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Consolidated Edison 10-Q 2008
Form 10-Q
Table of Contents

FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

x

 

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

For the quarterly period ended JUNE 30, 2008

OR

   

¨

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

 

Commission
File Number
  

Exact name of registrant as specified in its charter

and principal office address and telephone number

   State of
Incorporation
   I.R.S. Employer
ID. Number

1-14514

  

Consolidated Edison, Inc.

4 Irving Place, New York, New York 10003

(212) 460-4600

   New York    13-3965100

1-1217

  

Consolidated Edison Company of New York, Inc.

4 Irving Place, New York, New York 10003

(212) 460-4600

   New York    13-5009340

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Con Edison        Yes  x    No  ¨
Con Edison of New York        Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Con Edison         
Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
Con Edison of New York         
Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x    Smaller reporting company  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Con Edison        Yes  ¨    No  x
Con Edison of New York        Yes  ¨    No  x

 

As of July 31, 2008, Con Edison had outstanding 273,190,866 Common Shares ($.10 par value). All of the outstanding common equity of Con Edison of New York is held by Con Edison.

 

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Table of Contents

Filing Format

 

This Quarterly Report on Form 10-Q is a combined report being filed separately by two different registrants: Consolidated Edison, Inc. (Con Edison) and Consolidated Edison Company of New York, Inc. (Con Edison of New York). Con Edison of New York is a subsidiary of Con Edison and, as such, the information in this report about Con Edison of New York also applies to Con Edison. As used in this report, the term the “Companies” refers to Con Edison and Con Edison of New York. However, Con Edison of New York makes no representation as to the information contained in this report relating to Con Edison or the subsidiaries of Con Edison other than itself.

 

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Table of Contents

TABLE OF CONTENTS

 

          PAGE

Glossary of Terms

   4

PART I—Financial Information

    

ITEM 1

   Financial Statements (Unaudited)     
    

Con Edison

    
    

Consolidated Balance Sheet

   6
    

Consolidated Income Statement

   8
    

Consolidated Statement of Comprehensive Income

   9
    

Consolidated Statement of Common Shareholders’ Equity

   10
    

Consolidated Statement of Cash Flows

   11
    

Con Edison of New York

    
    

Consolidated Balance Sheet

   12
    

Consolidated Income Statement

   14
    

Consolidated Statement of Comprehensive Income

   15
    

Consolidated Statement of Common Shareholder’s Equity

   16
    

Consolidated Statement of Cash Flows

   17
    

Notes to Financial Statements (Unaudited)

   18

ITEM 2

  

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

  

47

ITEM 3

  

Quantitative and Qualitative Disclosures About Market Risk

   81

ITEM 4

  

Controls and Procedures

   81

ITEM 4T

  

Controls and Procedures

   81

PART II—Other Information

    

ITEM 1

  

Legal Proceedings

   82

ITEM 1A

  

Risk Factors

   82

ITEM 4

  

Submission of Matters to a Vote of Security Holders

   83

ITEM 6

  

Exhibits

   85

Signatures

   86

 

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Table of Contents

GLOSSARY OF TERMS

 

The following is a glossary of frequently used abbreviations or acronyms that are found in the Companies’ SEC reports:

 

Con Edison Companies

    

Con Edison

  

Consolidated Edison, Inc.

Con Edison Communications

  

Con Edison Communications, LLC

Con Edison Development

  

Consolidated Edison Development, Inc.

Con Edison Energy

  

Consolidated Edison Energy, Inc.

Con Edison of New York

  

Consolidated Edison Company of New York, Inc.

Con Edison Solutions

  

Consolidated Edison Solutions, Inc.

O&R

  

Orange and Rockland Utilities, Inc.

Pike

  

Pike County Light & Power Company

RECO

  

Rockland Electric Company

The Companies

  

Con Edison and Con Edison of New York

The Utilities

  

Con Edison of New York and O&R

Regulatory and State Agencies

    

ALJs

  

Administrative Law Judges

DEC

  

New York State Department of Environmental Conservation

EPA

  

Environmental Protection Agency

FERC

  

Federal Energy Regulatory Commission

IRS

  

Internal Revenue Service

ISO-NE

  

ISO New England

NJBPU

  

New Jersey Board of Public Utilities

NJDEP

  

New Jersey Department of Environmental Protection

NYAG

  

New York Attorney General

NYISO

  

New York Independent System Operator

NYPA

  

New York Power Authority

NYSERDA

  

New York State Energy Research and Development Authority

NYSRC

  

New York State Reliability Council

PJM

  

PJM Interconnection

PSC

  

New York State Public Service Commission

PPUC

  

Pennsylvania Public Utility Commission

SEC

  

Securities and Exchange Commission

Other

    

ABO

  

Accumulated Benefit Obligation

APB

  

Accounting Principles Board

AFDC

  

Allowance for funds used during construction

CO2

  

Carbon dioxide

COSO

  

Committee of Sponsoring Organizations Treadway

Commission

DIG

  

Derivatives Implementation Group

District Court

  

The United States District Court for the Southern District of

New York

dths

  

Dekatherms

EITF

  

Emerging Issues Task Force

 

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Table of Contents

Other

    

EMF

  

Electric and magnetic fields

ERRP

  

East River Repowering Project

FASB

  

Financial Accounting Standards Board

FIN

  

FASB Interpretation No.

First Quarter Form 10-Q

  

The Companies’ combined Quarterly Report on Form 10-Q

for the quarterly period ended March 31, 2008

Fitch

  

Fitch Ratings

Form 10-K

  

The Companies’ combined Annual Report on Form 10-K for

the year ended December 31, 2007

FSP

  

FASB Staff Position

GHG

  

Greenhouse gases

kV

  

Kilovolts

kWh

  

Kilowatt-hour

LILO

  

Lease In/Lease Out

LTIP

  

Long Term Incentive Plan

MD&A

  

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

mdths

  

Thousand dekatherms

MGP Sites

  

Manufactured gas plant sites

mmlbs

  

Million pounds

Moody’s

  

Moody’s Investors Service

MVA

  

Megavolt amperes

MW

  

Megawatts or thousand kilowatts

MWH

  

Megawatt hour

Net T&D Revenues

  

Revenue requirement impact resulting from the reconciliation

pursuant to Con Edison of New York’s electric rate agreement

of the differences between the actual amount of transmission

and distribution utility plant, net of depreciation, to the

amount reflected in electric rates

NUGs

  

Non-utility generators

OCI

  

Other Comprehensive Income

PCBs

  

Polychlorinated biphenyls

PPA

  

Power purchase agreement

PRP

  

Potentially responsible party

S&P

  

Standard & Poor’s Rating Services

SFAS

  

Statement of Financial Accounting Standards

SO2

  

Sulfur dioxide

SSCM

  

Simplified service cost method

Second Quarter Form 10-Q

  

The Companies’ combined Quarterly Report on Form 10-Q

for the quarterly period ended June 30, 2008

Superfund

  

Federal Comprehensive Environmental Response,

Compensation and Liability Act of 1980 and similar state

statutes

VaR

  

Value-at-Risk

VIE

  

Variable interest entity

 

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Table of Contents

Consolidated Edison, Inc.

 

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30, 2008

   December 31, 2007

     (Millions of Dollars)

ASSETS

             

UTILITY PLANT, AT ORIGINAL COST

             

Electric

   $ 16,785    $ 15,979

Gas

     3,545      3,403

Steam

     1,785      1,755

General

     1,747      1,732

TOTAL

     23,862      22,869

Less: Accumulated depreciation

     4,922      4,784

Net

     18,940      18,085

Construction work in progress

     968      1,028

NET UTILITY PLANT

     19,908      19,113

NON-UTILITY PLANT

             

Non-utility property, less accumulated depreciation of $39 and $36 in 2008 and 2007, respectively

     20      18

Non-utility property held for sale

          778

Construction work in progress

     1      5

NET PLANT

     19,929      19,914

CURRENT ASSETS

             

Cash and temporary cash investments

     1,757      210

Restricted cash

     1      1

Accounts receivable—customers, less allowance for uncollectible accounts of $51 and $47 in 2008 and 2007, respectively

     901      970

Accrued unbilled revenue

     161      149

Other receivables, less allowance for uncollectible accounts of $6 in 2008 and 2007

     425      288

Fuel oil, at average cost

     50      44

Gas in storage, at average cost

     245      215

Materials and supplies, at average cost

     145      146

Prepayments

     103      119

Fair value of derivative assets

     385      98

Recoverable energy costs

     345      213

Deferred derivative losses

     2      45

Current assets held for sale

          40

Other current assets

     11      12

TOTAL CURRENT ASSETS

     4,531      2,550

INVESTMENTS

     380      378

DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS

             

Goodwill

     415      408

Intangible assets, less accumulated amortization of $1

             

in 2008 and 2007

     2      2

Regulatory assets

     4,381      4,511

Noncurrent assets held for sale

          88

Other deferred charges and noncurrent assets

     616      411

TOTAL DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS

     5,414      5,420

TOTAL ASSETS

   $ 30,254    $ 28,262

 

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

 

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Table of Contents

Consolidated Edison, Inc.

 

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30, 2008

   December 31, 2007

     (Millions of Dollars)

CAPITALIZATION AND LIABILITIES

             

CAPITALIZATION

             

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

   $ 9,680    $ 9,076

Preferred stock of subsidiary

     213      213

Long-term debt

     8,802      7,611

TOTAL CAPITALIZATION

     18,695      16,900

MINORITY INTERESTS

          43

NONCURRENT LIABILITIES

             

Obligations under capital leases

     19      22

Provision for injuries and damages

     162      161

Pensions and retiree benefits

     1,049      938

Superfund and other environmental costs

     290      327

Uncertain income taxes

     147      155

Asset retirement obligations

     116      110

Fair value of derivative liabilities

     105      15

Noncurrent liabilities held for sale

          61

Other noncurrent liabilities

     88      95

TOTAL NONCURRENT LIABILITIES

     1,976      1,884

CURRENT LIABILITIES

             

Long-term debt due within one year

     582      809

Notes payable

     77      840

Accounts payable

     1,387      1,187

Customer deposits

     260      249

Accrued taxes

     283      26

Accrued interest

     153      149

Accrued wages

     81      82

Fair value of derivative liabilities

     273      76

Deferred derivative gains

     372      10

Deferred income taxes - recoverable energy costs

     140      86

Current liabilities held for sale

          28

Other current liabilities

     341      309

TOTAL CURRENT LIABILITIES

     3,949      3,851

DEFERRED CREDITS AND REGULATORY LIABILITIES

             

Deferred income taxes and investment tax credits

     4,660      4,465

Regulatory liabilities

     940      1,097

Other deferred credits

     34      22

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES

     5,634      5,584

TOTAL CAPITALIZATION AND LIABILITIES

   $ 30,254    $ 28,262

 

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

 

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Table of Contents

Consolidated Edison, Inc.

 

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
       2008         2007         2008         2007    
     (Millions of Dollars/Except Share Data)  

OPERATING REVENUES

                                

Electric

   $ 1,957     $ 1,896     $ 3,830     $ 3,683  

Gas

     426       422       1,272       1,271  

Steam

     133       128       418       422  

Non-utility

     633       511       1,205       937  

TOTAL OPERATING REVENUES

   $ 3,149       2,957       6,725       6,313  

OPERATING EXPENSES

                                

Purchased power

     1,362       1,254       2,653       2,372  

Fuel

     124       136       325       355  

Gas purchased for resale

     243       250       740       764  

Other operations and maintenance

     572       497       1,108       988  

Depreciation and amortization

     182       160       347       318  

Taxes, other than income taxes

     328       317       677       645  

Income taxes

     203       76       351       229  

TOTAL OPERATING EXPENSES

     3,014       2,690       6,201       5,671  

Gain on sale of generation projects

     295             295        

OPERATING INCOME

     430       267       819       642  

OTHER INCOME (DEDUCTIONS)

                                

Investment and other income

     11       21       69       35  

Allowance for equity funds used during construction

     2       2       4       3  

Preferred stock dividend requirements of subsidiary

     (3 )     (3 )     (6 )     (6 )

Other deductions

     (5 )     (13 )     (9 )     (17 )

Income taxes

     (5 )     5       (21 )     10  

TOTAL OTHER INCOME (DEDUCTIONS)

           12       37       25  

INTEREST EXPENSE

                                

Interest on long-term debt

     131       116       244       234  

Other interest

           14       16       29  

Allowance for borrowed funds used during construction

     (3 )     (2 )     (6 )     (5 )

NET INTEREST EXPENSE

     128       128       254       258  

INCOME FROM CONTINUING OPERATIONS

     302       151       602       409  

INCOME FROM DISCONTINUED OPERATIONS

                                

Gain on sale of generation projects, net of tax expense of $160 in 2008

     248             248        

Income from discontinued operations, net of tax expense of $1 and $3 in 2008 and $3 and $0 in 2007, respectively

     2       3       4       1  

TOTAL INCOME FROM DISCONTINUED OPERATIONS

     250       3       252       1  

NET INCOME

   $ 552     $ 154     $ 854     $ 410  

EARNINGS PER COMMON SHARE - BASIC

                                

Continuing operations

   $ 1.10     $ 0.57     $ 2.21     $ 1.56  

Discontinued operations

     0.92       0.01       0.93       0.01  

Net income

   $ 2.02     $ 0.58     $ 3.14     $ 1.57  

EARNINGS PER COMMON SHARE - DILUTED

                                

Continuing operations

   $ 1.10     $ 0.57     $ 2.20     $ 1.55  

Discontinued operations

     0.92       0.01       0.93       0.01  

Net income

   $ 2.02     $ 0.58     $ 3.13     $ 1.56  

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

   $ 0.585     $ 0.580     $ 1.170     $ 1.160  

AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC (IN MILLIONS)

     272.7       264.9       272.5       261.9  

AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED (IN MILLIONS)

     273.5       266.2       273.3       263.1  

 

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

 

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Consolidated Edison, Inc.

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2008     2007     2008     2007  
     (Millions of Dollars)  

NET INCOME

   $ 552     $ 154     $ 854     $ 410  

OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES

                                

Pension plan liability adjustments, net of $1 and $1 in 2008 and $1 and $2 taxes 2007, respectively

     1       2       2       3  

Unrealized gains/(losses) on derivatives qualified as cash flow hedges, net of $0 and $(1) in 2008 and $(11) and $3 taxes in 2007, respectively

           (19 )     (2 )     4  

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

                 (8 )      

Less: Reclassification adjustment for losses included in net income, net of $(1) and $(1) in 2008 and $(5) and $(14) taxes in 2007, respectively

     (2 )     (8 )     (2 )     (20 )

TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES

     3       (9 )     10       27  

COMPREHENSIVE INCOME

   $ 555     $ 145     $ 864     $ 437  

 

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

 

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Consolidated Edison, Inc.

 

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

    Common Stock  

Additional
Paid-

In Capital

  Retained
Earnings
    Treasury Stock     Capital
Stock
Expense
    Accumulated
Other
Comprehensive
Loss
    Total  
  Shares   Amount       Shares   Amount        
    (Millions of Dollars/Except Share Data)  

BALANCE AS OF

DECEMBER 31, 2006

  257,456,303   $ 28   $ 3,314   $ 5,804     23,210,700   $ (1,001 )   $ (58 )   $ (83 )   $ 8,004  

Net income

        0           256                                   256  

Common stock dividends

                    (150 )                                 (150 )

Issuance of common shares—dividend reinvestment and employee stock plans

  1,327,669           61                                         61  

Stock options

                                                         

Other comprehensive loss

                                                36       36  

BALANCE AS OF

MARCH 31, 2007

  258,783,972   $ 28   $ 3,375   $ 5,910     23,210,700   $ (1,001 )   $ (58 )   $ (47 )   $ 8,207  

Net income

                    154                                   154  

Common stock dividends

                    (156 )                                 (156 )

Issuance of common shares—public offering

  11,000,000     1     559                         (2 )             558  

Issuance of common shares—dividend reinvestment and employee stock plans

  1,089,068           52                                         52  

Other comprehensive income

                                                (9 )     (9 )

BALANCE AS OF

JUNE 30, 2007

  270,873,040   $ 29   $ 3,986   $ 5,908     23,210,700   $ (1,001 )   $ (60 )   $ (56 )   $ 8,806  

BALANCE AS OF

DECEMBER 31, 2007

  272,024,874   $ 29   $ 4,038   $ 6,113     23,210,700   $ (1,001 )   $ (60 )   $ (43 )   $ 9,076  

Net income

                    303                                   303  

Common stock dividends

                    (160 )                                 (160 )

Issuance of common shares—dividend reinvestment and employee stock plans

  476,809           21                                         21  

Other comprehensive income

                                                7       7  

Adjustment for adoption of FASB Statement No. 157

                    17                                   17  

BALANCE AS OF

MARCH 31, 2008

  272,501,683   $ 29   $ 4,059   $ 6,273     23,210,700   $ (1,001 )   $ (60 )   $ (36 )   $ 9,264  

Net income

                    552                                   552  

Common stock dividends

                    (162 )                                 (162 )

Issuance of common shares—dividend reinvestment and employee stock plans

  493,092           23                                         23  

Other comprehensive income

                                                3       3  

BALANCE AS OF

JUNE 30, 2008

  272,994,775   $ 29   $ 4,082   $ 6,663     23,210,700   $ (1,001 )   $ (60 )   $ (33 )   $ 9,680  

 

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

 

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Consolidated Edison, Inc.

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

     For the Six Months
Ended June 30,


 
       2008  

      2007  

 

OPERATING ACTIVITIES

                

Net Income

   $ 854     $ 410  

PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME

                

Depreciation and amortization

     347       331  

Deferred income taxes

     202       89  

Rate case amortization and accruals

     (105 )     (156 )

Net transmission and distribution reconciliation

     (52 )     (98 )

Common equity component of allowance for funds used during construction

     (4 )     (3 )

Prepaid pension costs (net of capitalized amounts)

           71  

Pre-tax gain on sale of generation projects

     (704 )      

Other non-cash items (net)

     (223 )     (55 )

CHANGES IN ASSETS AND LIABILITIES

                

Accounts receivable—customers, less allowance for uncollectibles

     69       (42 )

Materials and supplies, including fuel oil and gas in storage

     (35 )     85  

Other receivables and other current assets

     (148 )     143  

Prepayments

     16       32  

Recoverable energy costs

     (33 )     74  

Accounts payable

     335       (7 )

Pensions and retiree benefits

     63       13  

Accrued taxes

     257       22  

Accrued interest

     4       (3 )

Deferred charges, noncurrent assets and other regulatory assets

     (230 )     (257 )

Deferred credits and other regulatory liabilities

     638       146  

Other assets

     133       (10 )

Other liabilities

     (94 )     36  

  


 


NET CASH FLOWS FROM OPERATING ACTIVITIES

     1,290       821  

INVESTING ACTIVITIES

                

Utility construction expenditures (excluding capitalized support costs of $- and $(30) in 2008 and 2007, respectively)

     (1,068 )     (891 )

Cost of removal less salvage

     (90 )     (73 )

Non-utility construction expenditures

     3       (3 )

Common equity component of allowance for funds used during construction

     4       3  

Increase in restricted cash

           1  

Proceeds from sale of generation projects

     1,477        

Proceeds from sale of properties

           30  

Purchase of ownership interest in Hawkeye lease

     (12 )      

Purchase of ownership interest in Newington SCS

     (20 )      

  


 


NET CASH FLOWS FROM/(USED) IN INVESTING ACTIVITIES

     294       (933 )

FINANCING ACTIVITIES

                

Net proceeds from/(payments of) short-term debt

     (763 )     198  

Retirement of long-term debt

     (186 )     (359 )

Issuance of long-term debt

     1,200        

Issuance of common stock

     19       651  

Debt issuance costs

     (9 )      

Common stock dividends

     (298 )     (286 )

  


 


NET CASH FLOWS FROM/(USED) FINANCING ACTIVITIES

     (37 )     204  

CASH AND TEMPORARY CASH INVESTMENTS:

                

NET CHANGE FOR THE PERIOD

     1,547       92  

BALANCE AT BEGINNING OF PERIOD

     210       94  

  


 


BALANCE AT END OF PERIOD

   $ 1,757     $ 186  

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

                

Cash paid during the period for:

                

Interest

   $ 244     $ 226  

Income taxes

   $ 87     $ 75  

 

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

 

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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30, 2008

   December 31, 2007

     (Millions of Dollars)

ASSETS

             

UTILITY PLANT, AT ORIGINAL COST

             

Electric

   $ 15,795    $ 15,027

Gas

     3,133      2,999

Steam

     1,785      1,755

General

     1,608      1,599

TOTAL

     22,321      21,380

Less: Accumulated depreciation

     4,485      4,360

Net

     17,836      17,020

Construction work in progress

     931      973

NET UTILITY PLANT

     18,767      17,993

NON-UTILITY PROPERTY

             

Non-utility property, less accumulated depreciation of $18 in 2008 and 2007

     11      12

NET PLANT

     18,778      18,005

CURRENT ASSETS

             

Cash and temporary cash investments

     341      121

Accounts receivable - customers, less allowance for uncollectible accounts of $47 and $43 in 2008 and 2007, respectively

     748      832

Other receivables, less allowance for uncollectible accounts of $3 and $4 in 2008 and 2007, respectively

     190      159

Accounts receivable from affiliated companies

     182      96

Fuel oil, at average cost

     50      44

Gas in storage, at average cost

     197      170

Materials and supplies, at average cost

     136      138

Prepayments

     77      81

Fair value of derivative assets

     128      66

Recoverable energy costs

     334      190

Deferred derivative losses

     1      44

Other current assets

     4      5

TOTAL CURRENT ASSETS

     2,388      1,946

INVESTMENTS

     114      111

DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS

             

Regulatory assets

     3,979      4,103

Other deferred charges and noncurrent assets

     394      339

TOTAL DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS

     4,373      4,442

TOTAL ASSETS

   $ 25,653    $ 24,504

 

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

 

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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30, 2008    December 31, 2007
     (Millions of Dollars)

CAPITALIZATION AND LIABILITIES

             

CAPITALIZATION

             

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

   $ 8,191    $ 8,086

Preferred stock

     213      213

Long-term debt

     8,095      7,172

TOTAL CAPITALIZATION

     16,499      15,471

NONCURRENT LIABILITIES

             

Obligations under capital leases

     19      22

Provision for injuries and damages

     155      154

Pensions and retiree benefits

     740      638

Superfund and other environmental costs

     234      271

Uncertain income taxes

     134      142

Asset retirement obligations

     116      110

Fair value of derivative liabilities

     —        4

Other noncurrent liabilities

     75      77

TOTAL NONCURRENT LIABILITIES

     1,473      1,418

CURRENT LIABILITIES

             

Long-term debt due within one year

     375      280

Notes payable

     —        555

Accounts payable

     1,015      899

Accounts payable to affiliated companies

     32      19

Customer deposits

     245      234

Accrued taxes

     42      30

Accrued interest

     137      134

Accrued wages

     75      74

Fair value of derivative liabilities

     47      20

Deferred derivative gains

     263      5

Deferred income taxes—recoverable energy costs

     136      77

Other current liabilities

     309      276

TOTAL CURRENT LIABILITIES

     2,676      2,603

DEFERRED CREDITS AND REGULATORY LIABILITIES

             

Deferred income taxes and investment tax credits

     4,214      4,018

Regulatory liabilities

     760      976

Other deferred credits

     31      18

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES

     5,005      5,012

TOTAL CAPITALIZATION AND LIABILITIES

   $ 25,653    $ 24,504

 

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

 

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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
         2008             2007             2008             2007      
     (Millions of Dollars)  

OPERATING REVENUES

                                

Electric

   $ 1,778     $ 1,731     $ 3,492     $ 3,374  

Gas

     383       377       1,124       1,113  

Steam

     133       128       418       422  

TOTAL OPERATING REVENUES

     2,294       2,236       5,034       4,909  

OPERATING EXPENSES

                                

Purchased power

     704       713       1,425       1,369  

Fuel

     124       123       322       335  

Gas purchased for resale

     215       216       642       650  

Other operations and maintenance

     488       431       950       863  

Depreciation and amortization

     171       147       325       292  

Taxes, other than income taxes

     313       303       645       615  

Income taxes

     41       61       154       197  

TOTAL OPERATING EXPENSES

     2,056       1,994       4,463       4,321  

OPERATING INCOME

     238       242       571       588  

OTHER INCOME (DEDUCTIONS)

                                

Investment and other income

     10       15       13       25  

Allowance for equity funds used during construction

     2       2       4       3  

Other deductions

     (5 )     (3 )     (7 )     (7 )

Income taxes

     (4 )     (2 )     (3 )      

TOTAL OTHER INCOME (DEDUCTIONS)

     3       12       7       21  

INTEREST EXPENSE

                                

Interest on long-term debt

     121       105       227       209  

Other interest

     (2 )     9       10       23  

Allowance for borrowed funds used during construction

     (2 )     (2 )     (5 )     (4 )

NET INTEREST EXPENSE

     117       112       232       228  

NET INCOME

     124       142       346       381  

PREFERRED STOCK DIVIDEND REQUIREMENTS

     3       3       6       6  

NET INCOME FOR COMMON STOCK

   $ 121     $ 139     $ 340     $ 375  

 

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

 

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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

     For the Three Months
Ended June 30,
   For the Six Months
Ended June 30,
         2008            2007            2008            2007    
     (Millions of Dollars)

NET INCOME

   $ 124    $ 142    $ 346    $ 381

OTHER COMPREHENSIVE INCOME, NET OF TAXES

     —        —        —        —  

COMPREHENSIVE INCOME

   $ 124    $ 142    $ 346    $ 381

 

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

 

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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDER'S EQUITY

(UNAUDITED)

 

    Common Stock

  Additional
Paid-

In Capital

  Retained
Earnings

    Repurchased
Con Edison

Stock

    Capital
Stock

Expense

    Accumulated
Other
Comprehensive

Loss

    Total

 
    Shares

  Amount

           
    (Millions of Dollars/Except Share Data)  

BALANCE AS OF DECEMBER 31, 2006

  235,488,094   $ 589   $ 2,252   $ 5,320     $ (962 )   $ (58 )   $ (9 )   $ 7,132  

Net income

                    239                               239  

Common stock dividend to parent

                    (131 )                             (131 )

Cumulative preferred dividends

                    (3 )                             (3 )

BALANCE AS OF MARCH 31, 2007

  235,488,094   $ 589   $ 2,252   $ 5,425     $ (962 )   $ (58 )   $ (9 )   $ 7,237  

Net income

                    142                               142  

Common stock dividend to parent

                    (131 )                             (131 )

Capital contribution by parent

              518                     (2 )             516  

Cumulative preferred dividends

                    (3 )                             (3 )

BALANCE AS OF JUNE 30, 2007

  235,488,094   $ 589   $ 2,770   $ 5,433     $ (962 )   $ (60 )   $ (9 )   $ 7,761  

BALANCE AS OF DECEMBER 31, 2007

  235,488,094   $ 589   $ 2,912   $ 5,616     $ (962 )   $ (60 )   $ (9 )   $ 8,086  

Net income

                    222                               222  

Common stock dividend to parent

                    (139 )                             (139 )

Capital contribution by parent

              23                                     23  

Cumulative preferred dividends

                    (3 )                             (3 )

BALANCE AS OF MARCH 31, 2008

  235,488,094   $ 589   $ 2,935   $ 5,696     $ (962 )   $ (60 )   $ (9 )   $ 8,189  

Net income

                    124                               124  

Common stock dividend to parent

                    (145 )                             (145 )

Capital contribution by parent

              26                                     26  

Cumulative preferred dividends

                    (3 )                             (3 )

BALANCE AS OF JUNE 30, 2008

  235,488,094   $ 589   $ 2,961   $ 5,672     $ (962 )   $ (60 )   $ (9 )   $ 8,191  

 

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

 

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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

     For the Six Months
Ended June 30,
 
         2008             2007      
     (Millions of Dollars)  

OPERATING ACTIVITIES

                

Net income

   $ 346     $ 381  

PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME

                

Depreciation and amortization

     325       292  

Deferred income taxes

     193       86  

Rate case amortization and accruals

     (105 )     (156 )

Net transmission and distribution reconciliation

     (52 )     (98 )

Common equity component of allowance for funds used during construction

     (4 )     (3 )

Prepaid pension costs (net of capitalized amounts)

           12  

Other non-cash items (net)

     (27 )     (32 )

CHANGES IN ASSETS AND LIABILITIES

                

Accounts receivable—customers, less allowance for uncollectibles

     84       (3 )

Materials and supplies, including fuel oil and gas in storage

     (31 )     45  

Other receivables and other current assets

     (171 )     89  

Prepayments

     4       7  

Recoverable energy costs

     (42 )     69  

Accounts payable

     129       (18 )

Pensions and retiree benefits

     44       (7 )

Accrued taxes

     12       35  

Accrued interest

     3       1  

Deferred charges, noncurrent assets and other regulatory assets

     (119 )     (248 )

Deferred credits and other regulatory liabilities

     473       156  

Other assets

           (1 )

Other liabilities

     3       48  

  


 


NET CASH FLOWS FROM OPERATING ACTIVITIES

     1,065       655  

INVESTING ACTIVITIES

                

Utility construction expenditures (excluding capitalized support costs of $- and $(30) in 2008 and 2007, respectively)

     (1,031 )     (852 )

Cost of removal less salvage

     (88 )     (71 )

Common equity component of allowance for funds used during construction

     4       3  

Proceeds from loan to affiliate

     55        

Proceeds from sale of properties

           30  

  


 


NET CASH FLOWS USED IN INVESTING ACTIVITIES

     (1,060 )     (890 )

FINANCING ACTIVITIES

                

Net payments of short-term debt

     (555 )      

Retirement of long-term debt

     (180 )      

Issuance of long-term debt

     1,200        

Debt issuance costs

     (9 )      

Capital contribution by parent

     49       516  

Dividend to parent

     (284 )     (262 )

Preferred stock dividends

     (6 )     (6 )

  


 


NET CASH FLOWS FROM FINANCING ACTIVITIES

     215       248  

CASH AND TEMPORARY CASH INVESTMENTS:

                

NET CHANGE FOR THE PERIOD

     220       13  

BALANCE AT BEGINNING OF PERIOD

     121       47  

BALANCE AT END OF PERIOD

   $ 341     $ 60  

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

                

Cash paid during the period for:

                

    Interest

   $ 223     $ 203  

    Income taxes

   $ 70     $ 102  

 

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

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)

 

General

These combined notes accompany and form an integral part of the separate consolidated financial statements of each of the two separate registrants: Consolidated Edison, Inc. and its subsidiaries (Con Edison) and Consolidated Edison Company of New York, Inc. and its subsidiaries (Con Edison of New York). Con Edison of New York is a subsidiary of Con Edison and as such its financial condition and results of operations and cash flows, which are presented separately in the Con Edison of New York consolidated financial statements, are also consolidated, along with those of Con Edison’s other utility subsidiary, Orange and Rockland Utilities, Inc. (O&R), and Con Edison’s competitive energy businesses (discussed below) in Con Edison’s consolidated financial statements. The term “Utilities” is used in these notes to refer to Con Edison of New York and O&R.

 

As used in these notes, the term “Companies” refers to Con Edison and Con Edison of New York and, except as otherwise noted, the information in these combined notes relates to each of the Companies. However, Con Edison of New York makes no representation as to information relating to Con Edison or the subsidiaries of Con Edison other than itself.

 

The separate interim consolidated financial statements of each of the Companies are unaudited but, in the opinion of their respective managements, reflect all adjustments (which include only normally recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The Companies’ separate interim consolidated financial statements should be read together with their separate audited financial statements (including the combined notes thereto) included in Item 8 of their combined Annual Report on Form 10-K for the year ended December 31, 2007 (the Form 10-K) and their separate unaudited financial statements (including the combined notes thereto) included in Part I, Item 1 of their combined Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008 (the First Quarter Form 10-Q). Information in the notes to the consolidated financial statements in the Form 10-K and the First Quarter Form 10-Q referred to in these notes is incorporated by reference herein. The use of terms such as “see” or “refer to” shall be deemed to incorporate by reference into these notes the information to which reference is made. Certain prior period amounts have been reclassified to conform to the current period presentation. Results for interim periods are not necessarily indicative of results for the entire fiscal year.

 

Con Edison has two regulated utility subsidiaries: Con Edison of New York and O&R. Con Edison of New York provides electric service and gas service in New York City and Westchester County. The company also provides steam service in parts of Manhattan. O&R, along with its regulated utility subsidiaries, provides electric service in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service in southeastern New York and adjacent areas of eastern Pennsylvania. Con Edison has the following competitive energy businesses: Consolidated Edison

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

Solutions, Inc. (Con Edison Solutions), a retail energy services company that sells electricity and also offers energy-related services; Consolidated Edison Energy, Inc. (Con Edison Energy), a wholesale energy supply company; and Consolidated Edison Development, Inc. (Con Edison Development), a company that participates in infrastructure projects. During the second quarter of 2008, Con Edison Development and its subsidiary, CED/SCS Newington, LLC, completed the sale of their ownership interests in power generating projects with an aggregate capacity of approximately 1,706 megawatts. See Note N.

 

Note A - Earnings Per Common Share

Reference is made to “Earnings Per Common Share” in Note A to the financial statements included in Item 8 of the Form 10-K. For the three and six months ended June 30, 2008 and 2007, Con Edison’s basic and diluted EPS are calculated as follows:

 

     For the Three
Months Ended
June 30,
   For the Six
Months Ended
June 30,
(Millions of Dollars, except per share amounts/Shares in Millions)    2008    2007    2008    2007

Income from continuing operations

   $ 302    $ 151    $ 601    $ 409

Income from discontinued operations, net of tax

     250      3      253      1

Net income

   $ 552    $ 154    $ 854    $ 410

Weighted average common shares outstanding - Basic

     272.7      264.9      272.5      261.8

Add: Incremental shares attributable to effect of potentially dilutive securities

     0.8      1.3      0.8      1.3

Adjusted weighted average common shares outstanding - Diluted

     273.5      266.2      273.3      263.1

EARNINGS PER COMMON SHARE - BASIC

                           

Continuing operations

   $ 1.10    $ 0.57    $ 2.21    $ 1.56

Discontinued operations

     0.92      0.01      0.93      0.01

Net income

   $ 2.02    $ 0.58    $ 3.14    $ 1.57

EARNINGS PER COMMON SHARE – DILUTED

                           

Continuing operations

   $ 1.10    $ 0.57    $ 2.20    $ 1.55

Discontinued operations

     0.92      0.01      0.93      0.01

Net income

   $ 2.02    $ 0.58    $ 3.13    $ 1.56

 

Note B - Regulatory Matters

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

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

Rate Agreements

Con Edison of New York - Electric

In May 2008, Con Edison of New York filed a proposal with the New York State Public Service Commission (PSC) for a three-year electric rate plan with level annual rate increases of $556.7 million effective April 2009, 2010 and 2011. The filing reflects a return on common equity of 10.0 percent and a common equity ratio of 48.0 percent.

 

The filing reflects efforts by Con Edison of New York to mitigate the impact on its customers of rate increases, including its proposed targeted energy efficiency programs and its proposal to begin to accrue revenues in the month electric service is provided instead of when it bills customers for the service.

 

The filing also includes an alternative proposal for an electric rate increase of $654 million, effective April 2009, to recover increased property taxes ($200 million); additional operating costs and new and/or expanded operating programs ($165 million); carrying charges on additional infrastructure investments ($230 million); and an increased return on equity as compared to the return on equity reflected in current electric rates ($115 million).

 

The company is requesting that expenses for pension and other post-retirement benefits, property taxes, municipal infrastructure support and environmental site investigation and remediation be reconciled to amounts reflected in rates and that increases, if any, in certain expenses above a four percent annual inflation rate be deferred as a regulatory asset if its annual return on common equity is less than the authorized return. The filing reflects continuation of the revenue decoupling mechanism that eliminates the direct relationship between the company’s level of delivery revenues and profits. It also reflects continuation of the provisions pursuant to which the company recovers its purchased power and fuel costs from customers.

 

O&R - Electric

In July 2008, the PSC approved a Joint Proposal among O&R, the PSC staff and other parties for the rates O&R can charge its New York customers for electric service from July 2008 through June 2011. The rate plan approved by the PSC provides for electric rate increases of $15.6 million, $15.6 million and $5.7 million effective July 1, 2008, 2009 and 2010, respectively, and the collection of an additional $9.9 million during the 12-month period beginning July 1, 2010.

 

The Joint Proposal reflected the following major items:

 

   

an annual return on common equity of 9.4 percent;

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

   

most of any actual earnings above a 10.2 percent return on equity (based on actual average common equity ratio, subject to a 50 percent maximum) are to be applied to reduce regulatory assets for pension and other post-retirement benefit expenses;

 

   

deferral as a regulatory asset or regulatory liability, as the case may be, of the difference between actual pension and other post-retirement benefit expenses, environmental remediation expenses, property taxes, tax-exempt debt costs and certain other expenses and amounts for those expenses reflected in rates;

 

   

deferral as a regulatory liability of the revenue requirement impact (i.e., return on investment, depreciation and income taxes) of the amount, if any, by which actual transmission and distribution related capital expenditures are less than amounts reflected in rates;

 

   

deferral as a regulatory asset of increases, if any, in certain expenses above a 4 percent annual inflation rate, but only if the actual annual return on common equity is less than 9.4 percent;

 

   

potential negative earnings adjustments of approximately $2 million to $3 million annually if certain customer service and system reliability performance targets are not met;

 

   

implementation of a revenue decoupling mechanism under which actual energy delivery revenues would be compared, on a periodic basis, with the authorized delivery revenues with the difference accrued, with interest, for refund to, or recovery from, customers, as applicable;

 

   

continuation of the rate provisions pursuant to which the company recovers its purchased power costs from customers; and

 

   

withdrawal of the litigation O&R commenced seeking to annul the PSC’s March and October 2007 orders relating to O&R’s electric rates.

 

Con Edison of New York - Steam

In June 2008, Con Edison of New York entered into a Joint Proposal with the PSC staff and other parties with respect to the rates the company can charge its customers for steam service. The Joint Proposal, which is subject to PSC approval, covers the period from October 1, 2008 through September 30, 2010. The Joint Proposal provides for steam rate increases of $43.7 million effective October 1, 2008 and 2009. The PSC is expected to consider the Joint Proposal in September 2008.

 

The Joint Proposal reflects the following major items:

 

   

an annual return on common equity of 9.3 percent;

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

   

any actual earnings above a 10.1 percent return on equity (based on actual average common equity ratio, subject to a 50 percent maximum) are to be shared as follows: half will be deferred for the benefit of customers and the other half is to be retained by the company (with half of the company’s share subject to offset to reduce any regulatory assets for under-collections of property taxes);

 

   

deferral as a regulatory asset or regulatory liability, as the case may be, of the difference between (i) actual costs for pension and other post-retirement benefits, environmental remediation, property taxes, tax-exempt debt, municipal infrastructure support and certain other costs and (ii) amounts for those costs reflected in rates (90 percent of the difference in the case of property taxes and interference costs);

 

   

deferral as a regulatory liability of the revenue requirement impact (i.e., return on investment, depreciation and income taxes) of the amount, if any, by which the actual capital expenditures related to steam production plant are less than amounts reflected in rates;

 

   

potential negative earnings adjustments (revenue reductions) of approximately $950,000 to $1 million annually if certain business development, customer service and safety performance targets are not met;

 

   

amortization of certain regulatory assets and liabilities, the net effect of which will be a non-cash increase in steam revenues of $20.3 million over the two-year period covered by the Joint Proposal; and

 

   

continuation of the rate provisions pursuant to which the company recovers its fuel and purchased steam costs from customers.

 

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Regulatory Assets and Liabilities

Regulatory assets and liabilities at June 30, 2008 and December 31, 2007 were comprised of the following items:

 

     Con Edison     Con Edison of
New York
(Millions of Dollars)    2008    2007     2008    2007

Regulatory assets

                            

Unrecognized pension and other postretirement costs

   $ 2,097    $ 2,106     $ 1,959    $ 1,956

Future federal income tax

     1,168      1,112          1,112      1,057

Environmental remediation costs

     385      378       319      312

World Trade Center restoration costs

     149      154       149      154

Pension and other postretirement benefits deferrals

     90      152       34      96

Revenue taxes

     77      77       75      75

O&R transition bond charges

     61      63           

Unbilled gas revenue

     44      44       44      44

Workers’ compensation

     38      41       38      41

Net electric deferrals

     36            36     

Other retirement program costs

     15      16       15      16

Asbestos-related costs

     10      10       10      10

Deferred derivative losses - long-term

     1      5       1      4

Net T&D reconciliation

          142            142

Recoverable energy costs

          50            50

Electric rate increase accrual

          14            14

Other

     210      147       187      132

Regulatory assets

     4,381      4,511       3,979      4,103

Deferred derivative losses - current

     2      45       1      44

Recoverable energy costs - current

     345      213       334      190

Total Regulatory Assets

   $ 4,728    $ 4,769     $ 4,314    $ 4,337

Regulatory liabilities

                            

Allowance for cost of removal less salvage

   $ 398    $ 422     $ 336    $ 362

Deferred derivative gains - long-term

     152      21       78      8

Refundable energy costs

     78      29       52     

Net electric deferrals

     57      33       57      33

Gain on sale of First Avenue properties

     32      124       32      124

Gas excess earnings

     15      10       15      10

Gas interruptible sales credits

     10      10       10      10

Transmission congestion contracts

     7      40       7      40

Net steam deferrals

     7      21       7      21

EPA SO2 allowance proceeds – electric and steam

     6      18       6      18

Property tax reconciliation

     5      41       5      41

Prior year deferred tax amortization

     2      51       2      51

NYS tax law changes

     1      42            41

DC service incentive

     1      10       1      10

Interest on federal income tax refund

          41            41

2004 electric, gas and steam one-time rate agreement charges

          16            16

Gain on sale of W. 24th St. property

          10            10

Other

     169      158       152      140

Regulatory liabilities

     940      1,097       760      976

Deferred derivative gains – current

     372      10       263      5

Total Regulatory Liabilities

   $ 1,312    $ 1,107     $ 1,023    $ 981

 

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Power Outage Proceedings

In July 2008, the PSC approved a Joint Proposal among Con Edison of New York, the PSC staff and other parties with respect to the July 2006 Queens outage. The PSC order provides that (i) the company will make available $17 million for the benefit of the communities affected by the outage, including customer bill credits, and will not recover from customers $40 million of capital costs incurred to replace and repair electric delivery facilities and $6 million of related carrying charges; and (ii) the company will be released from all prudence-related claims that were or could have been asserted in any PSC proceeding relating to the outage other than with respect to any damage to the Long Island City network, or incremental costs, that are neither known nor reasonably foreseeable.

 

In June 2008, the PSC concluded that Con Edison of New York is not liable for food spoilage claims in connection with the September 2006 outage in Westchester resulting from Tropical Storm Ernesto.

 

Note C - Long-term Debt

Reference is made to Note C to the financial statements in Item 8 of the Form 10-K and Note C to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q.

 

At June 30, 2008, $49 million of the $55 million of O&R’s weekly-rate, tax-exempt debt that is insured by Financial Guaranty Insurance Company (Series 1994A Debt), and $1 million of the $44 million of such debt insured by Ambac Assurance Company (Series 1995 A Debt), had been tendered by bondholders and purchased with funds drawn under letters of credit maintained as liquidity facilities for the tax-exempt debt. O&R reimbursed the bank for the funds used to purchase the tendered bonds, together with interest thereon.

 

In June 2008, Con Edison issued $326 million of 8.71 percent long-term unsecured notes due in 2022 in exchange for a like amount of secured project debt in connection with the purchase by a subsidiary of Con Edison Development of a 525 MW generating project in Newington, New Hampshire. Upon completion of the exchange, the project debt was cancelled. Previously, the project had been leased by the subsidiary and Con Edison had guaranteed the payment of certain obligations in connection with the project. See Notes H and P to the financial statements in Item 8 of the Form 10-K. The new notes are, and the project debt had been, included in Con Edison’s consolidated balance sheet. Con Edison Development subsequently completed the sale of its ownership interests in the project. See Note N.

 

The new notes mature, bear interest and are subject to substantially the same terms as the project debt (other than terms relating to the project being leased or security for the debt), including the payment of a make-whole premium in connection with any optional prepayment. There are no significant debt covenants applicable to the notes other than covenants requiring Con Edison to pay principal and

 

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interest when due, not to consolidate with or merge into any other corporation and to continue its business unless certain conditions are met, and not to permit its ratio of consolidated debt to consolidated capital to exceed 0.675 to 1. The failure to comply with applicable covenants would, except as provided, constitute an event of default with respect to the notes. Events of default with respect to the notes also include events of default of other indebtedness of Con Edison or its material subsidiaries having a then outstanding principal balance in excess of $100 million. If an event of default with respect to the notes occurs and is continuing, the note holders may, subject to certain conditions, declare the unpaid principal amount of the notes, together with any accrued and unpaid interest and applicable make-whole premium, due and payable.

 

Note D - Short-Term Borrowing and Credit Agreements

Reference is made to Note D to the financial statements in Item 8 of the Form 10-K and Note D to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q.

 

At June 30, 2008, Con Edison had $77 million of commercial paper outstanding, none of which was outstanding under Con Edison of New York’s program. The weighted average interest rate at June 30, 2008 was 3.0 percent for Con Edison. At June 30, 2007, Con Edison had $314 million of commercial paper outstanding, none of which was outstanding under Con Edison of New York’s program. The weighted average interest rate at June 30, 2007 was 5.5 percent for Con Edison. At June 30, 2008 and 2007, no loans were outstanding under the Companies’ credit agreements and $115 million and $47 million of letters of credit were outstanding, respectively.

 

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Note E - Pension Benefits

Reference is made to Note E to the financial statements in Item 8 of the Form 10-K and Note E to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q.

 

Net Periodic Benefit Cost

The components of the Companies’ net periodic benefit costs for the three and six months ended June 30, 2008 and 2007 were as follows:

 

     For the Three Months Ended June 30,  
     Con Edison     Con Edison of
New York
 
(Millions of Dollars)       2008           2007           2008           2007     

Service cost – including administrative expenses

   $ 34     $ 33     $ 32     $ 31  

Interest cost on projected benefit obligation

     129       123          121       115  

Expected return on plan assets

     (173 )     (162 )     (165 )     (155 )

Amortization of net actuarial loss

     48       40       42       34  

Amortization of prior service costs

     2       3       2       3  

NET PERIODIC BENEFIT COST

   $ 40     $ 37     $ 32     $ 28  

Amortization of regulatory asset*

     1       1       1       1  

TOTAL PERIODIC BENEFIT COST

   $ 41     $ 38     $ 33     $ 29  

Cost capitalized

     (14 )     (11 )     (11 )     (8 )

Cost deferred

     (5 )     (20 )     (7 )     (18 )

Cost charged to operating expenses

   $ 22     $ 7     $ 15     $ 3  
* Relates to increases in Con Edison of New York’s pension obligations of $33 million from a 1993 special retirement program and $45 million from a 1999 special retirement program.

 

     For the Six Months Ended June 30,  
     Con Edison     Con Edison of
New York
 
(Millions of Dollars)       2008           2007           2008           2007     

Service cost – including administrative expenses

   $ 69     $ 66     $ 64     $ 61  

Interest cost on projected benefit obligation

     258       246          241       230  

Expected return on plan assets

     (346 )     (323 )     (330 )     (309 )

Amortization of net actuarial loss

     96       80       85       69  

Amortization of prior service costs

     4       5       4       5  

NET PERIODIC BENEFIT COST

   $ 81     $ 74     $ 64     $ 56  

Amortization of regulatory asset*

     2       2       2       2  

TOTAL PERIODIC BENEFIT COST

   $ 83     $ 76     $ 66     $ 58  

Cost capitalized

     (28 )     (23 )     (23 )     (18 )

Cost deferred

     (25 )     (49 )     (28 )     (45 )

Cost charged/(credited) to operating expenses

   $ 30     $ 4     $ 15     $ (5 )
* Relates to increases in Con Edison of New York’s pension obligations of $33 million from a 1993 special retirement program and $45 million from a 1999 special retirement program.

 

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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 and Note F to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q.

 

Net Periodic Benefit Cost

The components of the Companies’ net periodic postretirement benefit costs for the three and six months ended June 30, 2008 and 2007 were as follows:

 

     For the Three Months Ended June 30,  
     Con Edison     Con Edison of
New York
 
(Millions of Dollars)       2008           2007           2008           2007     

Service cost

   $ 5     $ 5     $ 4     $ 4  

Interest cost on accumulated other postretirement benefit obligation

     23       23       21       21  

Expected return on plan assets

     (21 )     (20 )     (19 )     (19 )

Amortization of net actuarial loss

     17       16       14       14  

Amortization of prior service cost

     (3 )     (3 )     (4 )     (3 )

Amortization of transition obligation

     1       1       1       1  

NET PERIODIC POSTRETIREMENT BENEFIT COST

   $ 22     $ 22     $ 17     $ 18  

Cost capitalized

     (7 )     (8 )     (6 )     (6 )

Cost deferred

     (4 )     (9 )     (2 )     (9 )

Cost charged to operating expenses

   $ 11     $ 5     $ 9     $ 3  

 

     For the Six Months Ended June 30,  
     Con Edison     Con Edison of
New York
 
(Millions of Dollars)       2008           2007           2008           2007     

Service cost

   $ 10     $ 9     $ 8     $ 7  

Interest cost on accumulated other postretirement benefit obligation

     47       46       42       41  

Expected return on plan assets

     (43 )     (40 )     (39 )     (37 )

Amortization of net actuarial loss

     34       33       29       29  

Amortization of prior service cost

     (6 )     (7 )     (7 )     (7 )

Amortization of transition obligation

     2       2       2       2  

NET PERIODIC POSTRETIREMENT BENEFIT COST

   $ 44     $ 43     $ 35     $ 35  

Cost capitalized

     (15 )     (15 )     (12 )     (12 )

Cost deferred

     (11 )     (20 )     (9 )     (18 )

Cost charged to operating expenses

   $ 18     $ 8     $ 14     $ 5  

 

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Note G - Environmental Matters

Superfund Sites

Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or generated in the course of operations of the Utilities and their predecessors and are present at sites and in facilities and equipment they currently or previously owned, including sites at which gas was manufactured or stored.

 

The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes (Superfund) impose joint and several liability, regardless of fault, upon generators of hazardous substances for investigation and remediation costs (which include costs of demolition, removal, disposal, storage, replacement, containment, and monitoring) and environmental damages. Liability under these laws can be material and may be imposed for contamination from past acts, even though such past acts may have been lawful at the time they occurred. The sites at which the Utilities have been asserted to have liability under these laws, including their manufactured gas plant sites and any neighboring areas to which contamination may have migrated, are referred to herein as “Superfund Sites.”

 

For Superfund Sites where there are other potentially responsible parties and the Utilities are not managing the site investigation and remediation, the accrued liability represents an estimate of the amount the Utilities will need to pay to discharge their related obligations. For Superfund Sites (including the manufactured gas plant sites) for which one of the Utilities is managing the investigation and remediation, the accrued liability represents an estimate of the company’s share of undiscounted cost to investigate the sites and, for sites that have been investigated in whole or in part, the cost to remediate the sites. Remediation costs are estimated in light of the information available, applicable remediation standards, and experience with similar sites.

 

The accrued liabilities and regulatory assets related to Superfund Sites at June 30, 2008 and December 31, 2007 were as follows:

 

     Con Edison     Con Edison of
New York
(Millions of Dollars)    2008    2007     2008    2007

Accrued Liabilities:

                            

Manufactured gas plant sites

   $ 242    $ 267     $ 187    $ 212

Other Superfund Sites

     48      60          47      59

Total

   $ 290    $ 327     $ 234    $ 271

Regulatory assets

   $ 385    $ 378     $ 319    $ 312

 

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Most of the accrued Superfund Site liability relates to sites that have been investigated, in whole or in part. As investigations progress on these and other sites, the Utilities expect that additional liability will be accrued, the amount of which is not presently determinable but may be material. Under their current rate agreements, the Utilities are permitted to recover or defer as regulatory assets (for subsequent recovery through rates) certain site investigation and remediation costs.

 

Environmental remediation payments and insurance recoveries received related to Superfund Sites for the three and six months ended June 30, 2008 and 2007 were as follows:

 

     For the Three Months Ended June 30,
     Con Edison   

Con Edison of

New York

(Millions of Dollars)        2008            2007            2008            2007    

Remediation payments

   $ 31    $ 9    $ 31    $ 7

Insurance recoveries received

          1           1
     For the Six Months Ended June 30,
     Con Edison   

Con Edison of

New York

(Millions of Dollars)    2008    2007    2008    2007

Remediation payments

   $ 53    $ 18    $ 52    $ 16

Insurance recoveries received

          1           1

 

In 2006, Con Edison of New York estimated that for its manufactured gas plant sites, its aggregate undiscounted potential liability for the investigation and remediation of coal tar and/or other manufactured gas plant-related environmental contaminants could range up to $1.1 billion. In 2007, O&R estimated that for its manufactured gas plant sites, each of which has been investigated, the aggregate undiscounted potential liability for the remediation of such contaminants could range up to $115 million. These estimates were based on the assumption that there is contamination at the sites that have not yet been investigated and additional assumptions about these and the other sites regarding the extent of contamination and the type and extent of remediation that may be required. Actual experience may be materially different.

 

Asbestos Proceedings

Suits have been brought in New York State and federal courts against the Utilities and many other defendants, wherein a large number of plaintiffs sought large amounts of compensatory and punitive damages for deaths and injuries allegedly caused by exposure to asbestos at various premises of the Utilities. The suits that have been resolved, which are many, have been resolved without any payment by the Utilities, or for amounts that were not, in the aggregate, material to them. The amounts specified in all the remaining thousands of suits total billions of dollars; however, the Utilities believe

 

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that these amounts are greatly exaggerated, based on the disposition of previous claims. In 2006, Con Edison of New York estimated that its aggregate undiscounted potential liability for these suits and additional suits that may be brought over the next 15 years is $10 million. The estimate was based upon a combination of modeling, historical data analysis and risk factor assessment. Actual experience may be materially different. In addition, certain current and former employees have claimed or are claiming workers’ compensation benefits based on alleged disability from exposure to asbestos. Under its current rate agreements, Con Edison of New York is permitted to defer as regulatory assets (for subsequent recovery through rates) costs incurred for its asbestos lawsuits and workers’ compensation claims. The accrued liability for asbestos suits and workers’ compensation proceedings (including those related to asbestos exposure) and the amounts deferred as regulatory assets for the Companies at June 30, 2008 and December 31, 2007 were as follows:

 

     Con Edison   

Con Edison of

New York

(Millions of Dollars)        2008            2007            2008            2007    

Accrued liability – asbestos suits

   $ 10    $ 10    $ 10    $ 10

Regulatory assets – asbestos suits

   $ 10    $ 10    $ 10    $ 10

Accrued liability – workers’ compensation

   $ 114    $ 116    $ 108    $ 111

Regulatory assets – workers’ compensation

   $ 38    $ 41    $ 38    $ 41

 

Note H - Other Material Contingencies

Manhattan Steam Main Rupture

In July 2007, a Con Edison of New York steam main located in midtown Manhattan ruptured. It has been reported that one person died and others were injured as a result of the incident. Several buildings in the area were damaged. Debris from the incident included dirt and mud containing asbestos. The response to the incident required the closing of several buildings and streets for various periods. As of June 30, 2008, with respect to the incident, the company incurred estimated operating costs of $35 million for property damage, clean up and other response costs, recorded $21 million in actual and expected insurance recoveries and invested $12 million in capital, retirement and other costs. Over 50 suits are pending against the company seeking generally unspecified compensatory and, in some cases, punitive damages, for personal injury, property damage and business interruption. The company has notified its insurers of the incident and believes that the policies currently in force will cover most of the 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.

 

In August 2008, Con Edison of New York entered into a Joint Proposal with the PSC staff and the New York State Consumer Protection Board with respect to the PSC’s ongoing proceeding relating to the steam main rupture. (See “Regulatory Matters – Con Edison of New York – Steam” in Note B to

 

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the financial statements in Item 8 of the Form 10-K.) Pursuant to the Joint Proposal, which is subject to PSC approval, among other things, the company (i) will not recover from customers the operating, capital and retirement costs it incurred as a result of the steam main rupture; (ii) will, in general, effectively be limited in its recovery from customers of premiums for its excess liability insurance policies for each of the policy years beginning April 2008 through April 2011 to amounts designed to prevent recovery of any premium increase resulting from the steam main rupture; and (iii) will be released from all prudence-related claims that were or could have been asserted in any PSC proceeding relating to the steam main rupture other than with respect to any damage to company facilities, or incremental costs, that are neither known nor reasonably foreseeable. The Joint Proposal does not preclude the PSC from pursuing a penalty action for any violations of the Public Service Law or the PSC’s regulations or orders.

 

Lease In/Lease Out Transactions

In each of 1997 and 1999, Con Edison Development entered into a transaction in which it leased property and then immediately subleased it back to the lessor (termed “Lease In/Lease Out,” or LILO transaction). The transactions respectively involve electric generating and gas distribution facilities in the Netherlands, with a total investment of $259 million. The transactions were financed with $93 million of equity and $166 million of non-recourse, long-term debt secured by the underlying assets. In accordance with Statement of Financial Accounting Standards (SFAS) No. 13, “Accounting for Leases,” Con Edison is accounting for the two LILO transactions as leveraged leases. Accordingly, the 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 immaterial at June 30, 2008 and $9 million at December 31, 2007 and is comprised of a $235 million gross investment less $235 million of deferred tax liabilities at June 30, 2008 and $235 million gross investment less $226 million of deferred tax liabilities at December 31, 2007.

 

On audit of Con 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 and post trial briefs have been filed. A decision is possible later this year.

 

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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). Post-verdict motions are pending in that case and a decision has not been rendered.

 

In connection with its audit of Con Edison’s federal income tax return for the tax year 2006, the IRS disallowed $43 million of net tax deductions taken with respect to both of the LILO transactions for the tax year. Con Edison filed an appeal of this audit level disallowance with the Appeals Office of the IRS, where consideration of this matter is pending. In connection with its audit of Con Edison’s federal income tax returns for the tax years 1998 through 2005, the IRS indicated that it intends to disallow $332 million of net tax deductions taken with respect to both of the LILO transactions for the tax years. If and when these audit level disallowances become appealable, Con Edison intends to file appeals of the disallowances with the Appeals Office of the IRS.

 

Con Edison believes that its LILO transactions have been correctly reported, and has not recorded any reserve with respect to the disallowance of tax losses, or related interest, in connection with its LILO transactions. Con Edison’s estimated tax savings, reflected in its financial statements, from the two LILO transactions through June 30, 2008, in the aggregate, was $180 million. If Con Edison were required to repay all or a portion of these amounts, it would also be required to pay interest of up to $71 million at June 30, 2008.

 

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In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FASB Statement (FAS) 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,” which became effective for fiscal years beginning after December 15, 2006. This FSP requires the expected timing of income tax cash flows generated by Con Edison’s LILO transactions to be reviewed at least annually. If the expected timing of the cash flows is revised, the rate of return and the allocation of income would be recalculated from the inception of the LILO transactions, and the company would be required to recalculate the accounting effect of the LILO transactions, which would result in a charge to earnings that could have a material adverse effect on the company’s results of operations.

 

Uncertain Tax Positions

Reference is made to “Uncertain Tax Positions” in Note L to the financial statements included in Item 8 of the Form 10-K.

 

In July 2008, the IRS entered into a closing agreement with Con Edison covering the Companies use of the “simplified service cost method” (SSCM) to determine the extent to which construction-related costs could be deducted in 2002 through 2004. The closing agreement does not cover 2005, the last year for which SSCM is an uncertain tax position. The Companies do not expect the required repayment, with interest, to the IRS of their SSCM tax benefits for 2002 through 2005 to exceed the $160 million ($147 million of which is attributable to Con Edison of New York) the Companies paid to the IRS in June 2007 as a deposit for the repayment.

 

Other Contingencies

See “Power Outage Proceedings” in Note B.

 

Guarantees

Con Edison and its subsidiaries enter into various agreements providing financial or performance assurance primarily to third parties on behalf of their subsidiaries. In addition, a Con Edison Development subsidiary has issued a guarantee on behalf of an entity in which it has an equity interest. Maximum amounts guaranteed by Con Edison totaled $1.5 billion and $1.4 billion at June 30, 2008 and December 31, 2007, respectively.

 

 

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A summary, by type and term, of Con Edison’s total guarantees at June 30, 2008 is as follows:

 

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

Commodity transactions

   $ 857    $ 41    $ 273    $ 1,171

Affordable housing program

          15           15

Intra-company guarantees

     39           1      40

Other guarantees

     217      34           251

TOTAL

   $ 1,113    $ 90    $ 274    $ 1,477

 

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

 

Note I - Stock-Based Compensation

For a description of stock-based compensation, including stock options, restricted stock units (RSUs) and stock purchase plan, reference is made to Note M to the financial statements in Item 8 of the Form 10-K.

 

In accordance with SFAS No. 123(R), “Share-Based Payment,” the Companies have recognized the cost of stock-based compensation as an expense using a fair value measurement method. The following table summarizes stock-based compensation expense recognized by the Companies in the three and six months ended June 30, 2008 and 2007:

 

     For the Three Months Ended June 30,
    

Con

Edison

   Con Edison of
New York
(Millions of Dollars)    2008    2007    2008    2007

Stock options

   $    $    $    $

Restricted stock units

          1           1

Performance-based restricted stock

     1      1      1      1

Total

   $ 1    $ 2    $ 1    $ 2

 

     For the Six Months Ended June 30,
    

Con

Edison

   Con Edison of
New York
(Millions of Dollars)    2008    2007    2008    2007

Stock options

   $ 1    $ 1    $ 1    $ 1

Restricted stock units

          1           1

Performance-based restricted stock

          2           2

Total

   $ 1    $ 4    $ 1    $ 4

 

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Stock Options

A summary of changes in the status of stock options during the three and six months ended June 30, 2008 and 2007 is as follows:

 

     Con Edison   

Con Edison of

New York

     Shares     Weighted
Average
Exercise
Price
   Shares     Weighted
Average
Exercise
Price

Outstanding at 12/31/06

   8,617,601     $ 42.773    7,346,601     $ 42.842

Granted

                 

Exercised

   (975,100 )     41.630    (907,050 )     41.634

Forfeited

   (1,001 )     42.169    (1,001 )     42.169

Outstanding at 3/31/07

   7,641,500     $ 42.919    6,438,550     $ 43.013

Granted

                 

Exercised

   (668,350 )     42.803    (587,500 )     42.829

Forfeited

   (19,350 )     42.483    (7,500 )     41.870

Outstanding at 6/30/07

   6,953,800     $ 42.931    5,843,550     $ 43.033

Outstanding at 12/31/07

   6,596,850     $ 43.072    5,531,850     $ 43.187

Granted

                 

Exercised

   (26,500 )     39.658    (22,000 )     39.242

Forfeited

   (75,550 )     43.028    (73,050 )     43.032

Outstanding at 3/31/08

   6,494,800     $ 43.087    5,436,800     $ 43.205

Granted

                 

Exercised

   (5,000 )     36.988    (5,000 )     36.988

Forfeited

   (36,600 )     43.648    (17,000 )     43.602