumes from levels assumed when rates were approved. Delivery revenues for CECONY’s steam business and O&R’s businesses
in New Jersey and Pennsylvania are affected by changes in delivery volumes resulting from weather, economic conditions and other factors. See Note B to the First Quarter Financial Statements.
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. 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 CECONY’s regulated utility activities, O&R’s regulated utility activities and Con Edison’s competitive energy businesses. CECONY’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, 2012 and 2011 follows. For additional business segment financial information, see Note I to the First Quarter Financial Statements.
Three Months Ended March 31, 2012 Compared with Three Months Ended March 31, 2011
The Companies’ results of operations (which were discussed above under “Results of Operations – Summary”) in 2012 compared with 2011 were:
Competitive EnergyBusinesses and Other (a)
Increases
(Decreases)
Percent
Operating revenues
Operating revenues less purchased power, fuel and gas purchased for resale (net revenues)
Operating income
Other income less deductions
Net interest expense
Income before income tax expense
Income tax expense
Net revenues
CECONY’s results of electric operations for the three months ended March 31, 2012 compared with the 2011 period is as follows:
Electric operating income
CECONY’s electric sales and deliveries, excluding off-system sales, for the three months ended March 31, 2012 compared with the 2011 period were:
Residential/Religious (a)
Commercial/Industrial
Retail access customers
NYPA, Municipal Agency and other sales
Other operating revenues
CECONY’s electric operating revenues increased $14 million in the three months ended March 31, 2012 compared with the 2011 period due primarily to higher revenues from the electric rate plan ($73 million), offset in part by lower purchased power ($32 million) and fuel costs ($26 million). CECONY’s revenues from electric sales are subject to a revenue decoupling mechanism, as a result of which delivery revenues generally are 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 plan.
Electric delivery volumes in CECONY’s service area decreased 3.4 percent in the three months ended March 31, 2012 compared with the 2011 period. After adjusting for variations, principally weather and billing days, electric delivery volumes in CECONY’s service area decreased 0.8 percent in the three months ended March 31, 2012 compared with the 2011 period reflecting lower average use per customer.
CECONY’s electric purchased power costs decreased $32 million in the three months ended March 31, 2012 compared with the 2011 period due to a decrease in purchased volumes ($51 million), offset by an increase in unit costs ($19 million). Electric fuel costs decreased $26 million in the three months ended March 31, 2012 compared with the 2011 period due to lower unit costs ($20 million) and sendout volumes from the company’s electric generating facilities ($6 million).
CECONY’s electric operating income increased $7 million in the three months ended March 31, 2012 compared with the 2011 period. The increase reflects primarily higher net revenues ($72 million, due primarily to the electric rate plan) and lower taxes, other than income taxes ($5 million, principally property taxes). The higher net revenues were offset by higher operations and maintenance costs ($58 million, due primarily to higher pension expense ($38 million), employees’ health care costs ($6 million)), injuries and damages ($6 million) and higher depreciation and amortization ($12 million). See “Regulatory Assets and Liabilities” in Note B to the First Quarter Financial Statements.
CECONY’s results of gas operations for the three months ended March 31, 2012 compared with the 2011 period is as follows:
Gas operating income
CECONY’s gas sales and deliveries, excluding off-system sales, for the three months ended March 31, 2012 compared with the 2011 period were:
Residential
Firm transportation
Total firm sales and transportation
Interruptible sales (a)
NYPA
Generation plants
CECONY’s gas operating revenues decreased $100 million in the three months ended March 31, 2012 compared with the 2011 period due primarily to a decrease in gas purchased for resale costs ($94 million). CECONY’s revenues from gas sales are subject to a weather normalization clause and a revenue decoupling mechanism as a result of which delivery 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 company’s rate plan.
CECONY’s sales and transportation volumes for firm customers decreased 15.4 percent in the three months ended March 31, 2012 compared with the 2011 period. After adjusting for variations, principally weather and billing days, firm gas sales and transportation volumes in the company’s service area increased 0.9 percent in the three months ended March 31, 2012.
CECONY’s purchased gas cost decreased $94 million in the three months ended March 31, 2012 compared with the 2011 period due to lower sendout volumes ($69 million) and unit costs ($25 million).
CECONY’s gas operating income increased $17 million in the three months ended March 31, 2012 compared with the 2011 period. The increase reflects primarily lower operations and maintenance costs ($21 million, due primarily to a decrease in the surcharge for New York State regulatory assessments ($12 million) and lower taxes, other than incomes taxes ($4 million, principally property taxes and local taxes), offset by lower net revenues ($6 million) and higher depreciation ($2 million).
CECONY’s results of steam operations for the three months ended March 31, 2012 compared with the 2011 period is as follows:
Steam operating income
CECONY’s steam sales and deliveries for the three months ended March 31, 2012 compared with the 2011 period were:
Apartment house
Annual power
CECONY’s steam operating revenues decreased $62 million in the three months ended March 31, 2012 compared with the 2011 period due primarily to lower fuel costs ($42 million), the net change in rates under the steam rate plan ($14 million) and lower purchased power costs ($4 million). Other steam operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plan.
Steam sales and delivery volumes decreased 23.4 percent in the three months ended March 31, 2012 compared with the 2011 period reflecting milder winter weather. After adjusting for variations, principally weather and billing days, steam sales and deliveries decreased 1.2 percent in the three months ended March 31, 2012, reflecting lower average normalized use per customer.
CECONY’s steam fuel costs decreased $42 million in the three months ended March 31, 2012 compared with the 2011 period due to lower unit costs ($25 million) and sendout volumes ($17 million). Steam purchased power costs decreased $4 million in the three months ended March 31, 2012 compared with the 2011 period due to a decrease in unit costs ($2 million) and purchased volumes ($2 million).
Steam operating income decreased $26 million in the three months ended March 31, 2012 compared with the 2011 period. The decrease reflects primarily lower net revenues ($16 million) and higher operations and maintenance costs ($11 million, due primarily to higher pension expense ($16 million)), offset by lower taxes, other than income taxes ($1 million, principally local taxes).
Income Taxes
Income taxes decreased $11 million in the three months ended March 31, 2012 compared with the 2011 period due primarily to higher deductions for injuries and damages payments in the 2012 period.
O&R’s results of electric operations for the three months ended March 31, 2012 compared with the 2011 period is as follows:
O&R’s electric sales and deliveries, excluding off-system sales, for the three months ended March 31, 2012 compared with the 2011 period were:
Public authorities
O&R’s electric operating revenues decreased $21 million in the three months ended March 31, 2012 compared with the 2011 period due primarily to lower purchased power costs ($28 million). O&R’s New York electric delivery revenues are subject to a revenue decoupling mechanism, as a result of which delivery revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved. O&R’s electric sales in New Jersey and Pennsylvania are not subject to a decoupling mechanism, and as a result, changes in such volumes do impact such revenues. Other electric operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s electric rate plan. See “Rate Agreements – O&R – Electric” in Note B to the First Quarter Financial Statements.
Electric delivery volumes in O&R’s service area decreased 4.3 percent in the three months ended March 31, 2012 compared with the 2011 period. After adjusting for weather and other variations, electric delivery volumes in O&R’s service area decreased 2.0 percent in the three months ended March 31, 2012 compared with the 2011 period.
Electric operating income decreased $2 million in the three months ended March 31, 2012 compared with the 2011 period. The decrease reflects primarily higher operations and maintenance costs ($6 million, due to higher pension expense and other postretirement costs) and taxes other than income taxes ($3 million, principally property taxes), offset by higher net revenues ($7 million).
O&R’s results of gas operations for the three months ended March 31, 2012 compared with the 2011 period is as follows:
O&R’s gas sales and deliveries, excluding off-system sales, for the three months ended March 31, 2012 compared with the 2011 period were:
Interruptible sales
Other gas revenues
O&R’s gas operating revenues decreased $10 million in the three months ended March 31, 2012 compared with the 2011 period due primarily to the decrease in gas purchased for resale in 2012 ($13 million), offset in part by the gas rate plan.
Sales and transportation volumes for firm customers decreased 20.6 percent in the three months ended March 31, 2012 compared with the 2011 period. After adjusting for weather and other variations, total firm sales and transportation volumes increased 2.1 percent in the three months ended March 31, 2012 compared with the 2011 period. O&R’s New York 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.
Gas operating income increased $2 million in the three months ended March 31, 2012 compared with the 2011 period. The increase reflects primarily higher net revenues ($3 million), offset by higher depreciation ($1 million).
The competitive energy businesses’ results of operations for the three months ended March 31, 2012 compared with the 2011 period is as follows:
The competitive energy businesses’ operating revenues decreased $98 million in the three months ended March 31, 2012 compared with the 2011 period, due primarily to lower electric retail and wholesale revenues. Electric wholesale revenues decreased $39 million in the three months ended March 31, 2012 as compared with the 2011 period, due to lower sales volumes ($25 million) and unit prices ($14 million). Electric retail revenues decreased $63 million, due to lower per unit prices ($33 million) and sales volume ($30 million). Gross profit on electric retail revenues decreased due primarily to lower volumes, offset in part by higher unit gross margins. Net mark-to-market values decreased $69 million in the three months ended
March 31, 2012 as compared with the 2011 period, of which $77 million in losses are reflected in purchased power costs and $9 million in gains are reflected in revenues. Other revenues decreased $5 million in the three months ended March 31, 2012 as compared with the 2011 period due primarily to lower energy services revenue.
Purchased power costs decreased $26 million in the three months ended March 2012 compared with the 2011 period, due primarily to lower purchased power costs of $103 million and changes in mark-to-market values of $77 million. Purchased power costs decreased $103 million due to lower unit prices ($58 million) and volumes ($45 million). Operating income decreased $64 million in the three months ended March 31, 2012 compared with the 2011 period due primarily to net mark-to-market effects ($69 million), partially offset by higher revenue from solar generating facilities and wholesale gross profit.
For Con Edison, “Other” includes inter-company eliminations relating to operating revenues and operating expenses.
Item 3: Quantitative and Qualitative 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 I, Item 2 of this report, which information is incorporated herein by reference.
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 Securities Exchange Act of 1934, as amended, 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.
The Utilities are undertaking a project with the objective of improving business processes and information systems. The Utilities expect the project to reduce costs, improve support of operating activities, reduce financial reporting risks, and simplify compliance activities. The focus of the project is the implementation of new financial and supply-chain enterprise resource planning information systems. The Utilities expect the project to enhance the processes used by employees to record financial transactions and analyze data; purchase materials and services and manage inventory; develop business plans and budgets and report financial and purchasing data. The project is reasonably likely to materially affect the Companies’ internal control over financial reporting.
Part II Other Information
Item 1: Legal Proceedings
For information about certain legal proceedings affecting the Companies, see Notes B, G and H to the financial statements in Part I, Item 1 of this report, which information is incorporated herein by reference.
Item 1A: Risk Factors
There were no material changes in the Companies’ risk factors compared to those disclosed in Item 1A of the Form 10-K.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
MaximumNumber (orAppropriate
DollarValue) ofShares (orUnits) thatMay Yet BePurchasedUnder thePlans orPrograms
January 1, 2012 to January 31, 2012
February 1, 2012 to February 29, 2012
March 1, 2012 to March 31, 2012
Item 6: Exhibits
CON EDISON
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Robert Hoglund
Senior Vice President, Chief
Financial Officer and Duly
Authorized Officer