For the fiscal year ended December 31, 2008
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 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.    New York      13-3965100
     4 Irving Place, New York, New York 10003        
     (212) 460-4600        

1-1217

     Consolidated Edison Company of New York, Inc.    New York      13-5009340
     4 Irving Place, New York, New York 10003        
     (212) 460-4600        

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class    Name of each exchange
on which registered

Consolidated Edison, Inc.,

  

Common Shares ($.10 par value)

   New York Stock Exchange

Consolidated Edison Company of New York, Inc.,

  

$5 Cumulative Preferred Stock, without par value

   New York Stock Exchange

Cumulative Preferred Stock, 4.65% Series C ($100 par value)

   New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:

 

Title of each class

Consolidated Edison Company of New York, Inc.

Cumulative Preferred Stock, 4.65% Series D ($100 par value)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Con Edison, Inc. (Con Edison)

   Yes    x      No    ¨  

Con Edison Company of New York, Inc. (Con Edison of New York)

   Yes    x      No    ¨  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

Con Edison

   Yes    ¨      No    x  

Con Edison of New York

   Yes    ¨      No    x  

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    ¨  


Table of Contents

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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 “accelerated filer,” “large 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  

The aggregate market value of the common equity of Con Edison held by non-affiliates of Con Edison, as of June 30, 2008, was approximately $10.7 billion.

As of January 31, 2009, Con Edison had outstanding 273,848,445 Common Shares ($.10 par value).

All of the outstanding common equity of Con Edison of New York is held by Con Edison.

Documents Incorporated By Reference

Portions of Con Edison’s definitive proxy statement and Con Edison of New York’s definitive information statement, for their respective Annual Meetings of Stockholders to be held on May 18, 2009, to be filed with the Commission pursuant to Regulation 14A and Regulation 14C, respectively, not later than 120 days after December 31, 2008, are incorporated in Part III of this report.

Filing Format

This Annual Report on Form 10-K 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.

 

 

 


Table of Contents

TABLE OF CONTENTS

      PAGE

Glossary of Terms

   4

PART I

     

ITEM 1.

   Business    6
  

Con Edison

   7
  

Con Edison of New York

   9

ITEM 1A.

   Risk Factors    17
  

Con Edison

   17
  

Con Edison of New York

   17

ITEM 1B.

   Unresolved Staff Comments    17
  

Con Edison

   17
  

Con Edison of New York

   17

ITEM 2.

  

Properties

   17
  

Con Edison

   17
  

Con Edison of New York

   17
  

O&R

   17

ITEM 3.

  

Legal Proceedings

   18
  

Con Edison

   18
  

Con Edison of New York

   18

ITEM 4.

  

Submission of Matters to a Vote of Security Holders

   21
  

Executive Officers of the Registrant

   21
  

Con Edison

   21
  

Con Edison of New York

   22

PART II

     

ITEM 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities

   23
  

Con Edison

   23
  

Con Edison of New York

   24

ITEM 6.

  

Selected Financial Data

   25
  

Con Edison

   25
  

Con Edison of New York

   25

ITEM 7.

  

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

   26
  

Con Edison

   26
  

Con Edison of New York

   26

ITEM 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   59
  

Con Edison

   59
  

Con Edison of New York

   59

ITEM 8.

  

Financial Statements and Supplementary Data

   60
  

Con Edison

   60
  

Con Edison of New York

   60

ITEM 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   127
  

Con Edison

   127
  

Con Edison of New York

   127

ITEM 9A.

  

Controls and Procedures

   127

ITEM 9A(T).

  

Controls and Procedures

   127

ITEM 9B.

  

Other Information

   127

PART III

      128

ITEM 10.

  

Directors, Executive Officers and Corporate Governance

   128

ITEM 11.

  

Executive Compensation

   128

ITEM 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   128

ITEM 13.

  

Certain Relationships and Related Transactions, and Director Independence

   128

ITEM 14.

  

Principal Accounting Fees and Services

   128

PART IV

      130

ITEM 15.

  

Exhibits and Financial Statement Schedules

   130
  

Signatures

   135

 

3


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

EMF

  

Electric and magnetic fields

ERRP

  

East River Repowering Project

FASB

  

Financial Accounting Standards Board

FIN

  

FASB Interpretation No.

Fitch

  

Fitch Ratings

FSP

  

FASB Staff Position

GHG

  

Greenhouse gases

kV

  

Kilovolts

 

4


Table of Contents

Other

    

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

Superfund

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

VaR

   Value-at-Risk

VIE

   Variable interest entity

 

5


Table of Contents

PART I

ITEM 1. BUSINESS

 

CONTENTS OF ITEM 1    PAGE

Incorporation By Reference

   7

Available Information

   7

Con Edison

  

Corporate Overview

   7
  

Operating Segments

   7
  

Con Edison of New York

   7
  

O&R

   7
  

Competitive Energy Businesses

   7
  

Regulation

   8
  

Competition

   8
  

Capital Requirements and Financing

   8
  

State Anti-Takeover Law

   9
  

Employees

   9

Con Edison

of New York

  

Corporate Overview

  

9

  

Operating Segments

   9
  

Electric Operations

   9
  

Gas Operations

   10
  

Steam Operations

   11
  

Regulation

   11
  

Competition

   11
  

Capital Requirements and Financing

   12
  

Environmental Matters

   12

Operating

Statistics

  

Con Edison of New York

  

13

  

O&R

   15

 

6


Table of Contents

Incorporation by Reference

Information in other Items of this report as to which reference is made in this Item 1 is hereby incorporated by reference in this Item 1. The use of terms such as “see” or “refer to” shall be deemed to incorporate into this Item 1 the information to which such reference is made.

Available Information

Con Edison and Con Edison of New York file annual, quarterly and current reports, proxy or information statements and other information with the Securities and Exchange Commission (SEC). The public may read and copy any materials that the Companies file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580 Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers (including Con Edison and Con Edison of New York) that file electronically with the SEC. The address of that site is http://www.sec.gov.

This information the Companies file with the SEC is also available free of charge on or through the Investor Information section of their websites as soon as reasonably practicable after the reports are electronically filed with, or furnished to, the SEC. Con Edison’s internet website is at: http://www.conedison.com; and Con Edison of New York’s is at: http://www.coned.com.

The Investor Information section of Con Edison’s website also includes the company’s code of ethics (and amendments or waivers of the code for executive officers or directors), corporate governance guidelines and the charters of the following committees of the company’s Board of Directors: Audit Committee, Management Development and Compensation Committee, and Corporate Governance and Nominating Committee. This information is available in print to any shareholder who requests it. Requests should be directed to: Corporate Secretary, Consolidated Edison, Inc., 4 Irving Place, New York, NY 10003.

Information on the Companies’ websites is not incorporated herein.

Con Edison

Corporate Overview

Consolidated Edison, Inc. (Con Edison), incorporated in New York State in 1997, owns all of the outstanding common stock of Consolidated Edison Company of New York, Inc. (Con Edison of New York) and Orange and Rockland Utilities, Inc. (O&R). Con Edison of New York and O&R, which are regulated utilities, are referred to in this report as the “Utilities.” As used in this report, the term the “Companies” refers to Con Edison and Con Edison of New York. Con Edison has no significant business operations other than those of the Utilities and Con Edison’s competitive energy businesses. See “Corporate Overview” in Item 7.

Operating Segments

Con Edison’s principal business segments are Con Edison of New York’s regulated electric, gas and steam utility segments, O&R’s regulated electric and gas utility segments and Con Edison’s competitive energy businesses. For a discussion of operating revenues and operating income for each segment, see “Results of Operations” in Item 7. For additional segment information see Note N to the financial statements in Item 8.

Con Edison of New York

For information about Con Edison of New York, see below in this Item 1.

O&R

O&R, a subsidiary of Con Edison, has two wholly-owned utility subsidiaries, Rockland Electric Company (RECO), a New Jersey corporation, and Pike County Light & Power Company (Pike), a Pennsylvania corporation.

O&R and its utility subsidiaries provide electric service in southeastern New York and in adjacent areas of northern New Jersey and eastern Pennsylvania, an approximately 1,350 square mile service area. They also provide gas service in southeastern New York and adjacent areas of eastern Pennsylvania. O&R’s business is subject to regulation by the New York State Public Service Commission (PSC), the New Jersey Board of Public Utilities (NJBPU), the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). Changes in regulation or legislation applicable to O&R could have a material adverse effect on the company’s financial position, results of operations or liquidity. O&R’s principal business segments are its regulated electric and gas utility businesses. In 2008, electric and gas operating revenues were 74 percent and 26 percent, respectively, of its operating revenues. See “O&R Operating Statistics” below.

Competitive Energy Businesses

Con Edison pursues competitive energy opportunities through three wholly owned subsidiaries: Consolidated Edison Development, Inc. (Con Edison Development), Consolidated Edison Energy, Inc. (Con Edison Energy) and Consolidated Edison Solutions, Inc. (Con Edison Solutions).

Con Edison Development participates in infrastructure projects. In 2008, Con Edison Development and its subsidiary, CED/SCS Newington, LLC, completed the sale of their ownership interests in power generating projects with an aggregate capacity of approximately 1,706 MW. See Note V to the financial statements in Item 8.

 

7


Table of Contents

Con Edison Development has investments in two “Lease In/ Lease Out” (LILO) transactions—see Note J to the financial statements in Item 8. These leases involve gas distribution and electric generating facilities in the Netherlands. Additionally, Con Edison Development has invested in tax-advantaged leases under Section 42 of the Internal Revenue Code. See “Affordable Housing Program” in Note H to the financial statements in Item 8.

Con Edison Energy supplies electricity to wholesale customers, procures electricity for Con Edison Solutions, and offers plant optimization services to generation facilities in the northeastern United States.

Con Edison Solutions was reported by KEMA consulting in August 2008, as the 10th largest non-residential retail electricity provider in the United States. The company primarily sells electricity to industrial and large commercial customers and also to residential customers in the northeastern United States. At December 31, 2008, it served approximately 54,000 customers, not including approximately 173,000 served under two aggregation agreements in Massachusetts. Con Edison Solutions sold 10.7 million MWHs of electricity in 2008, a 12 percent decrease from 2007 volumes.

Con Edison Solutions seeks to serve customers in utility service territories that encourage retail competition through transparent pricing, purchase of receivables or utility-sponsored customer acquisition programs. The company currently sells electricity in the service territories of 34 utilities in the states of New York, Massachusetts, Connecticut, New Hampshire, Maine, New Jersey, Delaware, Maryland, Illinois, Pennsylvania and Texas, as well as the District of Columbia.

Total peak load at the end of 2008 was 3,700 MWs. Approximately one-half of the sales volumes were contracted by customers in New York, with essentially all of the remainder in New England and the Mid-Atlantic States. Con Edison Solutions entered the retail electricity supply market in Texas in 2006 and Illinois in 2007 but volumes remain small.

Con Edison Solutions offers the choice of green power to customers. In 2008 it sold approximately 160,000 MWHs of green power, ending the year with almost 19,000 customers.

Green power is a term used by electricity suppliers to describe electricity produced from renewable energy sources, including wind, hydro and solar.

Con Edison Solutions also provides energy-efficiency services to government and commercial customers. The services include the design and installation of lighting retrofits, high-efficiency heating, ventilating and air conditioning equipment and other energy saving technologies. The company is compensated based primarily on the increased energy efficiency of installed equipment over a multi-year period. Con Edison Solutions has won competitive solicitations for energy savings contracts with the Department of Energy, the Department of Defense and a shared energy savings contract with the United States Postal Service.

The competitive energy businesses’ generating capacity owned or leased, sales and customers were as follows:

 

     2008     2007     2006     2005     2004

Generating capacity (MW)

  21     1,739     1,668     1,668     1,668

Generation sold (MWH)

  1,422,491     3,558,302     3,154,988     3,602,727     3,397,007

Wholesale electricity sales (MWH)

  7,798,463     8,046,474     6,548,658     1,288,696     1,907,302

Retail electric volumes sold (MWH)

  10,749,361     12,209,233     10,633,151     9,970,252     6,943,299
Number of retail customers accounts:          

Industrial and large commercial

  14,491 *   14,335 *   10,957 *   5,775 *   3,913

Mass market

  39,976     33,979     31,725     24,989     24,242
* Excludes aggregation agreement customers

Regulation

The Utilities are subject to extensive federal and state regulation, including by state utility commissions and the FERC. Con Edison, itself, is not subject to such regulation except to the extent that the rules or orders of these agencies impose restrictions on relationships between Con Edison and the Utilities. The North American Electric Reliability Corporation has been granted authority by the FERC to set bulk system reliability standards and impose penalties upon utilities for violations of those standards. See “Regulation” in the discussion below of Con Edison of New York’s business in this Item 1.

Con Edison has been and is expected to continue to be impacted by legislative and regulatory developments. The Utilities are subject to extensive regulation in New York, New Jersey and Pennsylvania. Changes in regulation or legislation applicable to Con Edison’s subsidiaries could have a material adverse effect on the Companies. See “Regulatory Matters” in Item 7.

Competition

See “Competition,” below in the discussion of the businesses of Con Edison of New York in this Item 1. The competitive energy businesses participate in competitive energy supply and services businesses that are subject to different risks than those found in the businesses of the Utilities.

Capital Requirements and Financing

For information about Con Edison’s capital requirements, financing and securities ratings, see “Liquidity and Capital

 

8


Table of Contents

Resources—Capital Resources” and “Capital Requirements” and “Financial and Commodity Market Risks” in Item 7.

State Anti-Takeover Law

New York State law provides that a “domestic corporation,” such as Con Edison, may not consummate a merger, consolidation or similar transaction with the beneficial owner of a 20 percent or greater voting stock interest in the corporation, or with an affiliate of the owner, for five years after the acquisition of the voting stock interest, unless the transaction or the acquisition of the voting stock interest was approved by the corporation’s board of directors prior to the acquisition of the voting stock interest. After the expiration of the five-year period, the transaction may be consummated only pursuant to a stringent “fair price” formula or with the approval of a majority of the disinterested stockholders.

Employees

Con Edison has no employees other than those of Con Edison of New York, O&R and Con Edison’s competitive energy businesses (which at December 31, 2008 had 14,299, 1,067 and 262, employees, respectively). The collective bargaining agreements covering most of the employees of Con Edison of New York and O&R expire in June 2012 and June 2009, respectively.

Con Edison of New York

Corporate Overview

Con Edison of New York, incorporated in New York State in 1884, is a subsidiary of Con Edison and has no significant subsidiaries of its own. Con Edison of New York provides electric service 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. It also provides gas service in Manhattan, the Bronx and parts of Queens and Westchester, and steam service in parts of Manhattan.

Operating Segments

Con Edison of New York’s principal business segments are its regulated electric, gas and steam businesses. In 2008, electric, gas and steam operating revenues were 75 percent, 18 percent and 7 percent, respectively, of its operating revenues. For a discussion of the company’s operating revenues and operating income for each segment, see “Results of Operations” in Item 7. For additional information about the segments, see Note N to the financial statements in Item 8.

Electric Operations

Electric Sales.    Electric operating revenues were $7.9 billion in 2008 or 75 percent of Con Edison of New York’s operating revenues. The percentages were 75 and 76 percent, respectively, in the two preceding years. In 2008, 42 percent of the electricity delivered by Con Edison of New York in its service area was sold by the company to its full-service customers, 37 percent was sold by other suppliers, including Con Edison Solutions, a competitive energy business of Con Edison, to Con Edison of New York’s customers under its electric retail access program and the balance was delivered to the state and municipal customers of the New York Power Authority (NYPA) and the economic development customers of municipal electric agencies. The company charges its cost for the electricity it sells to full-service customers, and it charges all customers in its service area for the delivery of electricity.

For additional information about electricity sales, see “Con Edison of New York Operating Statistics,” below, and “Results of Operations” in Item 7.

Electric Peak Demand.    The electric peak demand in Con Edison of New York’s service area occurs during the summer air conditioning season. The 2008 service area peak demand, which occurred on June 10, 2008, was 12,987 thousand kilowatts (MW). The 2008 peak demand included an estimated 5,989 MW for Con Edison of New York’s full-service customers, 4,998 MW for customers participating in its electric retail access program and 2,000 MW for NYPA’s customers and municipal electric agency customers. The New York Independent System Operator (NYISO) did not invoke demand reduction programs on June 10, 2008, as it had on peak demand days in 2006 and 2005. “Design weather” for the electric system is a standard to which the actual peak demand is adjusted for evaluation and planning purposes. Since the majority of demand reduction programs are invoked only in specific circumstances, design conditions do not include these programs’ potential impact. However, the Con Edison of New York forecasted peak demand at design conditions does include the impact of permanent demand reduction programs. The company estimates that, under design weather conditions, the 2009 service area peak demand will be 13,750 MW, including an estimated 6,303 MW for its full-service customers, 5,457 MW for its electric retail access customers and 1,990 MW for NYPA’s customers and municipal electric agency customers. The company continues to monitor the effects of the ongoing global financial turmoil on the local economy, and its potential impact on customer demand.

Electric Supply.    Most of the electricity sold by Con Edison of New York to its customers in 2008 was purchased under firm power contracts or through the wholesale electricity market administered by the NYISO.

The company plans to meet its continuing obligation to supply electricity to its customers with electric energy purchased under contracts with non-utility generators (NUGs) or others, purchased through the NYISO’s wholesale electricity or generated from its electric generating facilities.

For additional information about electric power purchases, see “Electric Power Requirements” in Item 7 and “Recoverable Energy Costs” in Note A to the financial statements in Item 8.

 

9


Table of Contents

For information about the company’s contracts with NUGs for approximately 3,499 MW of electric generating capacity, see Note I to the financial statements in Item 8.

For information about the company’s current 710 MW of electric generating capacity, see Item 2.

In 2008, the Governor of New York announced a new goal of 45 percent of the State’s electricity needs to be met with energy efficiency or renewable resources by 2015. The goal combines two previous goals of the state to reduce energy consumption by 15 percent by 2015 and to have 25 percent (increased in 2008 to 30 percent) of the electricity used in New York provided by renewable resources by 2013. In September 2004, the PSC issued an order, which provides that by 2013, 23.5 percent of the State’s energy needs would come from large renewable facilities such as wind, hydro, and biomass, 1 percent would come from green marketing efforts, and the remaining 0.5 percent is expected to come from on-site generation, limited to solar, fuel cells, and wind farms less than 300 kW in size. The PSC agreed with the Utilities that the responsibility for procuring the new renewable resources would rest with the New York State Energy Research and Development Authority (NYSERDA), and not the Utilities. NYSERDA enters into long-term agreements with developers that pay renewable premiums to finance the construction of renewable projects. The renewable premiums plus NYSERDA’s administrative fee are financed through a volumetric wires charge imposed on the delivery customers of each of the state’s utilities. Pursuant to the PSC order, Con Edison and Con Edison of New York billed customers renewable portfolio standard surcharges of $31 million and $28 million in 2008, respectively, and $23 million and $21 million in 2007, respectively. These surcharges may increase if the PSC increases the State’s renewables commitments. The PSC issued a notice in October 2008 stating that it was considering an increase in the renewable portfolio standard target to 30 percent by 2015 and that it may also provide an opportunity for utilities to implement photovoltaic projects. In 2008, the PSC issued an order authorizing the Utilities to begin implementing energy efficiency programs. Costs of the programs will be recovered primarily through a separate non-bypassable charge similar to the systems benefit charge.

New York Independent System Operator.    The NYISO is a not-for-profit organization that controls and operates most of the electric transmission facilities in New York State, including those of Con Edison of New York, as an integrated system and administers wholesale markets for electricity in New York State. Pursuant to a requirement that is set annually by the New York State Reliability Council (NYSRC), the NYISO requires that entities supplying electricity to customers in New York State have generating capacity (either owned or contracted for) in an amount above the expected peak demand for their customers. NYSRC set the margin at 15.0 percent for the 2008/2009 capability year and, subject to approval by the appropriate regulatory agency, at 16.5 percent for the 2009/2010 capability year, which begins May 1, 2009. In addition, the NYISO has determined that entities that serve customers in New York City must have enough New York City-located capacity to cover a substantial percentage of their New York City customer peak demands. Con Edison of New York met the requirements applicable to it in 2008 and expects to meet them in 2009. As transmission owners participating in the NYISO, the Utilities may be required to construct projects that result from the NYISO’s FERC-approved planning process.

Gas Operations

Gas Sales.    Gas operating revenues in 2008 were $1.8 billion or 18 percent of Con Edison of New York’s operating revenues. The percentages were 18 and 17 percent in the two preceding years. In 2008, 30 percent of the gas delivered by the company in its service area was sold by the company to its full-service (firm and interruptible) customers and 70 percent was sold by other suppliers. For additional information about gas sales, see “Con Edison of New York Operating Statistics,” below, and “Results of Operations” in Item 7.

Gas Requirements and Peak Demand.    Firm demand for gas in Con Edison of New York’s service area peaks during the winter heating season. The “design criteria” for the company’s gas system assume severe weather conditions, which have not occurred since the 1933-34 winter. Under these criteria, the company estimated that its requirements to deliver gas to firm customers during the November 2008/March 2009 winter heating season would amount to 97,524 mdths (including 57,000 mdths to its firm sales customers and 40,524 mdths to its firm transportation customers). Through January 31, 2009, the company’s peak throughput day in this heating season occurred on January 8, 2009, when it delivered 1,256 mdths of gas (including 481 mdths to its firm and interruptible sales customers, 161 mdths to NYPA, 450 mdths to its transportation customers and 164 mdths for use by the company in generating electricity and steam).

Under its design criteria, the company projects that for the November 2009/March 2010 winter heating season, its requirements for firm gas customers will amount to 102,753 mdths (including 58,331 mdths to firm sales customers and 44,422 mdths to firm transportation customers) and that the peak day requirements for these customers will amount to 1,137 mdths. The company expects to be able to meet these requirements.

Gas Supply.    Con Edison of New York and O&R have established a combined gas supply and capacity portfolio. The combined portfolio is administered by, and related management services are provided by, Con Edison of New York (for itself and as agent for O&R) and costs are allocated between the Utilities in

 

10


Table of Contents

accordance with provisions approved by the PSC. See Note S to the financial statements in Item 8.

Charges from suppliers for the firm purchase of gas, which are based on formulas or indexes or are subject to negotiation, are generally designed to approximate market prices. The contracts are for various terms extending to 2012. The Utilities have contracts with interstate pipeline companies for the purchase of firm transportation and storage services. Charges under these contracts are approved by the FERC. The contracts are for various terms extending to 2023. The Utilities are required to pay certain charges under the supply, transportation and storage contracts whether or not the contracted capacity is actually used. These fixed charges amounted to approximately $260 million in 2008, including $216 million for Con Edison of New York. See “Liquidity and Capital Resources—Contractual Obligations” in Item 7. In addition, the Utilities purchase gas on the spot market and have interruptible gas transportation contracts. See “ Recoverable Energy Costs” in Note A to the financial statements in Item 8.

Steam Operations

Steam Sales.    Con Edison of New York sells steam in Manhattan south of 96th Street, mostly to large office buildings, apartment houses and hospitals. In 2008, steam operating revenues were $707 million or 7 percent of the company’s operating revenues. The percentages were 7 percent in the two preceding years.

For additional information about Con Edison of New York’s steam operations, see “Regulatory Matters” and “Results of Operations” in Item 7, the discussion of Con Edison of New York’s steam facilities in Item 2 and “Con Edison of New York Operating Statistics,” below.

Steam Peak Demand and Capacity.    Demand for steam in Con Edison of New York’s service area peaks during the winter heating season. The one-hour peak demand during the winter of 2008/2009 (through January 31, 2009) occurred on January 16, 2009 when the demand reached 8.6 million pounds (mmlbs) per hour. The company’s estimate for the winter of 2009/2010 peak demand of its steam customers is 10.3 mmlbs per hour under design criteria, which assume severe weather.

On December 31, 2008, the steam system had the capability of delivering approximately 13.2 mmlbs of steam per hour and Con Edison of New York estimates that the system will have the capability to deliver this capacity in the 2009/2010 winter.

Steam Supply.    Forty-eight percent of the steam production by Con Edison of New York in 2008 was supplied by the company’s steam-only generating assets; 37 percent was produced by the company’s steam-electric generating assets, where steam and electricity are primarily cogenerated; and 15 percent was purchased from others. See Item 2 for a discussion of Con Edison of New York’s steam facilities.

Regulation

The PSC regulates, among other things, Con Edison of New York’s electric, gas and steam rates, the siting of its transmission lines and the issuance of its securities. Certain activities of the company are subject to the jurisdiction of the FERC. The state regulatory authorities in New Jersey and Pennsylvania regulate Con Edison’s utility subsidiaries in those states. In addition, various matters relating to the construction and operation of the company’s facilities are subject to regulation by other governmental agencies. Changes in regulation or legislation applicable to the company could have a material adverse effect on the company. For additional information, including information about the company’s electric, gas and steam rates, see “Regulatory Matters” in Item 7.

The PSC from time to time conducts “generic” proceedings to consider issues relating to all electric and gas utilities operating in New York State. Pending proceedings include those relating to utilities exiting the business of selling electric energy and gas at retail (including an examination of utilities’ provider of last resort responsibility, the implementation of energy efficiency programs and consumer protections) and addressing any rate disincentives to the promotion of energy efficiency and distributed generation. The company typically is an active participant in such proceedings. The company does not expect that the pending generic proceedings will have a material adverse effect on its financial position, results of operation or liquidity.

Competition

Con Edison of New York is primarily a “wires and pipes” energy delivery company that:

- has sold most of its electric generating capacity;
- provides its customers the opportunity to buy electricity and gas from other suppliers;
- purchases substantially all of the electricity and all of the gas it sells to its full-service customers (the cost of which is recovered pursuant to provisions approved by the PSC); and
- provides energy delivery services to customers pursuant to rate provisions approved by the PSC.

See “Rate Agreements” in Note B and “Recoverable Energy Costs” in Note A to the financial statements in Item 8.

Competition from suppliers of oil and other sources of energy, including distributed generation (such as fuel cells and micro-turbines) may provide alternatives for Con Edison of New York delivery customers. The company does not consider it reasonably likely that another company would be authorized to provide utility delivery service where the company already provides service. Any such other company would need to obtain

 

11


Table of Contents

PSC consent, satisfy applicable local requirements and install facilities to provide the service. A new company would also be subject to extensive ongoing regulation by the PSC.

Capital Requirements and Financing

For information about Con Edison of New York’s capital requirements, financing and securities ratings, see “Liquidity and Capital Resources—Capital Resources” and “Capital Requirements” and “Financial and Commodity Market Risks” in Item 7.

Environmental Matters

Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or generated in the course of operations of Con Edison of New York and its 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. See “Asbestos” and “Superfund” in the discussion of Con Edison of New York’s legal proceedings in Item 3 and Note G to the financial statements in Item 8.

Con Edison of New York’s capital expenditures for environmental protection facilities and related studies were $148 million in 2008 and are estimated to be $154 million in 2009.

Toxic Substances Control Act.    Virtually all electric utilities, including Con Edison of New York, own equipment containing PCBs. PCBs are regulated under the Federal Toxic Substances Control Act of 1976.

Water Quality.    Certain governmental authorities are investigating contamination in the Hudson River and the New York Harbor. These waters run through portions of Con Edison of New York’s service area. Governmental authorities could require entities that released hazardous substances that contaminated these waters to bear the cost of investigation and remediation, which could be substantial.

Climate Change.    As indicated in 2007 by the Intergovernmental Panel on Climate Change, emissions of greenhouse gases, including carbon dioxide are very likely changing the world’s climate.

Based on the most recent data (2006) published by the federal Department of Energy, Con Edison estimates that its greenhouse gas emissions constitute less than 0.1 percent of the nation’s greenhouse gas emissions. Con Edison’s emissions of greenhouse gases during the past five years (expressed in terms of millions of tons of carbon dioxide equivalent) were:

 

2008    2007    2006    2005    2004

4.6

   5.3    5.4    6.6    6.5

The decrease in greenhouse gas emissions in 2008, as compared to 2007, reflects equipment and repair projects to reduce sulfur hexafluoride emissions and increased use of natural gas at our steam production facilities. Emissions from electric generation at the Con Edison Development generating projects (which were sold – see Note V to the financial statements in Item 8) have been removed from each year of the above data. Con Edison of New York also reduced its greenhouse gas emissions following 2005 when it replaced old generating facilities with its East River Repowering Project. The project, which consists of gas-fueled, combined-cycle combustion turbines, comprises almost 42 percent of the company’s 710 MW of electric generating capacity, based on 2008 summer ratings.

The Companies are working to further reduce greenhouse gas emissions. Con Edison of New York minimizes greenhouse gas emissions from its generating plants through the use of oil and gas fuels and cogeneration technologies that reduce emissions per unit of energy output. Also, it has participated for several years in voluntary initiatives with the Environmental Protection Agency to reduce its methane and sulfur hexafluoride emissions. The Utilities reduce methane emissions from the operation of their gas distribution systems through pipe maintenance and replacement programs, by operating system components at lower pressure, and by introducing new technologies. The Utilities reduce emissions of sulfur hexafluoride, which is used for arc suppression in substation circuit breakers and switches, by using improved technologies to locate and repair leaks, and by replacing older equipment. The Utilities also promote energy efficiency programs for customers that reduce greenhouse gas emissions.

Beginning in 2009, Con Edison of New York is subject to carbon dioxide emissions regulations established under the Regional Greenhouse Gas Initiative. The initiative is a cooperative effort by Northeastern and Mid-Atlantic states which will first cap and then reduce carbon dioxide emissions resulting from the generation of electricity to a level ten percent below current emissions by 2019. Under this program, affected electric generators are required to obtain emission allowances to cover their carbon dioxide emissions, available primarily through auctions administered by participating states or a secondary market. The participating states initiated auctions in 2008 for portions of the 2009 and 2010 allowances.

We expect that Congress will consider climate change legislation that will limit greenhouse gas emissions. Also, New York State has announced a goal to meet 45 percent of its energy needs through energy efficiency and clean renewable energy by 2015, and New York City is aiming to reduce its greenhouse gas emissions 30 percent by 2030.

The cost to comply with legislation, regulations or initiatives limiting the company’s greenhouse gas emissions could be substantial.

Operating Statistics

The following tables contain operating statistics for Con Edison of New York and O&R.

 

12


Table of Contents

Con Edison of New York

Operating Statistics

 

     Year Ended December 31,
      2008    2007    2006    2005    2004

ELECTRIC ENERGY (MWH)

              

Generated

   2,857,711    2,888,371    2,785,602    2,261,680    1,441,498

Purchased from others

   23,864,812    24,719,391    25,282,216    29,055,402    30,221,137

Total Generated and Purchased

   26,722,523    27,607,762    28,067,818    31,317,082    31,662,635

Less: Used by company

   165,802    174,077    162,449    178,406    168,533

  Distribution losses and other variances

   1,180,742    1,294,268    1,028,512    1,794,724    1,623,682

Net Generated and Purchased

   25,375,979    26,139,417    26,876,857    29,343,952    29,870,420

Electric Energy Sold

              

Residential

   11,719,705    12,312,007    12,589,961    13,689,870    12,672,847

Commercial and industrial

   12,852,121    12,918,203    13,409,474    15,402,396    16,966,448

Railroads and railways

   10,893    13,430    13,217    16,847    19,308

Public authorities

   57,115    71,008    88,061    234,839    209,699

Con Edison of New York full service customers

   24,639,834    25,314,648    26,100,713    29,343,952    29,868,302

Off-System Sales

   736,145    824,769    776,144    -    2,118

Total Electric Energy Sold

   25,375,979    26,139,417    26,876,857    29,343,952    29,870,420

Electric Energy Delivered

              

Con Edison of New York full service Customers

   24,639,833    25,314,648    26,100,713    29,343,952    29,868,302

Delivery service for retail access Customers

   22,047,255    21,531,885    19,256,268    16,847,745    14,143,045

Delivery service to NYPA customers and others

   10,918,267    10,691,701    10,227,204    10,457,619    10,067,633

Delivery service for municipal agencies

   717,692    723,201    723,905    720,757    696,041

Total Deliveries in Franchise Area

   58,323,047    58,261,435    56,308,090    57,370,073    54,775,021

Average Annual KWH Use per Residential Customer(a)

   4,232    4,480    4,613    5,052    4,700

Average Revenue per KWH Sold (Cents)

              

Residential(a)

   24.2    21.6    20.9    21.1    18.9

Commercial and Industrial(a)

   21.2    19.2    18.3    18.6    16.0

 

(a) Includes Municipal Agency sales.

 

13


Table of Contents

Con Edison of New York

Operating Statistics – Continued

 

    Year Ended December 31,  
     2008     2007     2006     2005     2004  

GAS (DTH)

         

Purchased

    141,158,314       141,839,604       133,395,510       147,855,203       137,605,722  

Storage – net change

    (11,530,207 )     (1,273,518 )     (8,294,717 )     (5,041,321 )     (1,331,154 )

Used as boiler fuel at Electric and
Steam Stations

    (42,373,335 )     (41,256,777 )     (38,061,392 )     (35,820,239 )     (29,435,890 )

Gas Purchased for Resale

    87,254,772       99,309,309       87,039,401       106,993,643       106,838,678  

Less:  Gas used by the company

    108,785       144,236       120,626       366,780       364,142  

Off-System Sales, NYPA and other variances

    5,522,156       11,843,241       724,748       6,449,725       6,062,145  

Distribution losses

    1,460,000       3,010,000       2,340,000       2,074,000       2,769,000  

Total Gas Purchased for Con
Edison of New York Customers

    80,163,831       84,311,832       83,854,027       98,103,138       97,643,391  

Gas Sold

         

Firm Sales

         

Residential

    40,195,427       42,572,866       40,589,064       48,175,004       48,569,514  

General

    28,747,982       31,161,746       31,269,464       36,800,299       35,886,544  

Total Firm Sales

    68,943,409       73,734,612       71,858,528       84,975,303       84,456,058  

Interruptible Sales

    11,220,422       10,577,220       11,995,499       13,127,835       13,187,333  

Total Gas Sold to Con Edison of
New York Customers

    80,163,831       84,311,832       83,854,027       98,103,138       97,643,391  

Transportation of customer-owned gas

         

Firm transportation

    43,244,965       39,016,610       23,687,707       19,087,650       16,795,124  

NYPA

    44,694,104       42,084,635       41,057,320       22,305,249       18,622,910  

Other

    94,086,524       95,260,356       83,687,918       66,667,025       63,306,409  

Off-System Sales

    1,537,590       2,324,700       691,321       127,696       266,907  

Total Sales and Transportation

    263,727,014       262,998,133       232,978,293       206,290,758       196,634,741  

Average Revenue per DTH Sold

         

Residential

  $ 21.16     $ 19.78     $ 19.24     $ 16.94     $ 13.94  

General

  $ 16.82     $ 16.01     $ 15.07     $ 13.41     $ 10.75  

Steam Sold (Mlb)

    23,976,343       25,803,909       23,250,064       26,876,883       26,128,644  

Average Revenue per Mlb Sold

  $ 28.22     $ 25.33     $ 25.71     $ 22.77     $ 20.34  

Customers – Average for Year

         

Electric

    3,261,502       3,236,036       3,203,541       3,176,355       3,152,023  

Gas

    1,060,581       1,060,744       1,058,816       1,054,981       1,053,698  

Steam

    1,771       1,771       1,780       1,796       1,811  

 

14


Table of Contents

O&R

Operating Statistics

 

     Year Ended December 31,
      2008    2007    2006    2005    2004

ELECTRIC ENERGY (MWH)

              

Total Purchased

   4,258,708    4,440,300    4,099,968    4,348,953    4,113,111

Less: Used by company

   14,716    14,417    13,539    15,068    14,174

      Distribution losses and other(a)

   151,335    202,100    76,455    38,585    217,043

Net Purchased

   4,092,657    4,223,783    4,009,974    4,295,300    3,881,894

Electric Energy Sold

              

Residential

   1,892,034    1,912,310    1,802,574    1,904,884    1,729,095

Commercial and industrial

   2,081,429    2,191,307    2,093,880    2,276,161    2,045,800

Public authorities

   119,194    120,166    113,520    114,255    106,999

Total Electric Energy Sold

   4,092,657    4,223,783    4,009,974    4,295,300    3,881,894

Total deliveries to O&R customers

   4,092,657    4,223,783    4,009,974    4,295,300    3,881,894

Delivery service for retail access customers

   1,814,439    1,687,794    1,765,958    1,835,948    1,860,661

Total Deliveries In Franchise Area

   5,907,096    5,911,577    5,775,932    6,131,248    5,742,555

Average Annual KWH Use Per Residential Customer

   9,339    9,472    8,979    9,657    8,818

Average Revenue Per KWH Sold (Cents)

              

Residential

   17.44    15.56    13.98    13.34    12.35

Commercial and Industrial

   14.58    12.90    11.34    10.90    9.89

 

(a) Includes unbilled sales adjustments of 89,331 MWH recorded in March 2005 for 2005, and 22,510 MWH recorded in March 2006 for 2006.

 

15


Table of Contents

O&R

Operating Statistics – Continued

 

     Year Ended December 31,
      2008    2007     2006    2005    2004

GAS (DTH)

             

Purchased

     12,038,779      16,412,737       12,582,361      15,329,809      16,105,586

Storage – net change

     892,058      (1,950,963 )     409,333      121,547      373,271

Gas Purchased For Resale

     12,930,837      14,461,774       12,991,694      15,451,356      16,478,857

Less: Gas used by the company

     46,232      38,268       37,630      48,410      58,823

  Distribution losses and other variances

     433,738      937,526       703,676      848,790      1,390,405

Total Gas Purchased For O&R Customers

     12,450,867      13,485,980       12,250,388      14,554,156      15,029,629

Gas Sold

             

Firm Sales

             

Residential

     8,068,168      8,768,828       7,758,439      9,306,592      9,486,765

General

     1,815,995      2,065,633       1,891,565      2,269,207      2,487,197

Total Firm Sales

     9,884,163      10,834,461       9,650,004      11,575,799      11,973,962

Interruptible Sales

     2,566,705      2,651,519       2,600,384      2,978,357      3,055,667

Total Gas Sold To O&R Customers

     12,450,868      13,485,980       12,250,388      14,554,156      15,029,629

Transportation of customer-owned gas

             

Firm transportation

     10,470,664      10,248,184       9,058,260      9,840,507      9,930,731

Interruptible transportation

     2,842,434      3,330,770       3,255,956      3,480,376      3,940,332

Sales for resale

     1,007,007      1,043,864       938,503      1,072,111      1,067,953

Sales to electric generating stations

     2,326,778      4,552,473       3,035,695      1,433,891      659,449

Off-System Sales

     249,111      455,360       371,724      172,458      53,692

Total Sales and Transportation

     29,346,862      33,116,631       28,910,526      30,553,499      30,681,786

Average Revenue Per DTH Sold

             

Residential

   $ 17.64    $ 17.31     $ 17.38    $ 14.07    $ 11.84

General

   $ 16.55    $ 16.36     $ 16.44    $ 13.37    $ 11.27

Customers – Average For Year

             

Electric

     299,279      297,641       295,390      293,245      290,905

Gas

     127,738      126,713       125,589      124,591      123,505

 

16


Table of Contents
ITEM 1A. RISK FACTORS

Con Edison

For information about the risk factors of Con Edison, see “Risk Factors” in Item 7 (which information is incorporated herein by reference).

Con Edison of New York

For information about the risk factors of Con Edison of New York, see “Risk Factors” in Item 7 (which information is incorporated herein by reference).

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

Con Edison

None.

Con Edison of New York

None.

 

ITEM 2. PROPERTIES

Con Edison

Con Edison has no significant properties other than those of the Utilities and its competitive energy businesses.

For information about the capitalized cost of the Companies’ utility plant, net of accumulated depreciation, see “Plant and Depreciation” in Note A to the financial statements in Item 8 (which information is incorporated herein by reference).

Con Edison of New York

Electric Facilities

Generating Facilities.     Con Edison of New York’s electric generating facilities consist of plants located in New York City with an aggregate capacity of 710 MW based on 2008 summer ratings. The company expects to have sufficient amounts of gas and fuel oil available in 2009 for use in these facilities. This includes the company’s East River Repowering Project, which commenced commercial operations in April 2005 and is currently supplying electric capacity of 297 MW based on a 2008 summer rating.

Transmission Facilities.    Under terms of the NYISO Tariff, Con Edison of New York’s transmission facilities are operated under the jurisdiction of the NYISO, except specific underground bulk power facilities which are located predominantly within New York City. See “Electric Operations—Electric Supply” in Item 1 (which information is incorporated herein by reference). As of December 31, 2008, Con Edison of New York owns or jointly owns 438 circuit miles of overhead lines operating at 138, 230, 345 and 500 kV and 729 circuit miles of underground cables operating at 69, 138 and 345 kV. The company’s 38 transmission substations are supplied by circuits operated at 69 kV and above. The company’s transmission facilities are located in New York City and Westchester, Orange, Rockland, Putnam and Dutchess counties in New York State.

 

Con Edison of New York has transmission interconnections with Niagara Mohawk, Central Hudson Gas & Electric Corporation, O&R, New York State Electric and Gas Corporation, Connecticut Light and Power Company, Long Island Power Authority, NYPA and Public Service Electric and Gas Company.

Distribution Facilities.    Con Edison of New York owns 60 area distribution substations and various distribution facilities located throughout New York City and Westchester County. At December 31, 2008, the company’s distribution system had a transformer capacity of 28,345 MVA, with 36,648 miles of overhead distribution lines and 94,929 miles of underground distribution lines.

Gas Facilities

Natural gas is delivered by pipeline to Con Edison of New York at various points in its service territory and is distributed to customers by the company through an estimated 4,322 miles of mains and 383,862 service lines. The company owns a natural gas liquefaction facility and storage tank at its Astoria property in Queens, New York. The plant can store approximately 1,000 mdths of which a maximum of about 250 mdths can be withdrawn per day. The company has about 1,226 mdths of additional natural gas storage capacity at a field in upstate New York, owned and operated by Honeoye Storage Corporation, a corporation 28.8 percent owned by Con Edison of New York.

Steam Facilities

Con Edison of New York generates steam at one steam/electric generating station and five steam-only generating stations and distributes steam to its customers through approximately 105 miles of transmission, distribution, and service piping. Con Edison of New York also has an energy sales agreement for steam and electricity with Brooklyn Navy Yard Cogeneration Partners.

O&R

Electric Transmission and Distribution Facilities

O&R and its utility subsidiaries, RECO and Pike, own, in whole or in part, transmission and distribution facilities which include 554 circuit miles of transmission lines, 13 transmission substations, 61 distribution substations, 101,372 in-service line transformers, 3,675 pole miles of overhead distribution lines and 1,634 miles of underground distribution lines. O&R’s transmission system is part of the NYISO system except that portions of RECO’s system are located within the transmission area controlled by the Pennsylvania-Jersey-Maryland Independent System Operator.

Gas Facilities

O&R and Pike own their gas distribution systems, which include 1,735 miles of mains. In addition, O&R owns and maintains a gas transmission system, which includes 77 miles of mains.

 

17


Table of Contents

Competitive Energy Businesses

Con Edison Development, a subsidiary of Con Edison, owns a 49 percent interest in a 42 MW electric generating facility, located in Guatemala, at December 31, 2008. This interest is accounted for as an equity interest. In 2008, Con Edison Development and its subsidiary, CED/SCS Newington, LLC, completed the sale of their ownership interests in power generating projects with an aggregate capacity of approximately 1,706 megawatts. See Note V to the financial statements in Item 8 (which information is incorporated herein by reference).

Con Edison Development has also leased gas distribution and electric generating facilities in the Netherlands in two separate transactions. See Note J to the financial statements in Item 8 (which information is incorporated herein by reference).

 

ITEM 3. LEGAL PROCEEDINGS

Con Edison

Lease In/Lease Out Transactions

For information about Con Edison’s competitive energy businesses’ appeal of a disallowance by the Internal Revenue Service of certain tax losses recognized in connection with the company’s lease in/lease out transactions, as to which a trial was held in October 2007, see Note J to the financial statements in Item  8 (which information is incorporated herein by reference).

Con Edison of New York

Manhattan Steam Main Rupture

For information about proceedings relating to the July 2007 rupture of a steam main located in midtown Manhattan, see “Manhattan Steam Main Rupture” in Note H to the financial statements in Item 8 (which information is incorporated herein by reference).

Investigation of Contractor Payments

For information about alleged unlawful conduct in connection with contractor payments, see “Investigation of Contractor Payments” in Note H to the financial statements in Item 8 (which is incorporated herein by reference).

Asbestos

For information about legal proceedings relating to exposure to asbestos, see Note G to the financial statements in Item 8 (which information is incorporated herein by reference).

Superfund

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 costs, remediation costs and environmental damages. The sites at which Con Edison of New York has been asserted to have liability under Superfund include its and its predecessor companies’ former manufactured gas sites, its Astoria Site, its former Arthur Kill Site, its former Flushing Service Center Site and other Superfund Sites discussed below. There may be additional sites as to which assertions will be made that the company has liability. For a further discussion of claims and possible claims against the company under Superfund, including with respect to its manufactured gas sites, estimated liability accrued for Superfund claims and recovery from customers of site investigation and remediation costs, see Note G to the financial statements in Item 8 (which information is incorporated herein by reference).

Manufactured Gas Sites. Con Edison of New York and its predecessors formerly manufactured gas and maintained storage holders for manufactured gas at sites in New York City and Westchester County (MGP Sites). Many of these sites are now owned by parties other than Con Edison of New York and have been redeveloped by them for other uses, including schools, residential and commercial developments and hospitals. The New York State Department of Environmental Conservation (DEC) is requiring the company to investigate, and if necessary, develop and implement remediation programs for the sites, which include 34 manufactured gas plant sites and 17 storage holder sites and any neighboring areas to which contamination may have migrated.

The information available to Con Edison of New York for many of the MGP Sites is incomplete as to the extent of contamination and scope of the remediation likely to be required. Through the end of 2008, investigations have been started for all or portions of 42 MGP Sites, and have been completed at 14 of the sites. Coal tar and/or other manufactured gas production/storage-related environmental contaminants have been detected at 31 MGP Sites, including locations within Manhattan and other parts of New York City and in Westchester County. Remediation has been completed at three sites and portions of seven other sites.

Astoria Site.    Con Edison of New York is permitted by the DEC to operate a hazardous waste storage facility on property the company owns in the Astoria section of Queens, New York. Portions of the property were formerly the location of a manufactured gas plant and also have been used or are being used for, among other things, electric generation operations, electric substation operations, the storage of fuel oil and liquefied natural gas, and the maintenance and storage of electric equipment. As a condition of its DEC permit, the company is required to investigate the property and, where environmental contamination is found and action is necessary, to conduct corrective action to remediate the contamination. The company has investigated various sections of the property and is performing additional investigations. The company has submitted to the DEC and the New York State Department of Health a report identifying the known areas of contamination. The company estimates that its undiscounted potential liability for the completion of the site investigation and cleanup of the known contamination on the property will be at least $17 million.

 

18


Table of Contents

Arthur Kill Site.    Following a September 1998 transformer fire at Con Edison of New York’s former Arthur Kill Generating Station, it was determined that oil containing high levels of PCBs was released to the environment during the incident. The company has completed DEC-approved cleanup programs for the station’s facilities and various soil and pavement areas of the site affected by the PCB release. Pursuant to a July 1999 DEC consent order, the company completed a DEC-approved assessment of the nature and extent of the contamination in the waterfront area of the station. DEC has selected the remediation program for the waterfront area, and the company is implementing it pursuant to an additional consent order entered into during 2005. Field work associated with the waterfront remediation program has been substantially completed. The company estimates that its undiscounted potential future liability for completing the remediation and reporting to the DEC will be approximately $0.3 million.

Flushing Service Center Site.    The owner of a former Con Edison of New York service center facility in Flushing, New York, informed the company that PCB contamination had been detected on a substantial portion of the property, which the owner remediated pursuant to the New York State

Brownfield Cleanup Program administered by the DEC, and is redeveloping for residential and commercial use. The property owner asserted a claim against the company for the cost it incurred for the investigation and remediation of this site. This claim has been resolved through a negotiated settlement under which the company paid $10 million. The DEC has also demanded that the company investigate and remediate PCB contamination in the adjacent Flushing River that may have emanated from this site. The company and DEC have entered into a consent order under which the company has agreed to implement a DEC-approved investigation program for the Flushing River and, if deemed necessary by the DEC to protect human health and the environment from contamination, to implement a DEC-approved remediation program for the PCB contamination that migrated from the site. At this time, the company cannot estimate its liability for the investigation and cleanup of any PCB contamination that may have entered into the Flushing River from the site, but such liability may be substantial.

Other Superfund Sites.    Con Edison of New York is a potentially responsible party (PRP) with respect to other Superfund sites where there are other PRPs and where it is generally not responsible for managing the site investigation and remediation. Work at these sites is in various stages, with the company participating in PRP groups at some of the sites. Investigation, remediation and monitoring at some of these sites have been, and are expected to continue to be, conducted over extended periods of time. The company does not believe that it is reasonably likely that monetary sanctions, such as penalties, will be imposed upon it by any governmental authority with respect to these sites.

The following table lists each of Con Edison of New York’s other Superfund sites for which the company anticipates it may have a liability. The table also shows for each such site, its location, the year in which the company was designated or alleged to be a PRP or to otherwise have responsibilities with respect to the site (shown in the table under “Start”), the name of the court or agency in which proceedings with respect to the site are pending, and the company’s current estimate of its approximate potential liability for investigation, remediation and monitoring and environmental damages at the site or the unpaid share of any payments it is required to make under a settlement agreement resolving its liability for the site.

 

Site    Location    Start    Court or
Agency
   Estimated
Liability(a)
   % of Total(a)  

Maxey Flats Nuclear

   Morehead, KY    1986    EPA    $ 111,000    0.8 %

Curcio Scrap Metal

   Saddle Brook, NJ    1987    EPA      83,000    100 %

Metal Bank of America

   Philadelphia, PA    1987    EPA      33,000    1.0 %

Cortese Landfill

   Narrowsburg, NY    1987    EPA      827,000    6.0 %

Global Landfill

   Old Bridge, NJ    1988    EPA      115,000    0.3 %

Borne Chemical

   Elizabeth, NJ    1997    NJDEP      112,000    0.7 %
(a) Superfund liability is joint and several. Estimated liability shown is the company’s estimate of its anticipated share of the total liability determined pursuant to consent decrees, settlement agreements or otherwise and in light of financial condition of other PRPs.

 

Permit Non-Compliance and Pollution Discharges

Con Edison of New York understands that the New York State Department of Environmental Conservation (DEC) is contemplating issuing a proposed Administrative Order on Consent with respect to non-compliance with certain permit conditions and discharges of pollutants at Con Edison of New York’s generating facilities. The company does not know the extent to which DEC may seek to require remedial action or impose monetary sanctions, but such sanctions could be more than $100,000. For information about the company’s generating facilities, see “Con Edison of New York—Electric Facilities—Generating Facilities and Steam Facilities” in Item 2 (which information is incorporated herein by reference).

 

19


Table of Contents

O&R

Asbestos

For information about legal proceedings relating to exposure to asbestos, see Note G to the financial statements in Item 8 (which information is incorporated herein by reference).

Superfund

The sites at which O&R has been asserted to have liability under Superfund include its manufactured gas sites, its West Nyack site and other Superfund sites discussed below. There may be additional sites as to which assertions will be made that O&R has liability. For a further discussion of claims and possible claims against O&R under Superfund, see Note G to the financial statements in Item 8 (which information is incorporated herein by reference).

Manufactured Gas Sites.    O&R and its predecessors formerly owned and operated manufactured gas plants at seven sites (O&R MGP Sites) in Orange County and Rockland County, New York. Three of these sites are now owned by parties other than O&R, and have been redeveloped by them for residential, commercial or industrial uses. The DEC is requiring O&R to develop and implement remediation programs for the O&R MGP Sites including any neighboring areas to which contamination may have migrated.

O&R has conducted remedial investigations at all seven O&R MGP Sites and completed investigation of four of these sites. Supplemental investigation activities are ongoing at three of the former MGP sites. O&R has completed the remediation at one of its sites; has completed the DEC-approved remediation program for the land portion of its Nyack site; and has received DEC’s decision regarding the remedial work to be done at two other sites. Remedial design will begin in 2009 for one of the sites. Since the latter site is Company-owned and has no off-site impacts, remediation of this site has been deferred, with DEC’s concurrence, until approximately 2010, after remediation is conducted on the remaining sites.

West Nyack Site.    In 1994 and 1997, O&R entered into consent orders with the DEC pursuant to which O&R agreed to conduct a remedial investigation and remediate certain property it owns in West Nyack, New York at which PCBs were discovered. Petroleum contamination related to a leaking underground storage tank was found as well. O&R has completed all remediation at the site that the DEC has required to date. O&R is continuing a supplemental groundwater investigation and on-site vapor intrusion monitoring as required by the DEC.

Other Superfund Sites.    O&R is a PRP with respect to other Superfund sites where there are other PRPs and it is not managing the site investigation and remediation. Work at these sites is in various stages, with the company participating in PRP groups at some of the sites. Investigation, remediation and monitoring at some of these sites have been, and is expected to continue to be, conducted over extended periods of time. The company does not believe that it is reasonably likely that monetary sanctions, such as penalties, will be imposed upon it by any governmental authority with respect to these sites.

The following table lists each of O&R’s other Superfund sites for which the company anticipates it may have liability. The table also shows for each such site, its location, the year in which the company was designated or alleged to be a PRP or to otherwise have responsibilities with respect to the site (shown in the table under “Start”), the name of the court or agency in which proceedings with respect to the site are pending and the company’s current estimate of its potential liability for investigation, remediation and monitoring and environmental damages at the site.

 

Site    Location    Start    Court or
Agency
   Estimated
Liability(a)
   % of Total(a)  

Borne Chemical

   Elizabeth, NJ    1997    NJDEP    $ 338,000    1.7 %

Clarkstown Landfill

   Clarkstown, NY    2003    NYAG      397,000             (b)

Metal Bank of America

   Philadelphia, PA    1993    EPA      154,000    4.58 %

 

(a)

Superfund liability is joint and several. Estimated liability shown is the company’s estimate of its anticipated share of the total liability determined pursuant to consent decrees, settlement agreements or otherwise and in light of financial condition of other PRPs.

(b) Not ascertainable.

 

20


Table of Contents
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

Executive Officers of The Registrant

The following table sets forth certain information about the executive officers of Con Edison and Con Edison of New York as of February 19, 2009. As indicated, certain of the executive officers are executive officers of each of Con Edison and Con Edison of New York and others are executive officers of Con Edison or Con Edison of New York. The term of office of each officer, is until the next election of directors (trustees) of their company and until his or her successor is chosen and qualifies. Officers are subject to removal at any time by the board of directors (trustees) of their company. Mr. Burke has an employment agreement with Con Edison, which provides for him to serve in his present position through December 31, 2009. The employment agreement provides for automatic one-year extensions of its term, unless notice to the contrary is received six months prior to the end of the term.

 

Name    Age    Offices and Positions During Past Five Years

Executive Officers of Con Edison and Con Edison of New York

Kevin Burke

   58   

3/06 to present – Chairman of the Board, President and Chief Executive Officer and Director of Con Edison and Chairman, Chief Executive Officer and Trustee of Con Edison of New York

     

9/05 to 2/06 – President, Chief Executive Officer and Director of Con Edison and Chief Executive Officer and Trustee of Con Edison of New York

     

9/00 to 8/05 – President of Con Edison of New York

Louis L. Rana

   60   

9/05 to present – President of Con Edison of New York

2/03 to 8/05 – Senior Vice President – Electric Operations

John D. McMahon

   57   

2/09 to present – Executive Vice President

     

1/03 to 1/09 – President and Chief Executive Officer of O&R

Robert Hoglund

   47   

9/05 to present – Senior Vice President and Chief Financial Officer of Con Edison and Con Edison of New York

     

4/04 to 8/05 – Senior Vice President of Finance of Con Edison and Con Edison of New York

     

6/04 to present – Chief Financial Officer and Controller of O&R

     

4/97 to 3/04 – Managing Director, Citigroup Global Markets Inc. and predecessors

Frances A. Resheske

   48   

2/02 to present – Senior Vice President – Public Affairs of Con Edison of New York

JoAnn Ryan

   51   

7/06 to present – Senior Vice President – Business Shared Services of Con Edison of New York

     

3/01 to 6/06 – President and CEO, Con Edison Solutions

Luther Tai

   60   

7/06 to present – Senior Vice President – Enterprise Shared Services of Con Edison of New York

     

9/01 to 6/06 – Senior Vice President – Central Services of Con Edison of New York

Gurudatta Nadkarni

   43   

1/08 to present – Vice President of Strategic Planning

     

8/06 to 12/07 – Managing Director of Growth Initiatives, Duke Energy Corporation

     

1/05 to 7/06 – Director of Growth Initiatives, Strategy and Integration, Duke Energy Corporation

     

6/01 to 12/04 – Senior Project Manager of Strategic Business Development, Duke Energy Corporation

James P. O’Brien

   61   

5/08 to present – Vice President and Treasurer of Con Edison and Con Edison of New York

     

1/98 to 4/08 – Vice President and General Auditor

Edward J. Rasmussen

   60   

12/00 to present – Vice President and Controller of Con Edison and Con Edison of New York

Executive Officers of Con Edison but not Con Edison of New York

William G. Longhi

   55   

2/09 to present – President and Chief Executive Officer of O&R

     

12/06 to 1/09 – Senior Vice President – Central Operations

     

08/06 to 11/06 – Vice President – Manhattan Electric Operations

     

09/01 to 07/06 – Vice President – System and Transmission Operations

 

21


Table of Contents
Name    Age    Offices and Positions During Past Five Years

Executive Officers of Con Edison of New York but not Con Edison

(All offices and positions listed are with Con Edison of New York)

Marilyn Caselli

   54   

5/05 to present – Senior Vice President – Customer Operations

     

8/98 to 4/05 – Vice President – Customer Operations

John McAvoy

   48   

2/09 to present – Senior Vice President – Central Operations

     

12/06 to 1/09 – Vice President – System and Transmission Operations

Mary Jane McCartney

   60   

10/93 to present – Senior Vice President – Gas Operations

John F. Miksad

   49   

9/05 to present – Senior Vice President – Electric Operations

     

2/03 to 8/05 – Vice President – Manhattan Electric Operations

 

22


Table of Contents

PART II

ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Con Edison

Con Edison’s Common Shares ($.10 par value), the only class of common equity of Con Edison, are traded on the New York Stock Exchange. As of January 31, 2009, there were 70,520 holders of record of Con Edison’s Common Shares.

The market price range for Con Edison’s Common Shares during 2008 and 2007, as reported in the consolidated reporting system, and the dividends paid by Con Edison in 2008 and 2007 were as follows:

 

     2008    2007
      High    Low   

Dividends

Paid

   High    Low    Dividends
Paid

1st Quarter

   $ 49.30    $ 39.30    $ 0.585    $ 51.40    $ 47.19    $ 0.58

2nd Quarter

   $ 42.73    $ 38.36    $ 0.585    $ 52.90    $ 44.68    $ 0.58

3rd Quarter

   $ 46.39    $ 37.38    $ 0.585    $ 48.57    $ 43.10    $ 0.58

4th Quarter

   $ 44.86    $ 34.11    $ 0.585    $ 50.51    $ 44.57    $ 0.58

On January 22, 2009, Con Edison’s Board of Directors declared a quarterly dividend of 59 cents per Common Share. The first quarter 2009 dividend will be paid on March 15, 2009.

Con Edison expects to pay dividends to its shareholders primarily from dividends and other distributions it receives from its subsidiaries. The payment of future dividends, which is subject to approval and declaration by Con Edison’s Board of Directors, will depend on a variety of factors, including business, financial and regulatory considerations. For additional information see “Dividends” in Note C to the financial statements in Item 8 (which information is incorporated herein by reference).

During 2008, the market price of Con Edison’s Common Shares decreased by 20.31 percent (from $48.85 at year-end 2007 to $38.93 at year-end 2008). By comparison, the S&P 500 Index and the S&P Utilities Index decreased 38.49 percent and 31.55 percent, respectively. The total return to Con Edison’s common shareholders during 2008, including both price appreciation and reinvestment of dividends, was (15.65) percent. By comparison, the total returns for the S&P 500 Index and the S&P Utilities Index were (37) percent and (28.98) percent, respectively. For the five-year period 2004 through 2008, Con Edison’s shareholders’ total average annual return was 3.22 percent, compared with total average annual returns for the S&P 500 Index and the S&P Utilities Index of (2.19) percent and 8.29 percent, respectively.

LOGO

 

     Years Ending
Company / Index    2003    2004    2005    2006    2007    2008

Consolidated Edison, Inc.

   100    107.27    119.44    130.24    138.87    117.15

S&P 500 Index

   100    110.88    116.33    134.70    142.10    89.53

S&P Utilities

   100    124.28    145.21    175.69    209.73    148.95
Based on $100 invested at December 31, 2003, reinvestment of all dividends in equivalent shares of stock and market price changes on all such shares.

 

23


Table of Contents

Con Edison of New York

The outstanding shares of Con Edison of New York’s Common Stock ($2.50 par value), the only class of common equity of Con Edison of New York, are held by Con Edison and are not traded.

The dividends declared by Con Edison of New York in 2008 and 2007 are shown in its Consolidated Statement of Common Shareholder’s Equity included in Item 8 (which information is incorporated herein by reference). For additional information about the payment of dividends by Con Edison of New York, and restrictions thereon, see “Dividends” in Note C to the financial statements in Item 8 (which information is incorporated herein by reference).

 

24


Table of Contents
ITEM 6. SELECTED FINANCIAL DATA

Con Edison

 

     For the Year Ended December 31,  
(Millions of Dollars, except per share amounts)    2008     2007    2006     2005     2004  

Operating revenues

   $ 13,583     $ 13,120    $ 11,962     $ 11,343     $ 9,488 *

Purchased power

     5,749       5,428      4,976       4,700       3,925  

Fuel

     663       624      553       596       437  

Gas purchased for resale

     1,172       1,173      1,082       1,154       852  

Operating income

     1,407       1,394      1,221       1,126       896  

Income from continuing operations

     922       925      740       745       565  

Income/(Loss) from discontinued operations**

     274       4      (3 )     (26 )     (28 )

Net income

     1,196       929      737       719       537  

Total assets

     33,498 ***     28,262      26,699       24,848       22,560  

Long-term debt

     9,232       7,611      8,298       7,398       6,561  

Common shareholders’ equity

     9,698       9,076      8,004       7,310       7,054  

Basic earnings per share

           

Continuing operations

   $ 3.37     $ 3.48    $ 2.97     $ 3.05     $ 2.40  

Discontinued operations**

   $ 1.01     $ 0.01    $ (0.01 )   $ (0.10 )   $ (0.12 )

Net Income

   $ 4.38     $ 3.49    $ 2.96     $ 2.95     $ 2.28  

Diluted earnings per share

           

Continuing operations

   $ 3.36     $ 3.46    $ 2.96     $ 3.04     $ 2.39  

Discontinued operations**

   $ 1.01     $ 0.01    $ (0.01 )   $ (0.10 )   $ (0.12 )

Net income

   $ 4.37     $ 3.47    $ 2.95     $ 2.94     $ 2.27  

Cash dividends per common share

   $ 2.34     $ 2.32    $ 2.30     $ 2.28     $ 2.26  

Average common shares outstanding (millions)

     273       266      249       244       236  

 

* Reflects a $124 million pre-tax charge in 2004, in accordance with Con Edison of New York’s electric, gas and steam rate plans.
** See Notes U and V to the financial statements in Item 8.
*** Reflects a $3,519 million increase in regulatory assets for unrecognized pension and other retirement costs. See Notes E and F to the financial statements in Item 8.

Con Edison of New York

 

     For the Year Ended December 31,  
(Millions of Dollars)    2008     2007    2006    2005    2004  

Operating revenues

   $ 10,424     $ 9,886    $ 9,288    $ 9,227    $ 7,971 *

Purchased power

     3,185       3,014      3,052      3,322      3,029  

Fuel

     660       588      525      526      404  

Gas purchased for resale

     999       978      902      965      709  

Operating income

     1,271       1,278      1,110      1,041      825  

Net income for common stock

     783       844      686      694      518  

Total assets

     30,415 **     24,504      22,816      21,144      19,244  

Long-term debt

     8,494       7,172      6,925      6,055      5,235  

Common shareholder’s equity

     8,991       8,086      7,132      6,437      6,116  

 

* Reflects $124 million pre-tax charge in 2004, in accordance with Con Edison of New York’s electric, gas and steam rate plans.
** Reflects a $3,392 million increase in regulatory asset for unrecognized pension and other retirement costs. See Notes E and F to the financial statements in Item 8.

 

25


Table of Contents
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK)

 

This combined management’s discussion and analysis of financial condition and results of operations (MD&A) relates to the consolidated financial statements included in this report of two separate registrants: Consolidated Edison, Inc. (Con Edison) and Consolidated Edison Company of New York, Inc. (Con Edison of New York) and should be read in conjunction with the financial statements and the notes thereto. As used in this report, the term the “Companies” refers to Con Edison and Con Edison of New York. Con Edison of New York is a subsidiary of Con Edison and, as such, information in this MD&A about Con Edison of New York applies to Con Edison.

Information in the notes to the consolidated financial statements referred to in this discussion and analysis is incorporated by reference herein. The use of terms such as “see” or “refer to” shall be deemed to incorporate by reference into this discussion and analysis the information to which reference is made.

Corporate Overview

Con Edison’s principal business operations are those of its utility companies, Con Edison of New York and Orange and Rockland Utilities, Inc. (O&R), together known as the “Utilities.” Con Edison also has competitive energy businesses (see “Competitive Energy Businesses,” below). Certain financial data of Con Edison’s businesses is presented below:

 

    Twelve months ended
December 31, 2008
    At
December 31,
2008
 
(Millions of Dollars)   Operating
Revenues
   

Net

Income

    Assets  

Con Edison of New York

  $ 10,424     77 %   $ 783     65 %   $ 30,415   91 %

O&R

    991     7 %     44     4 %     2,157   6 %

Total Utilities

    11,415     84 %     827     69 %     32,572   97 %

Con Edison Development (a)

    48     - %     146     12 %     407   1 %

Con Edison Energy (a)

    878     7 %     (17 )   (1 )%     223   1 %

Con Edison Solutions (a)

    1,258     9 %     (56 )   (5 )%     38   - %

Other (b)

    (16 )   - %     22     2 %     258   1 %

Total continuing operations

    13,583     100 %     922     77 %     33,498   100 %

Discontinued operations (c)

    -     - %     274     23 %     -   - %

Total Con Edison

  $ 13,583     100 %   $ 1,196     100 %   $ 33,498   100 %

 

(a) Income from continuing operations of the competitive energy businesses for the twelve months ended December 31, 2008 includes $(59) million of net after-tax mark-to-market gains/(losses) (Con Edison Development, $17 million, Con Edison Energy, $(26) million and Con Edison Solutions, $(50) million). Con Edison Development’s income from continuing operations for the twelve months ended December 31, 2008 also includes $131 million of after-tax gain from the sale of generation projects. See Note V to the financial statements.

 

(b) Represents inter-company and parent company accounting. See “Results of Operations,” below. The twelve months ended December 31, 2008 includes $30 million of after-tax net income related to the resolution of the Company’s legal proceeding with Northeast Utilities.

 

(c) Represents the discontinued operations of Con Edison Development’s generation projects, which includes a $270 million after-tax gain on the sale of generation projects for the twelve months ended December 31, 2008. See Note V to the financial statements.

 

Con Edison’s net income for common stock in 2008 was $1,196 million or $4.38 a share. Net income for common stock in 2007 and 2006 was $929 million or $3.49 a share and $737 million or $2.96 a share, respectively. See “Results of Operations – Summary,” below.

Con Edison’s principal business segments are Con Edison of New York’s regulated electric, gas and steam utility activities, O&R’s regulated electric and gas utility activities and Con Edison’s competitive energy businesses. Con Edison of New York’s principal business segments are its regulated electric, gas and steam utility activities. For segment financial information, see Note N to the financial statements and “Results of Operations,” below.

For information about factors that could have a material adverse effect on the Companies, see “Risk Factors,” below.

Regulated Utilities

Con Edison of New York provides electric service to approximately 3.3 million customers and gas service to approximately 1.1 million customers in New York City and Westchester County. The company also provides steam service in parts of Manhattan. O&R, along with its regulated utility businesses, provides electric service to approximately 0.3 million customers in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service to over 0.1 million customers in southeastern New York and adjacent areas of eastern Pennsylvania.

The Utilities are primarily “wires and pipes” energy delivery businesses that deliver energy in their service areas subject to extensive federal and state regulation. The Utilities’ customers buy this energy from the Utilities, or from other suppliers through the Utilities’ retail access programs. The Utilities purchase substantially all of the energy they sell to customers pursuant to firm contracts or through wholesale energy markets, and recover (generally on a current basis) the cost of the energy sold, pursuant to approved rate plans.

Con Edison anticipates that the Utilities will continue to provide substantially all of its earnings over the next few years. The Utilities’ earnings will depend on various factors including demand for utility service and the Utilities’ ability to charge rates for their services that reflect the costs of service, including a return on invested equity capital.

 

26


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Because the energy delivery infrastructure must be adequate to meet demand in peak periods with a high level of reliability, the Utilities’ capital investment plans reflect in great part past actual electric peak demand adjusted to summer design weather conditions, as well as forecast growth in peak usage. The factors affecting demand for utility service include growth of customer demand, weather, market prices for energy, economic conditions and measures that promote energy efficiency. Demand for electric service peaks during the summer air conditioning season. Demand for gas and steam service peaks during the winter heating season.

The weather during the summer of 2008 was cooler than design conditions. The highest peak electric demand reached in 2008 was 12,987 MW for Con Edison of New York and 1,530 MW for O&R. Both peaks occurred on June 10, 2008. The Companies have continued to monitor the effects of the ongoing global financial turmoil on the local economy and have reduced their outlook for customer demand. The Utilities currently estimate that, under design weather conditions, the 2009 peak electric demand in their respective service areas will be 13,750 MW for Con Edison of New York and 1,650 MW for O&R. The average annual growth rate of the peak electric demand over the next five years at design conditions is estimated to be approximately 0.6 percent for Con Edison of New York and 2.1 percent for O&R. The Con Edison of New York forecasted peak demand includes the impact of permanent demand reduction programs. The Companies anticipate an ongoing need for substantial capital investment in order to meet this growth in peak usage with the high level of reliability that they currently provide (see “Liquidity and Capital Resources—Capital Requirements,” below).

The Utilities have rate plans approved by state utility regulators that cover the rates they can charge their customers. Con Edison of New York’s electric, gas and steam rate plans are effective through March 31, 2009, September 30, 2010 and September 30, 2010, respectively. In May 2008, Con Edison of New York filed a request for a new electric rate plan. O&R’s rate plans for its electric and gas service in New York and its subsidiary’s electric service in New Jersey extend through June 30, 2011, October 31, 2009 and March 31, 2010, respectively. Pursuant to the Utilities’ multi-year rate plans, charges to customers generally may not be changed during the respective terms of the rate plans other than for recovery of the costs incurred for energy supply, for specified increases provided in the rate plans and for limited other exceptions. The New York rate plans for Con Edison of New York’s gas and steam operations as well as O&R’s electric and gas operations generally require the Utilities to share with customers earnings in excess of specified rates of return on common equity capital. Under the revenue decoupling mechanisms in Con Edison of New York’s current electric and gas rate plans and O&R’s electric rate plan, the Utilities’ revenues will generally not be affected by changes in delivery volumes from levels assumed when rates were approved. See “Regulatory Matters” below and “Recoverable Energy Costs” and “Rate Agreements” in Notes A and B, respectively, to the financial statements.

Accounting rules and regulations for public utilities include Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation,” pursuant to which the economic effects of rate regulation are reflected in financial statements. See “Application of Critical Accounting Policies,” below.

Competitive Energy Businesses

Con Edison’s competitive energy businesses participate in segments of the electricity industry that are less comprehensively regulated than the Utilities. These segments include the sales and related hedging of electricity to wholesale and retail customers and sales of certain energy-related products and services. At December 31, 2008, Con Edison’s equity investment in its competitive energy businesses was $229 million and their assets amounted to $668 million. Con Edison is evaluating additional opportunities to invest in electric and gas-related businesses.

Consolidated Edison Solutions, Inc. (Con Edison Solutions) sells electricity directly to delivery-service customers of utilities primarily in the Northeast and Mid-Atlantic regions (including some of the Utilities’ customers) and also offers energy-related services. Con Edison Solutions does not sell electricity to the Utilities. The company sold approximately 11 million MWHs of electricity to customers in 2008.

Consolidated Edison Development, Inc. (Con Edison Development) participates in infrastructure projects. In 2008, Con Edison Development and its subsidiary, CED/SCS Newington, LLC, completed the sale of their ownership interests in power generating projects with an aggregate capacity of approximately 1,706 MW. See Note V to the financial statements.

Consolidated Edison Energy, Inc. (Con Edison Energy) procures electric energy and capacity for Con Edison Solutions and fuel for other companies. It sells the electric capacity and energy produced by plants owned, leased or operated by others. The company also provides energy risk management services to Con Edison Solutions, offers these services to others and enters into wholesale supply transactions.

Discontinued Operations

In 2008, Con Edison Development and its subsidiary, CED/SCS Newington, LLC, completed the sale of their ownership interests

 

27


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

in power generating projects with an aggregate capacity of approximately 1,706 MW. See Note V to the financial statements.

Results of Operations—Summary

Con Edison’s earnings per share in 2008 were $4.38 ($4.37 on a diluted basis). In 2007, earnings per share were $3.49 ($3.47 on a diluted basis). Earnings per share in 2006 were $2.96 ($2.95 on a diluted basis).

Net income for the years ended December 31, 2008, 2007 and 2006 was as follows:

 

(Millions of Dollars)    2008    2007     2006  

Con Edison of New York

   $ 783    $ 844     $ 686  

O&R

     44      46       45  

Competitive energy businesses (a)

     73      58       40  

Other (b)

     22      (23 )     (31 )

Total continuing operations

     922      925       740  

Discontinued operations (c)

     274      4       (3 )

Con Edison

   $ 1,196    $ 929     $ 737  

 

(a) Includes $(59) million, $(5) million and $(15) million of net after-tax mark-to-market losses in 2008, 2007 and 2006, respectively. In 2008, also includes $131 million after-tax from the gain on sale of Con Edison Development’s generation projects. See Note V to the financial statements.

 

(b) Other consists of inter-company and parent company accounting. See “Results of Operations,” below.

 

(c) Represents the discontinued operations of certain of Con Edison Development’s generation projects and Con Edison Communications. See Notes U and V to the financial statements.

 

Con Edison’s results of operations for 2008 include the gain on the sale of Con Edison Development’s generation projects in 2008, the resolution in 2008 of litigation with Northeast Utilities, the impact of discontinued operations in 2008 and 2007 (see Note V to the financial statements) and the operating results of the competitive energy businesses (including net mark-to-market effects). The Companies’ results of operations for 2008, as compared with 2007, also reflect changes in the Utilities’ rate plans (including lower allowed returns on equity and additional revenues designed to recover increases in certain operations and maintenance expenses, depreciation and property taxes, and interest charges), an additional reserve in 2008 related to the Long Island City power outage and the resolution in 2007 of a deferred tax amortization petition (see “Regulatory Assets and Liabilities” in Note B to the financial statements). Operations and maintenance expenses were higher in 2008 compared with 2007 reflecting primarily higher costs, which are generally reflected in rates, such as pension and other post-retirement benefits, the support and maintenance of company underground facilities to accommodate municipal projects, the write-off of uncollectible accounts and additional operating programs. Depreciation and property taxes were higher in 2008 compared with 2007 reflecting primarily the impact from increased capital expenditures.

 

28


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

The following table presents the estimated effect on earnings per share and net income from continuing operations for 2008 as compared with 2007 and 2007 as compared with 2006, resulting from these and other major factors:

 

     2008 vs. 2007     2007 vs. 2006  
      Earnings
per Share
    Net Income
(Millions of
Dollars)
    Earnings
per Share
    Net Income
(Millions of
Dollars)
 

Con Edison of New York

        

Sales growth

   $ 0.04     $ 11     $ 0.18     $ 46  

Impact of weather

     (0.07 )     (17 )     0.11       28  

Electric rate plan

     0.47       125       0.44       109  

Gas rate plan

     0.13       35       0.05       12  

Net transfers to firm gas service

     -       -       0.05       14  

Steam rate plan

     0.06       15       0.08       19  

Resolution of deferred tax amortization petition in 2007 and other tax matters

     (0.08 )     (22 )     0.06       17  

Operations and maintenance expense

     (0.44 )     (117 )     (0.05 )     (13 )

Long Island City power outage reserve

     0.04       10       (0.10 )     (24 )

Depreciation and property taxes

     (0.22 )     (59 )     (0.28 )     (69 )

Net interest expense

     (0.07 )     (19 )     (0.04 )     (10 )

Other (includes dilutive effect of new stock issuances)

     (0.16 )     (23 )     (0.08 )     29  

Total Con Edison of New York

     (0.30 )     (61 )     0.42       158  

Orange and Rockland Utilities

     (0.01 )     (2 )     (0.01 )     1  

Competitive energy businesses

        

Earnings excluding net mark-to-market effects, gain on sale of generation projects and discontinued operations

     (0.24 )     (62 )     0.01       8  

Net mark-to-market effects

     (0.20 )     (54 )     0.04       10  

Gain on the sale of Con Edison Development’s generation projects and discontinued operations

     1.48       401       0.02       7  

Total Competitive energy businesses

     1.04       285       0.07       25  

Northeast Utilities litigation settlement

     0.11       30       -       -  

Other, including parent company expenses

     0.05       15       0.05       8  

Total variations

   $ 0.89     $ 267     $ 0.53     $ 192  

See “Results of Operations” below for further discussion and analysis of results of operations.

 

29


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Risk Factors

The Companies’ businesses are influenced by many factors that are difficult to predict, and that involve uncertainties that may materially affect actual operating results, cash flows and financial condition. These risk factors include:

The Utilities’ Revenues And Results Of Operations Reflect Regulatory Actions—The Utilities have rate plans approved by state utility regulators that cover the prices they can charge their customers. The prices are generally designed to cover the Utilities’ cost of service (including a return on equity) and generally may not be changed during the specified terms of the rate plans other than for the recovery of energy costs and limited other exceptions. The rate plans generally include earnings adjustments for meeting or failing to meet certain standards. Certain of the plans require action by regulators at their expiration dates, which may include approval of new plans with different provisions. Regulators may also take actions affecting the company outside of the framework of the approved rate plans. The regulators in the states in which the Utilities provide service generally permit the Utilities to recover from their customers the cost of service, other than any cost that is determined to have been imprudently incurred. Regulatory policies are subject to change. The Utilities’ regulatory filings can involve complex accounting and other calculations. See “Application of Critical Accounting Polices” and “Regulatory Matters,” below.

Con Edison’s Ability To Pay Dividends Or Interest Is Subject To Regulatory Restrictions—Con Edison’s ability to pay dividends on its common stock or interest on its external borrowings depends primarily on the dividends and other distributions it receives from its businesses. The dividends that the Utilities may pay to Con Edison are generally limited to not more than 100 percent of their respective income available for dividends calculated on a two-year rolling average basis, with certain exceptions. See “Dividends” in Note C to the financial statements.

The Companies Purchase Energy For Their Customers—A disruption in the wholesale energy markets or in the Companies’ energy supply arrangements could adversely affect their ability to meet their customers’ energy needs and the Companies’ results of operations. The Companies have policies to manage the economic risks related to energy supply, including related hedging transactions and the risk of a counterparty’s non-performance. The Utilities generally recover their prudently incurred fuel, purchased power and gas costs, including the cost of hedging transactions, in accordance with rate provisions approved by state regulators. Con Edison’s competitive energy businesses enter into hedging transactions to manage their commodity-related price and volumetric risks. See “Financial and Commodity Market Risks,” below.

Energy Market Prices Are Volatile—The impact of changing energy market prices on the Companies is mitigated by their energy management policies and rate provisions pursuant to which the Utilities recover energy supply costs. See “Financial and Commodity Market Risks,” below. High energy market prices result in increases in energy costs billed to customers that could result in decreased energy usage. If this were to occur, until rates for Con Edison of New York’s steam business, O&R’s electric businesses in New Jersey and Pennsylvania and O&R’s gas business were adjusted to offset the effect of decreased usage, the Utilities would have decreased energy delivery revenues. Under the revenue decoupling mechanisms currently applicable to Con Edison of New York’s electric and gas businesses and O&R’s electric business in New York, the Utilities’ revenues will generally not be affected by changes in delivery volumes from levels assumed when rates were approved. See Note B to the financial statements. Prices for electricity, fuel oil and gas could also affect the value of Con Edison’s competitive energy businesses.

The Utilities Have A Substantial Ongoing Utility Construction Program—The Utilities estimate that their construction expenditures will exceed $7 billion over the next three years. The ongoing construction program includes large energy transmission, substation and distribution system projects. The failure to complete these projects in a timely manner could adversely affect the Utilities’ ability to meet their customers’ growing energy needs with the high level of reliability that they currently provide. A substantial portion of the construction program is undertaken through contractors. See “Investigation of Contractor Payments” in Note H to the financial statements. The Utilities expect to use internally-generated funds, equity contributions from Con Edison and external borrowings to fund the construction expenditures.

The Companies Are Active Participants in Financial Markets —Changes in financial market conditions or in the Companies’ credit ratings could adversely affect their ability and their cost to borrow funds. The Companies’ commercial paper and unsecured debt are rated by Moody’s Investors Services, Inc. (Moody’s), Standard & Poor’s Ratings Services (S&P) and Fitch Ratings (Fitch). The interest rates on $636 million of Con Edison of New York tax-exempt debt and $99 million of O&R tax-exempt debt are also affected by the credit ratings of bond insurers. See “Liquidity and Capital Resources – Capital

 

30


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Resources,” below. Changes to financial market conditions could also adversely affect the return on investment of the plan assets for the Companies’ pension and other postretirement benefit plans, and in 2008 did materially adversely affect the value of the plan assets. See “Application of Critical Accounting Policies—Accounting for Pensions and Other Postretirement Benefits” and “Financial and Commodity Market Risks,” below and Notes E and F to the financial statements.

The Companies Operate Essential Energy Facilities And Other Systems—The Utilities provide electricity, gas and steam service using energy facilities that are located either in, or close to, public places. A failure of, or damage to, these facilities could result in bodily injury or death, property damage, the release of hazardous substances or extended service interruptions. See “Manhattan Steam Main Rupture” in Note H to the financial statements. The Companies have energy facilities, information systems and business processes relating to their operations, billing, accounting and other matters, the failure of which could adversely affect the Companies’ operations and liquidity and result in substantial liability, higher costs and increased regulatory requirements. The Companies have training, operating, security, maintenance and capital programs designed to provide for the safe and reliable operation of their energy facilities, information systems and business processes.

Con Edison’s Competitive Energy Businesses Are In Evolving Markets—Con Edison’s competitive energy businesses are active in evolving markets that are affected by the actions of governmental agencies, other organizations (such as independent system operators) and other competitive businesses. Compared to the Utilities, the profitability of their products and services and the recoverability of Con Edison’s investment in these competitive energy businesses is not as predictable.

The Companies May Be Affected By The Application Of Critical Accounting Policies And Rules—The application of the Companies’ critical accounting policies reflects complex judgments, assumptions and estimates. These policies, which are described in “Application of Critical Accounting Policies” below, include industry specific accounting applicable to regulated public utilities, the accounting and funding rules applicable to pensions and other postretirement benefits, and accounting for contingencies, long-lived assets, derivative instruments, goodwill and leases. New accounting policies or rules or changes to current accounting policies, rules or interpretations of such policies or rules that affect the Companies’ financial statements may be adopted by the relevant accounting or other authorities.

 

The Companies Are Exposed To Risks Relating To Environmental Matters—Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or produced in the course of the Utilities’ operations and are present on properties or in facilities and equipment currently or previously owned by them. See “Environmental Matters” in Item 1 and Note G to the financial statements. Electric and magnetic fields (EMF) are found wherever electricity is used. If a causal relationship between EMF and adverse health effects were established, there could be a material adverse effect on the Companies. Negative perceptions about EMF can make it more difficult to construct facilities needed for the Companies’ operations.

The Companies Are Subject To Extensive Government Regulation And Taxation—The Companies’ operations require numerous permits, approvals and certificates from various federal, state and local governmental agencies. The Companies’ federal income tax returns reflect certain tax positions with which the Internal Revenue Service does not or may not agree, including tax positions with respect to Con Edison’s lease in/lease out transactions and the deduction of certain construction-related costs for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. See Notes J and L to the financial statements. The Companies may be subject to new laws or regulations or the revision or reinterpretation of existing laws or regulations which could have a material adverse effect on the Companies.

The Companies Face Risks That Are Beyond Their Control —The Companies’ results of operations can be affected by circumstances or events that are beyond their control. Weather directly influences the demand for electricity, gas and steam service, and can affect the price of energy commodities. Economic conditions can affect customers’ demand and ability to pay for service. The cost of repairing damage to the Companies’ facilities and the potential disruption of their operations due to heat, storms, natural disasters, wars, terrorist acts, pandemic illnesses and other catastrophic events could be substantial. See “Environmental Matters —Climate Change” in Item 1. The occurrence or risk of occurrence of future terrorist attacks or related acts of war could also adversely affect the New York or United States economy. A lower level of economic activity for these or other reasons could result in a decline in energy consumption, which could adversely affect the Companies’ revenues and earnings and limit the Companies’ future growth prospects.

Global Financial Turmoil is Ongoing—Ongoing global financial turmoil has reduced the availability, and increased the cost, of

 

31


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

credit and capital and reduced the value of financial assets. The economy has entered a recession. The Companies continue to monitor the effects on their businesses of these events. See “The Companies Are Active Participants in Financial Markets” and “The Companies Face Risks That Are Beyond Their Control,” above and “Capital Resources” and “Capital Requirements,” below. For information about potential for material pension plan funding requirements, see Note E to the financial statements. The ongoing turmoil could also reduce customer demand for the services provided by the Companies and the ability of the Companies’ customers, lenders and other counterparties to meet their obligations to the Companies.

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 factors such as those discussed under “Risk Factors,” above.

Application of Critical Accounting Policies

The Companies’ financial statements reflect the application of their accounting policies, which conform to accounting principles generally accepted in the United States of America. The Companies’ critical accounting policies include industry-specific accounting applicable to regulated public utilities and accounting for pensions and other postretirement benefits, contingencies, long-lived assets, derivative instruments, goodwill and leases.

Accounting for Regulated Public Utilities

The Utilities are subject to SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation,” and the accounting requirements of the Federal Energy Regulatory Commission and state public utility regulatory authorities having jurisdiction.

SFAS No. 71 specifies the economic effects that result from the causal relationship of costs and revenues in the rate-regulated environment and how these effects are to be accounted for by a regulated enterprise. Revenues intended to cover some costs may be recorded either before or after the costs are incurred. If regulation provides assurance that incurred costs will be recovered in the future, these costs would be recorded as deferred charges or “regulatory assets” under SFAS No. 71. If revenues are recorded for costs that are expected to be incurred in the future, these revenues would be recorded as deferred credits or “regulatory liabilities” under SFAS No. 71.

The Utilities’ principal regulatory assets and liabilities are listed in Note B to the financial statements. The Utilities are each receiving or being credited with a return on all regulatory assets for which a cash outflow has been made. The Utilities are each paying or being charged with a return on all regulatory liabilities for which a cash inflow has been received. The regulatory assets and liabilities will be recovered from customers, or applied for customer benefit, in accordance with rate provisions approved by the applicable public utility regulatory commission.

In the event that regulatory assets of the Utilities were no longer probable of recovery (as required by SFAS No. 71), these regulatory assets would be charged to earnings. At December 31, 2008, the regulatory assets for Con Edison and Con Edison of New York were $9 billion and $8 billion, respectively.

Accounting for Pensions and Other Postretirement Benefits

The Utilities provide pensions and other postretirement benefits to substantially all of their employees and retirees. Con Edison’s competitive energy businesses also provide such benefits to certain of their employees. The Companies account for these benefits in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R),” SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” In addition, the Utilities apply SFAS No. 71 to account for the regulatory treatment of these obligations (which, as described in Note B to the financial statements, reconciles the amounts reflected in rates for the costs of the benefit to the costs actually incurred). In applying these accounting policies, the Companies have made critical estimates related to actuarial assumptions, including assumptions of expected returns on plan assets, discount rates, health care cost trends and future compensation. See Notes E and F to the financial statements for information about the Companies’ pension and other postretirement benefits, the actuarial assumptions, actual performance, amortization of investment and other actuarial gains and losses and calculated plan costs for 2008, 2007 and 2006.

The cost of pension and other postretirement benefits in future periods will depend on actual returns on plan assets, assumptions for future periods, contributions and benefit experience. Con Edison’s and Con Edison of New York’s current

 

32


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

estimates for 2009 are increases, compared with 2008, in their pension and other postretirement benefits cost of $150 million and $144 million, respectively. The discount rate used to determine 2009 pension and other postretirement benefit accounting cost is 5.75 percent and the expected return on plan assets (tax-exempt assets for postretirement benefit accounting costs) is 8.5 percent.

Amortization of market gains and losses experienced in previous years is expected to increase Con Edison’s and Con Edison of New York’s pension and other postretirement benefit costs by an additional $68 million and $65 million, respectively, in 2010. A 5.0 percentage point variation in the actual annual return in 2009, as compared with the expected annual asset return of 8.5 percent, would change pension and other postretirement benefit costs for both Con Edison and Con Edison of New York by approximately $12 million and $11 million, respectively, in 2010.

The discount rate for determining the present value of future period benefit payments is determined using a model to match the durations of highly-rated (Aa and Aaa, by Moody’s) corporate bonds with the projected stream of benefit payments.

In determining the health care cost trend rate, the Companies review actual recent cost trends and projected future trends.

The following table illustrates the effect on 2009 pension and other postretirement costs of changing the critical actuarial assumptions discussed above, while holding all other actuarial assumptions constant:

 

Actuarial
Assumption
   Change in
Assumption
    Pension   

Other

Postretirement

Benefits

    Total  
           (Millions of Dollars)  

Increase in accounting cost:

 

Discount rate

 

Con Edison

   (0.25 %)   $ 30    $ 4     $ 34  

Con Edison of New York

   (0.25 %)   $ 28    $ 4     $ 32  

Expected return on plan assets

         

Con Edison

   (0.25 %)   $ 20    $ 3     $ 23  

Con Edison of New York

   (0.25 %)   $ 19    $ 2     $ 21  

Health care trend rate

         

Con Edison

   1.00 %     -    $ 3     $ 3  

Con Edison of New York

   1.00 %     -    $ (1 )   $ (1 )
Actuarial
Assumption
   Change in
Assumption
    Pension   

Other

Postretirement

Benefits

    Total  
           (Millions of Dollars)  

Increase in projected benefit obligation:

 

Discount rate

         

Con Edison

   (0.25 %)   $ 288    $ 47     $ 335  

Con Edison of New York

   (0.25 %)   $ 271    $ 40     $ 311  

Health care trend rate

         

Con Edison

   1.00 %     -    $ 17     $ 17  

Con Edison of New York

   1.00 %     -    $ (5 )   $ (5 )

Pension benefits are provided through a pension plan maintained by Con Edison to which Con Edison of New York, O&R and the competitive energy businesses make contributions for their participating employees. Pension accounting by the Utilities includes an allocation of plan assets.

The Companies were not required to make cash contributions to the pension plan in 2008 under funding regulations and tax laws. However, Con Edison of New York, O&R and Con Edison’s competitive energy businesses made discretionary contributions to the plan in 2008 of $127 million, $34 million and $0.6 million, respectively, and expect to make discretionary contributions in 2009 for Con Edison of New York and O&R of $253 million and $37 million, respectively.

The Companies’ policy is to fund their pension and other postretirement benefit accounting costs to the extent tax deductible and for the Utilities, to the extent these costs are recovered under their rate agreements. See “Expected Contributions” in Notes E and F to the financial statements.

Accounting for Contingencies

SFAS No. 5, “Accounting for Contingencies,” applies to an existing condition, situation or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur. Known material contingencies, which are described in the notes to the financial statements, include the Utilities’ responsibility for hazardous substances, such as asbestos, PCBs and coal tar that have been used or generated in the course of operations (Note G); certain tax matters (Notes J and L); and other contingencies (Note H). In accordance with SFAS No. 5, the Companies have accrued estimates of losses relating to the contingencies as to which loss is probable and can be reasonably estimated and no liability has been accrued for contingencies as to which loss is not probable or cannot be reasonably estimated.

 

33


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

The Utilities generally recover costs for asbestos lawsuits, workers’ compensation and environmental remediation pursuant to their current rate plans. Changes during the terms of the rate plans to the amounts accrued for these contingencies would not impact earnings.

Accounting for Long-Lived Assets

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” requires that certain long-lived assets must be tested for recoverability whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. The carrying amount of a long-lived asset is deemed not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Under SFAS No. 144, an impairment loss is recognized if the carrying amount is not recoverable from such cash flows, and exceeds its fair value, which approximates market value.

Accounting for Goodwill

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” Con Edison is required to annually test goodwill for impairment. See Note K to the financial statements. Goodwill is tested for impairment using a two-step approach. The first step of the goodwill impairment test compares the estimated fair value of a reporting unit with its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired. If the carrying value exceeds the estimated fair value of the reporting unit, the second step is performed to measure the amount of impairment loss, if any. The second step requires a calculation of the implied fair value of goodwill.

Goodwill was $411 million at December 31, 2008. The most recent test, which was performed during the fourth quarter of 2008, did not require any second-step assessment and did not result in any impairment. The company’s most significant assumptions surrounding the goodwill impairment test relate to the estimates of reporting unit fair values. The company estimated fair values based primarily on discounted cash flows and on market values for a proxy group of companies.

Accounting for Derivative Instruments

The Companies apply SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and other related accounting pronouncements to their derivative financial instruments. The Companies use derivative financial instruments to hedge market price fluctuations in related underlying transactions for the physical purchase and sale of electricity and gas and interest rate risk on certain debt securities. The Utilities are permitted by their respective regulators to reflect in rates all reasonably incurred gains and losses on these instruments. See “Financial and Commodity Market Risks,” below and Note O to the financial statements.

Where the Companies are required to make mark-to-market estimates pursuant to SFAS No. 133, the estimates of gains and losses at a particular period end do not reflect the end results of particular transactions, and will most likely not reflect the actual gain or loss at the conclusion of a transaction. Substantially all of the estimated gains or losses are based on prices supplied by external sources such as the fair value of exchange traded futures and options and the fair value of positions for which price quotations are available through or derived from brokers or other market sources.

Accounting for Leases

The Companies apply SFAS No. 13, “Accounting for Leases” and other related pronouncements to their leasing transactions. See Note J to the financial statements for information about Con Edison Development’s “Lease In/Lease Out” or LILO transactions, a disallowance of tax losses by the Internal Revenue Service and a possible future charge to earnings. In accordance with SFAS No. 13, Con Edison accounted 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.

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.

The principal factors affecting Con Edison’s liquidity are its investments in the Utilities, the dividends it pays to its shareholders and the dividends it receives from the Utilities and cash flows from financing activities discussed below.

The principal factors affecting Con Edison of New York’s liquidity are its cash flows from operating activities, cash used in investing activities (including construction expenditures), the dividends it pays to Con Edison and cash flows from financing activities discussed below.

The Companies generally maintain minimal cash balances and use short-term borrowing to meet their working capital needs

 

34


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

and other cash requirements. The Companies repay their short-term borrowings using funds from long-term financings and operating activities. The Utilities’ cost of capital, including working capital, is reflected in the rates they charge to their customers.

Each of the Companies believes that it will be able to meet its reasonably likely short-term and long-term cash requirements. See “Risk Factors–Global Financial Turmoil is Ongoing,” and “Application of Critical Accounting Policies–Accounting for Contingencies,” above, and “Regulatory Matters,” below.

Changes in the Companies’ cash and temporary cash investments resulting from operating, investing and financing activities for the years ended December 31, 2008, 2007 and 2006 are summarized as follows:

Con Edison

 

(Millions of Dollars)   2008     2007    

Variance

2008

vs. 2007

    2006    

Variance

2007

vs. 2006

 

Operating activities

  $ 629     $ 1,555     $ (926 )   $ 1,354     $ 201  

Investing activities

    (1,071 )     (2,086 )     1,015       (1,918 )     (168 )

Financing activities

    306       647       (341 )     577       70  

Net change

    (136 )     116       (252 )     13       103  

Balance at beginning of period

    210       94       116       81       13  

Balance at end of period

  $ 74     $ 210     $ (136 )   $ 94     $ 116  

Con Edison of New York

 

(Millions of Dollars)   2008     2007    

Variance

2008

vs. 2007

    2006    

Variance

2007

vs. 2006

 

Operating activities

  $ 1,036     $ 1,251     $ (215 )   $ 1,163     $ 88  

Investing activities

    (2,448 )     (2,021 )     (427 )     (1,839 )     (182 )

Financing activities

    1,328       844       484       662       182  

Net change

    (84 )     74       (158 )     (14 )     88  

Balance at beginning of
period

    121       47       74       61       (14 )

Balance at end of period

  $ 37     $ 121     $ (84 )   $ 47     $ 74  

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. 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. See “Recoverable Energy Costs” in Note A to the financial statements.

 

Net income is the result of cash and non-cash (or accrual) transactions. Only cash transactions affect the Companies’ cash flows from operating activities. Principal non-cash charges include depreciation and deferred income tax expense. Principal non-cash credits include the revenue requirement impact resulting from the reconciliation pursuant to Con Edison of New York’s 2005 electric rate agreement of the differences between the actual amount of transmission and distribution utility plant, net of depreciation to the amounts reflected in electric rates (Net T&D Revenues) and amortizations of certain net regulatory liabilities. Non-cash charges or credits may also be accrued under the revenue decoupling mechanisms in Con Edison of New York’s current electric and gas rate plans and O&R’s electric rate plan. See “Application of Critical Accounting Policies – Accounting for Pensions and Other Postretirement Benefits,” and Notes E and F to the financial statements and see “Rate Agreements–Con Edison of New York–Electric and O&R–Electric” in Note B to the financial statements.

Net cash flows from operating activities in 2008 for Con Edison and Con Edison of New York were $926 million and $215 million lower, respectively, than in the 2007 period. The decreases reflect primarily the July 2008 prepayment, by Con Edison of New York, of its annual New York City property taxes in the amount of $915 million. By prepaying this annual amount as opposed to paying in semi-annual installments, Con Edison of New York received a 1.5 percent reduction in its New York City property taxes. Con Edison’s decrease also reflects the 2008 payment of income taxes, which includes the taxes on the gain on the sale of Con Edison Development’s generation projects. The decreases also reflect higher cash collateral paid due to lower commodity prices associated with the Companies’ derivative transactions. Con Edison and Con Edison of New York’s decrease is offset by lower rate case amortizations and the reconciliation of Net T&D in 2008 when compared with 2007.

Net cash flows from operating activities in 2007 for Con Edison and Con Edison of New York were $201 million and $88 million higher, respectively, than in the 2006 period primarily reflecting increased net income, depreciation expense, deferred income taxes and recovery of certain other receivables, described below, offset in part by higher non-cash credits for Net T&D Revenues, rate case amortizations and accruals and higher customer accounts receivable.

The change in net cash flows also reflects the timing of payments for and recovery of energy costs. This timing issue is reflected within changes to accounts receivable–customers, recoverable energy costs and accounts payable balances. In 2007, the change in other deferred charges and noncurrent assets reflects

 

35


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

a $160 million deposit paid by Con Edison to the Internal Revenue Service with respect to the timing of deductions of certain construction related costs. See Note L to the financial statements. Con Edison of New York’s and O&R’s portion of this deposit, also recorded as a noncurrent asset, was $147 million and $13 million, respectively.

The increases in regulatory assets principally reflects increases in deferred pension costs in accordance with SFAS No. 158 and increases in future federal income taxes associated with increased removal costs. See Notes A, B and E to the financial statements.

The decrease in other receivables in 2007 reflects primarily the recovery of a property tax credit associated with Con Edison of New York’s East River Plant and lower hedging program broker margin deposits (reflecting higher commodity prices). For Con Edison, the decrease also reflects the expiration of certain wholesale load contracts, and receivables associated with other hedging activities at the competitive energy businesses.

Cash Flows Used in Investing Activities

Net cash flows used in investing activities in 2008 for Con Edison were $1,015 million lower than in 2007. The decrease reflects primarily the proceeds from the sale of Con Edison Development’s generation projects in 2008 offset, in part, by increased utility construction expenditures. Net cash flows used in investing activities for Con Edison of New York was $427 million higher in 2008 than in 2007, reflecting primarily increased utility construction expenditures in 2008.

From time to time, Con Edison of New York lends funds to O&R for periods of not more than 12 months. Con Edison of New York’s outstanding loans to O&R amounted to $113 million and $55 million at December 31, 2008 and 2007, respectively. See Note S to the financial statements.

Net cash flows used in investing activities in 2007 for Con Edison and Con Edison of New York were $168 million and $182 million higher, respectively, than in 2006. The increases for the Companies reflect primarily increased utility construction expenditures and lower net proceeds from the sale of certain properties ($30 million in 2007, as compared with $60 million in 2006). For Con Edison, the increase also reflects $39 million of net proceeds from the completion of the sale of Con Edison Communications that offset cash flows used in investing activities in 2006.

Cash Flows from Financing Activities

Net cash flows from financing activities in 2008 for Con Edison were $341 million lower than in 2007 and for Con Edison of New York were $484 million higher in 2008 than in 2007, and increased $70 million and $182 million, respectively, in 2007 compared with 2006.

Con Edison’s cash flows from financing activities for the years ended December 31, 2007 and 2006, reflect the issuance through public offerings of 11 million and 9.7 million Con Edison common shares resulting in net proceeds of $558 million and $447 million, respectively. The 2007 proceeds were invested by Con Edison in Con Edison of New York ($518 million) and O&R ($40 million). The $447 million from the 2006 proceeds were invested in Con Edison of New York. For Con Edison of New York, cash flows from financing activities in 2008 also reflect a $752 million capital contribution from Con Edison.

Cash flows from financing activities for 2008, 2007 and 2006 also reflect the issuance of Con Edison common shares through its dividend reinvestment and employee stock plans (2008: 1.7 million shares for $42 million, 2007: 3.6 million shares for $121 million, 2006: 2.5 million shares for $63 million). In addition, as a result of the stock plan issuances, cash used to pay common stock dividends was reduced by $21 million in 2008, $38 million in 2007 and $40 million in 2006.

Net cash flows from financing activities during the years ending December 31, 2008, 2007 and 2006 also reflect the following Con Edison of New York transactions:

2008

Issued $600 million 5.85% 10-year debentures, $600 million 6.75% 30-year debentures and $600 million 7.125% 10-year debentures, the proceeds of which were used to repay short-term borrowings and for other general corporate purposes; and
Redeemed at maturity $180 million 6.25% 10-year debentures and $100 million 6.15% 10-year debentures.

2007

Issued $525 million 6.30% 30-year debentures, the proceeds of which were used for general corporate purposes; and
Redeemed at maturity $330 million 6.45% 10-year debentures.

2006

Issued $400 million 5.85% 30-year debentures, $250 million 5.30% 10-year debentures and $250 million 5.70% 30-year debentures, the proceeds of which were used for general corporate purposes;

 

36


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Issued $400 million 6.20% 30-year debentures, the proceeds of which were used for general corporate purposes and to redeem in advance of maturity $100 million 7.75% debentures due 2026; and
Issued $400 million 5.50% 10-year debentures, the proceeds of which were used to redeem in advance of maturity $400 million 7.50% debentures due 2041.

In 2008, Con Edison issued $326 million of unsecured notes in exchange for a like amount of secured project debt (see Note Q to the financial statements) and redeemed at maturity $200 million 3.625% 5-year debentures. In 2007, Con Edison issued commercial paper and used available cash balances to redeem in advance of maturity $325 million 7.25% 40-year Public Income NotES.

Con Edison’s net cash flows from financing activities also include O&R’s financings. In 2008, O&R issued $50 million 6.15% 10-year debentures. The net proceeds received from the issuance were used for general corporate purposes, including repayment of short-term debt. In 2007, O&R’s New Jersey subsidiary redeemed at maturity $20 million 7.125% First Mortgage Bonds. In 2006, O&R issued $75 million of 5.45% 10-year debentures.

Cash flows from financing activities of the Companies also reflect commercial paper issuance (included on the consolidated balance sheets as “Notes payable”). The commercial paper amounts outstanding at December 31, 2008, 2007 and 2006 and the average daily balances for 2008, 2007 and 2006 for Con Edison and Con Edison of New York were as follows:

 

    2008     2007     2006  
(Millions of
Dollars, except
Weighted
Average Yield)
 

Out-

standing

at

Dec. 31

    Daily
average
   

Out-

standing

at

Dec. 31

    Daily
average
   

Out-

standing
at

Dec. 31

    Daily
average
 

Con Edison

  $ 363     $ 100     $ 840     $ 160     $ 117     $ 448  

Con Edison of New York

  $ 253     $ 380     $ 555     $ 151     $ -     $ 305  

Weighted average yield

    2.4 %     3.4 %     5.5 %     5.3 %     5.4 %     5.0 %

Common stock issuances and external borrowings are sources of liquidity that could be affected by changes in credit ratings, financial performance and capital market conditions. For information about the Companies’ credit ratings and certain financial ratios, see “Capital Resources,” below.

Other Changes in Assets and Liabilities

The following table shows changes in certain assets and liabilities at December 31, 2008, compared with December 31, 2007.

 

(Millions of Dollars)   Con Edison
2008 vs. 2007
Variance
  Con Edison of
New York
2008 vs. 2007
Variance

Assets

   

Regulatory assets

  $ 3,594   $ 3,416

Deferred derivative losses – current

    215     188

Fair value of derivative assets – current

    64     5

Liabilities

   

Pension and retiree benefits

    3,573     3,421

Fair value of derivative liabilities – current

    116     67

Regulatory Assets and Pension and Retiree Benefits Liability

Regulatory assets increased $3,594 million and $3,416 million for Con Edison and Con Edison of New York, respectively, at December 31, 2008 compared with December 31, 2007, due primarily to an increase in the regulatory asset for unrecognized pension and other postretirement costs. Pension and retiree benefits liability increased $3,573 million and $3,421 million for Con Edison and Con Edison of New York, respectively, at December 31, 2008 compared with December 31, 2007, due primarily to a decrease during 2008 in the fair value of the Companies’ retirement plan and other postretirement benefit plan assets. See Notes B, E and F to the financial statements.

Fair Value of Derivative Assets/Liabilities and Deferred Derivative Gains/Losses

Fair value of derivative assets increased $64 million and $5 million for Con Edison and Con Edison of New York, respectively, at December 31, 2008 compared with December 31, 2007. The changes for Con Edison are due primarily to forward price decline for energy on the portfolio of the competitive energy businesses. In addition, fair value of derivative liabilities increased $116 million and $67 million for Con Edison and Con Edison of New York, respectively, at December 31, 2008 compared with December 31, 2007. The changes are due primarily to the impact of lower electric and gas commodity prices on the hedging portfolios of the Utilities and competitive energy businesses and the timing of entering into new positions, offset in part by the maturity of certain contract positions and cash collateral.

Deferred derivative losses increased $215 million and $188 million for Con Edison and Con Edison of New York, respectively, at December 31, 2008 compared with December 31, 2007. The changes are due primarily to the impact of lower electric and gas commodity prices on the hedging portfolios of the Utilities and the timing of entering into new positions, offset in part, by the maturity of certain contract positions.

 

37


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

For the Utilities, mark-to-market activity had no effect on net income as the amounts were deferred as regulatory assets/liabilities (deferred derivative losses/gains). In accordance with provisions approved by state regulators, the Utilities generally recover from customers their energy supply costs, including gains and losses on derivative instruments used to hedge energy purchases. The mark-to-market accounting for Con Edison’s competitive energy businesses resulted in a net increase in the fair value of derivative assets and liabilities. The competitive energy businesses record mark-to-market gains and losses on derivative instruments in earnings in the reporting period in which such changes occur. See Note O to the financial statements. For the Companies, changes in fair value of derivative instruments may lead to collateral payments made to or received from counterparties or brokers that are reflected in the fair value of derivative assets and liabilities.

Capital Resources

Con Edison is a holding company that operates only through its subsidiaries and has no material assets other than its interests in its subsidiaries. Con Edison expects to finance its capital requirements primarily through the sale of securities including the issuance in 2009 of between $300 million and $550 million of Con Edison common shares in addition to stock issuances under its dividend reinvestment and employee stock plans and from dividends it receives from its subsidiaries. Con Edison’s ability to make payments on its external borrowings and dividends on its common shares is also dependent on its receipt of dividends from its subsidiaries or proceeds from the sale of its securities or its interests in its subsidiaries.

For information about restrictions on the payment of dividends by the Utilities and significant debt covenants, see Note C to the financial statements.

For information on the Companies’ commercial paper program and revolving credit agreements with banks, see Note D to the financial statements.

The Utilities expect to finance their operations, capital requirements and payment of dividends to Con Edison from internally-generated funds, contributions of equity capital from Con Edison and external borrowings, including long-term debt of between $1,100 million and $1,800 million in addition to debt issuances for maturing securities in 2009.

 

The Companies continue to evaluate their plans to finance their capital requirements in light of the ongoing extraordinary volatility and uncertainty in capital markets and the current Con Edison of New York electric rate proceeding. See “Risk Factors – Global Financial Turmoil is Ongoing,” above. The Companies require access to the capital markets to fund capital requirements that are substantially in excess of available internally-generated funds. See “Capital Requirements,” below. Each of the Companies believes that it will continue to be able to access capital, although capital market instability may affect the timing of the Companies’ financing activities and capital costs are expected to be higher than have been experienced in recent years. The Companies monitor the availability and costs of various forms of capital, and will seek to issue Con Edison common stock and other securities when it is necessary or advantageous to do so. For information about the Companies’ long-term debt and short-term borrowing, see Notes C and D to the financial statements.

In May 2005, the PSC authorized Con Edison of New York to issue up to $4.4 billion of debt securities prior to December 31, 2009, of which the company had issued $4.0 billion at December 31, 2008. In October 2008, the company filed a request with the PSC for authorization to issue additional securities prior to December 31, 2012. In January 2006, the PSC authorized O&R to issue up to $325 million of debt securities prior to December 31, 2009, of which the company had issued $125 million as of December 31, 2008. In addition, the PSC has authorized the Utilities’ to refund outstanding debt securities and preferred stock should the Utilities determine that it is economic to do so.

Con Edison’s competitive energy businesses have financed their operations and capital requirements primarily with capital contributions and borrowings from Con Edison, internally-generated funds and external borrowings. See Note Q to the financial statements.

For each of the Companies, the ratio of earnings to fixed charges (Securities and Exchange Commission basis) for the years ended December 31, 2008, 2007, 2006, 2005, and 2004 was:

 

Earnings to Fixed Charges
(Times)
   2008    2007    2006    2005    2004

Con Edison

   3.4    3.4    3.0    3.3    2.8

Con Edison of New York

   3.3    3.6    3.2    3.6    3.1

For each of the Companies, the common equity ratio at December 31, 2008, 2007 and 2006 was:

 

Common Equity Ratio (Percent of total
capitalization)
   2008    2007    2006

Con Edison

   50.7    53.7    48.5

Con Edison of New York

   50.8    52.3    50.0

 

38


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

The commercial paper of the Companies is rated P-1, A-2 and F2, respectively, by Moody’s, S&P and Fitch. Con Edison’s long-term credit rating is A2, BBB+ and BBB+, respectively, by Moody’s, S&P and Fitch. The unsecured debt of Con Edison of New York is rated A1, A- and A-, respectively, by Moody’s, S&P and Fitch. The unsecured debt of O&R is rated A2, A- and A, respectively, by Moody’s, S&P and Fitch. Securities ratings assigned by rating organizations are expressions of opinion and are not recommendations to buy, sell or hold securities. A securities rating is subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.

Con Edison of New York has $636 million of tax-exempt debt for which the interest rates are determined pursuant to periodic auctions. Of this amount, $391 million is insured by Ambac Assurance Corporation and $245 million is insured by Syncora Guarantee Inc. (formerly XL Capital Assurance Inc.). Credit rating agencies have downgraded the ratings of these insurers from AAA to lower levels. The weighted average annual interest rate on this tax-exempt debt was 1.14 percent on January 31, 2009. The weighted average interest rate was 3.94 percent, 3.77 percent and 3.45 percent for the years 2008, 2007 and 2006, respectively.

 

Con Edison of New York has $225 million of uninsured tax-exempt debt and O&R has $99 million of insured tax-exempt debt that currently bear interest at rates determined weekly and is subject to tender by bondholders for purchase by the company. Bondholders have tendered portions of this debt for purchase (see Note C to the financial statements). Of the $99 million of O&R debt, $55 million is insured by Financial Guaranty Insurance Company and $44 million is insured by Ambac Assurance Corporation (see Note C to the financial statements). Downgrades in the credit ratings of these insurers have resulted in interest rates on this O&R debt that are significantly higher than the interest rates borne by Con Edison of New York’s $225 million of uninsured weekly rate tender bonds. As of January 31, 2009, the weighted average annual interest rate on the O&R insured weekly rate tender bonds outstanding with bondholders, excluding the effects of an interest rate swap agreement (see “Interest Rate Swaps” in Note O to the financial statements), was 9.00 percent and the rate on the Con Edison of New York weekly rate tender bonds was 0.49 percent. O&R is evaluating alternatives with respect to its weekly rate tender bonds and termination of its interest rate swap agreement.

 

39


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Capital Requirements

The following table contains the Companies’ capital requirements for the years 2006 through 2008 and their current estimate of amounts for 2009 through 2011.

 

     Actual    Estimate
(Millions of Dollars)    2006    2007    2008    2009    2010    2011

Regulated utility construction expenditures

                 

Con Edison of New York

   $ 1,782    $ 1,879    $ 2,202    $ 2,400    $ 2,347    $ 2,063

O&R

     110      112      120      154      162      146

Total regulated utility construction expenditures

     1,892      1,991      2,322      2,554      2,509      2,209

Competitive energy businesses capital expenditures

     6      6      4      9      6      5

Sub-total

     1,898      1,997      2,326      2,563      2,515      2,214

Retirement of long-term securities at maturity*

                 

Con Edison – parent company

     -      325      204      4      2      1

Con Edison of New York

     500      330      280      475      625      -

O&R

     2      22      3      3      58      3

Competitive energy businesses

     21      22      -      -      1      1

Total retirement of long-term securities at maturity

     523      699      487      482      686      5

Total

   $ 2,421    $ 2,696    $ 2,813    $ 3,045    $ 3,201    $ 2,219

 

* Includes long-term securities redeemed in advance of maturity.

The Utilities have an ongoing need for substantial capital investment in order to meet the growth in demand for electricity and electric, gas and steam reliability needs. The balances in 2006, 2007 and 2008 reflect a higher level of expenditures for electric substations and ongoing improvements and reinforcements of the electric distribution system. The Utilities estimated construction expenditures for 2009, 2010, and 2011 are subject to change depending on the outcome of certain regulatory proceedings. See Note B to the financial statements.

 

40


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Contractual Obligations

The following table summarizes the Companies’ material obligations at December 31, 2008 to make payments pursuant to contracts. Long-term debt, capital lease obligations and other long-term liabilities are included on their balance sheets. Operating leases, non-utility generator (NUG) contracts and other purchased power agreements (PPAs) (for which undiscounted future annual payments are shown) are described in the notes to the financial statements.

 

     Payments Due by Period
(Millions of Dollars)    Total    Less than
1 year
   2 – 3
years
   4 – 5
years
   After 5
years

Long-term debt (Note C)

              

Con Edison of New York

   $ 8,991    $ 475    $ 625    $ 1,000    $ 6,891

O&R

     419      3      61      6      349

Competitive energy businesses and parent

     327      4      5      4      314

Interest on long-term debt

     7,927      503      888      809      5,727

Total Long-term debt, including interest

     17,664      985      1,579      1,819      13,281

Capital lease obligations (Note J)

              

Con Edison of New York

     27      8      14      5      -

Total capital lease obligations

     27      8      14      5      -

Operating leases (Notes J and Q)

              

Con Edison of New York

     270      42      83      84      61

O&R

     3      1      1      1      -

Competitive energy businesses

     1      1      -      -      -

Total operating leases

     274      44      84      85      61

Purchase obligations

              

Non-utility generator contracts and purchase power agreements – Utilities (Note I)

              

Con Edison of New York

              

Energy(a)

     11,980      1,207      2,063      1,366      7,344

Capacity

     4,157      486      962      931      1,778

Total Con Edison of New York

     16,137      1,693      3,025      2,297      9,122

O&R

              

Energy and Capacity(a)

     279      143      136      -      -

Total non-utility generator contracts and purchase power agreements – Utilities

     16,416      1,836      3,161      2,297      9,122

Natural gas supply, transportation, and storage contracts – Utilities(b)

              

Con Edison of New York

              

Natural gas supply

     904      426      313      165      -

Transportation and storage

     1,397      237      346      240      574

Total Con Edison of New York

     2,301      663      659      405      574

O&R

              

Natural gas supply

     124      57      45      22      -

Transportation and storage

     272      44      65      47      116

Total O&R

     396      101      110      69      116

Total natural gas supply, transportation and storage contracts

     2,697      764      769      474      690

Other purchase obligations(c)

              

Con Edison of New York

     2,698      1,951      664      59      24

O&R

     172      133      35      2      2

Total other purchase obligations

     2,870      2,084      699      61      26

Competitive energy businesses commodity and service agreements (d)

     130      99      30      1      -

Uncertain income taxes (Note L)

              

Con Edison of New York

     108      -      108      -      -

O&R

     9      -      9      -      -

Competitive energy businesses

     1      -      1      -      -

Total uncertain income taxes

     118      -      118      -      -

Total

   $ 40,196    $ 5,820    $ 6,454    $ 4,742    $ 23,180

 

(a) Included in these amounts is the cost of minimum quantities of energy that the company is obligated to purchase at both fixed and variable prices.

 

(b) Included in these amounts is the cost of minimum quantities of natural gas supply, transportation and storage that the Utilities are obligated to purchase at both fixed and variable prices.

 

(c) Amounts shown for other purchase obligations, which reflect capital and operations and maintenance costs incurred by the Utilities in running their day-to-day operations, were derived from the Utilities’ purchasing systems as the difference between the amounts authorized and the amounts paid (or vouchered to be paid) for each obligation. For many of these obligations, the Utilities are committed to purchase less than the amount authorized. Payments for the “Other Purchase Obligations” are generally assumed to be made ratably over the term of the obligations. The Utilities believe that unreasonable effort and expense would be involved to modify their purchasing systems to enable them to report their “Other Purchase Obligations” in a different manner.

 

(d) Amounts represent commitments to purchase minimum quantities of electric energy and capacity, natural gas, natural gas pipeline capacity and generating plant services entered into by Con Edison’s competitive energy businesses.

 

41


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

The Companies’ commitments to make payments in addition to these contractual commitments include their other liabilities reflected in their balance sheets, any funding obligations for their pension and other postretirement benefit plans, financial hedging activities, their collective bargaining agreements and Con Edison’s guarantees of certain obligations of its businesses. See Notes E, F, O and “Guarantees” in Note H to the financial statements.

Electric Power Requirements

In 2008, the Utilities purchased substantially all of the energy they sold to customers pursuant to firm contracts and through the NYISO’s wholesale electricity market. Con Edison expects that these resources will again be adequate to meet the requirements of its customers in 2009.

In general, the Utilities recover prudently-incurred purchased power costs pursuant to rate provisions approved by the state public utility regulatory authority having jurisdiction. See “Financial and Commodity Market Risks – Commodity Price Risk,” below and “Recoverable Energy Costs” in Note A to the financial statements. From time to time certain parties have petitioned the PSC to review these provisions, the elimination of which could have a material adverse effect on the Companies’ financial position, results of operations or liquidity.

To reduce the volatility of electric energy costs, the Utilities have firm contracts to purchase electric energy and enter into derivative transactions to hedge the costs of a portion of their expected purchases under these contracts and through the NYISO’s wholesale electricity market, which together cover a substantial portion of the electric energy expected to be sold to customers in 2009. See Notes I and O to the financial statements. O&R’s New Jersey subsidiary entered into firm contracts to purchase electric energy for substantially all of the electric energy expected to be sold to its customers in 2009.

 

Con Edison of New York also owns generating stations in New York City associated primarily with its steam system. As of December 31, 2008, the generating stations had a combined electric capacity of approximately 710 MW, based on 2008 summer ratings. O&R does not own any electric generating capacity.

In a July 1998 order, the PSC indicated that it “agree(s) generally that Con Edison of New York need not plan on constructing new generation as the competitive market develops,” but considers “overly broad” and did not adopt Con Edison of New York’s request for a declaration that, solely with respect to providing generating capacity, it will no longer be required to engage in long-range planning to meet potential demand and, in particular, that it will no longer have the obligation to construct new generating facilities, regardless of the market price of capacity. Con Edison of New York monitors the adequacy of the electric capacity resources and related developments in its service area, and works with other parties on long-term resource adequacy issues within the framework of the NYISO. In December 2007, the PSC initiated a proceeding to consider a form of integrated resource planning, which could involve the imposition of obligations on transmission owners (such as Con Edison of New York), that may be needed for system reliability if the market does not solve a reliability need identified by the NYISO.

Con Edison’s competitive energy businesses sell electricity to wholesale and retail customers in the NYISO, PJM Interconnection (PJM), ISO New England (ISO-NE) and other markets. Con Edison Energy sells the electric capacity and energy produced by plants owned, leased or operated by others. In 2008, Con Edison Development and its subsidiary, CED/SCS Newington, LLC, completed the sale of their ownership interests in power generating projects with an aggregate capacity of approximately 1,706 MW. See Note V to the financial statements.

 

42


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Regulatory Matters

The following table, which summarizes certain significant provisions of the Utilities’ principal rate plans, should be read in conjunction with, and is subject to, the more detailed discussion of these plans and prior rate plans in Note B to the financial statements.

 

Effective

Period

   Rate
Increases
  Amortization
To Income of
Net Regulatory
(Assets) and
Liabilities
 

Other Significant

Revenue Sources

   Authorized
Return on
Equity (ROE)
   

ROE Sharing Threshold
Earnings Sharing Terms*

(Shareholders /Customers)

(Millions of Dollars, except percentages)

Con Edison of New York – Electric

           

April 2008 -

March 2009

     $425**   $50   $150 of annual
transmission
congestion
contracts revenues
   9.1 %   No sharing by customers

Con Edison of New York – Gas

           

October 2007 -

September 2010

   Yr. 1 -$

Yr. 2 -$

Yr. 3 -$

67.5

67.5

67.5

  $18

over 3 yrs.

  $35 of annual non-
firm revenues
   9.7 %   10.70%

50/50

Con Edison of New York – Steam

           

October 2008 -

September 2010

   Yr. 1 - $

Yr. 2 - $

43.7

43.7

  Yr. 1 - $10.2

Yr. 2 - $10.2

  -    9.3 %   10.10%

50/50

O&R – Electric (NY)

           

July 2008 -

June 2011

   Yr. 1 - $

Yr. 2 - $

Yr. 3 - $

15.6

15.6

5.7

  -   One time surcharge
Yr. 3 - $9.9
   9.4 %   10.20% - 11.20% - 50/50

>11.20% -25/75

O&R – Gas*** (NY)

           

November 2006 -

October 2009

   Yr. 1 - $

Yr. 2 - $

Yr. 3 - $

6.5

6.5

6.3

  $(3)    

over 3 yrs.

  -    9.8 %   11% - 12% -50/50

12% - 14% - 35/65

>14% - 0/100

 

* Subject to limitation for cost reconciliations described in Note B to the financial statements.
** Collection of $237 million is subject to potential refund following PSC review of certain capital expenditures.
*** Reflects phase-in of rate increase discussed in Note B to the financial statements.

 

In May 2008, Con Edison of New York filed a request with the PSC for an electric rate increase of $654 million. O&R has pending a request with the PSC for an increase in the rates it charges for gas service rendered in New York, effective November 2009, of $17.8 million. See Note B to the financial statements.

The Companies are actively participating in regulatory proceedings at the federal and state level related to advancing policies such as efforts to increase investment in infrastructure, including transmission, renewables and smart grid. The Companies also participate in other federal regulatory proceedings that affect electric capacity and energy markets in New York and PJM regions, and those that affect gas pipeline companies.

 

43


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

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. The Companies estimate that at December 31, 2008, each 10 percent variation in interest rates applicable to Con Edison’s and Con Edison of New York’s variable rate debt and commercial paper would result in a change in annual interest expense of $3 million and $2 million, respectively.

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 O to the financial statements.

Commodity Price Risk

Con Edison’s commodity price risk relates primarily to the purchase and sale of electricity, gas and related derivative instruments. The Utilities and Con Edison’s competitive energy businesses have risk management strategies to mitigate their related exposures. See Note O to the financial statements.

Con Edison estimates that, as of December 31, 2008, a 10 percent decline in market prices would result in a decline in fair value of $126 million for the derivative instruments used by the Utilities to hedge purchases of electricity and gas, of which $91 million is for Con Edison of New York and $35 million is for O&R. Con Edison expects that any such change in fair value would be largely offset by directionally opposite changes in the cost of the electricity and gas purchased. In accordance with provisions approved by state regulators, the Utilities generally recover from customers the costs they incur for energy purchased for their customers, including gains and losses on certain derivative instruments used to hedge energy purchased and related costs. See “Recoverable Energy Costs” in Note A to the financial statements.

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 years ended December 31, 2008, and 2007, respectively, was as follows:

 

95% Confidence Level,

One-Day Holding Period

   2008    2007
     (Millions of Dollars)

Average for the period

   $ 2    $ 3

High

     3      7

Low

     -      1

Credit Risk

The Companies are exposed to credit risk related to transactions entered into primarily for the various energy supply and hedging activities by the Utilities and the competitive energy businesses. Credit risk relates to the loss that may result from a counterparty’s nonperformance. The Companies use credit policies to manage this risk, including an established credit approval process, monitoring of counterparty limits, netting provisions within agreements and collateral or prepayment arrangements, credit insurance and credit default swaps. The Companies measure credit risk exposure as the replacement cost for open energy commodity and derivative positions plus amounts owed from counterparties for settled transactions. The replacement cost of open positions represents unrealized gains, net of any unrealized losses where the company has a legally enforceable right of setoff.

Con Edison of New York had $67 million of credit exposure in connection with energy supply and hedging activities, net of collateral, at December 31, 2008. The entire amount was with commodity exchange brokers.

Con Edison’s competitive energy businesses had $222 million of credit exposure in connection with energy supply and hedging activities, net of collateral, at December 31, 2008, of which $183 million was with investment grade counterparties, $37 million was with commodity exchange brokers or independent system operators and $2 million was with non-investment grade counterparties.

Investment Risk

The Companies’ investment risk relates to the investment of plan assets for their pension and other postretirement benefit plans. See “Application of Critical Accounting Policies – Accounting for Pensions and Other Postretirement Benefits,” above. The Companies’ current investment policy for pension plan assets

 

44


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

includes investment targets of 65 percent equities and 35 percent fixed income and other securities. At December 31, 2008, the pension plan investments consisted of 59 percent equity and 41 percent fixed income and other securities. In 2008, financial market conditions materially adversely affected the value of the plan assets. See Notes E and F to the financial statements.

Environmental Matters

For information concerning potential liabilities arising from laws and regulations protecting the environment and from claims relating to alleged exposure to asbestos, see “Environmental Matters” in Item 1 and Note G to the financial statements.

Impact of Inflation

The Companies are affected by the decline in the purchasing power of the dollar caused by inflation. Regulation permits the Utilities to recover through depreciation only the historical cost of their plant assets even though in an inflationary economy the cost to replace the assets upon their retirement will substantially exceed historical costs. The impact is, however, partially offset by the repayment of the Companies’ long-term debt in dollars of lesser value than the dollars originally borrowed. Also, to the extent the Companies’ prices change by more or less than inflation, the real price of the Companies’ services will increase or decline. Over the past 20 years, for example, the real price of electric service has declined substantially.

Material Contingencies

For information concerning potential liabilities arising from the Companies’ material contingencies, see “Application of Critical Accounting Policies—Accounting for Contingencies,” above, and Notes B, G, H, J and L to the financial statements.

Results of Operations

Results of operations reflect, among other things, the Companies’ accounting policies (see “Application of Critical Accounting Policies,” above) and rate plans that cover the rates the Utilities can charge their customers (see “Regulatory Matters,” above). Under the revenue decoupling mechanisms currently applicable to Con Edison of New York’s electric and gas businesses and O&R’s electric business in New York, the Utilities’ revenues will generally not be affected by changes in delivery volumes from levels assumed when rates were approved. Revenues for Con Edison of New York’s steam business and O&R’s other utility businesses are affected by changes in delivery volumes resulting from weather, economic conditions and other factors. See Note B to the financial statements.

Con Edison’s results of operations for 2008 include the gain on the sale of Con Edison Development’s generation projects in 2008, the resolution in 2008 of litigation with Northeast Utilities, the impact of discontinued operations in 2008 and 2007 (see Note V to the financial statements) and the operating results of the competitive energy businesses (including net mark-to-market effects). The Companies’ results of operations for 2008, as compared with 2007, also reflect changes in the Utilities’ rate plans (including lower allowed returns on equity and additional revenues designed to recover increases in certain operations and maintenance expenses, depreciation and property taxes, and interest charges), an additional reserve in 2008 related to the Long Island City power outage and the resolution in 2007 of a deferred tax amortization petition (see “Regulatory Assets and Liabilities” in Note B to the financial statements). Operations and maintenance expenses were higher in 2008 compared with 2007 reflecting primarily higher costs, which are generally reflected in rates, such as pension and other post-retirement benefits, the support and maintenance of company underground facilities to accommodate municipal projects, the write-off of uncollectible accounts and additional operating programs. Depreciation and property taxes were higher in 2008 compared with 2007 reflecting primarily the impact from increased capital expenditures. For additional information about major factors affecting earnings, see “Results of Operations—Summary,” above.

In general, the Utilities recover on a current basis the fuel, gas purchased for resale and purchased power costs they incur in supplying energy to their full-service customers (see “Recoverable Energy Costs” in Note A and “Regulatory Matters” in Note B to the financial statements). Accordingly, such costs do not generally affect the Companies’ results of operations. Management uses the term “net revenues” (operating revenues less such costs) to identify changes in operating revenues that may affect the Companies’ results of operations. Management believes that, although “net revenues” may not be a measure determined in accordance with accounting principles generally accepted in the United States of America, the measure facilitates the analysis by management and investors of the Companies’ results of operations.

Con Edison’s principal business segments are Con Edison of New York’s regulated electric, gas and steam utility activities, O&R’s regulated electric and gas utility activities and Con Edison’s competitive energy businesses. Con Edison of New York’s principal business segments are its regulated electric, gas and steam utility activities. A discussion of the results of operations by principal business segment for the years ended December 31, 2008, 2007 and 2006 follows. For additional business segment financial information, see Note N to the financial statements.

 

45


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007

The Companies’ results of operations (which were discussed above under “Results of Operations—Summary”) in 2008 compared with 2007 were:

 

    Con Edison*     Con Edison of New York     O&R     Competitive Energy
Businesses and Other**
 
(Millions of Dollars)   Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
 

Operating revenues

  $ 463     3.5 %   $ 539     5.5 %   $ 55     5.9 %   $ (131 )   (5.7 )%

Purchased power

    321     5.9       171     5.7       49     12.8       101     5.0  

Fuel

    39     6.3       72     12.2       N/A     N/A       (33 )   (91.7 )

Gas purchased for resale

    (1 )   (0.1 )     21     2.1       (7 )   (4.2 )     (15 )   (51.7 )

Operating revenues less purchased power, fuel and gas purchased
for resale (net revenues)

    104     1.8       275     5.2       13     3.4       (184 )   (90.2 )

Other operations and maintenance

    179     8.6       157     8.8       19     9.4       3     3.1  

Depreciation and amortization

    72     11.2       79     13.3       2     5.3       (9 )   (64.3 )

Taxes, other than income taxes

    41     3.1       41     3.2       2     4.8       (2 )   (11.1 )

Income taxes

    60     13.3       4     1.0       (1 )   (4.2 )     57     Large  

Gain on sale of generation projects***

    261     Large       N/A     N/A       N/A     N/A       261     Large  

Operating income

    13     0.9       (6 )   (0.5 )     (9 )   (11.4 )     28     71.8  

Other income less deductions and related federal income tax

    11     23.4       (21 )   (58.3 )     1     Large       31     Large  

Net interest expense

    27     5.2       34     7.4       (6 )   (17.6 )     (1 )   (4.0 )

Income from continuing operations

    (3 )   (0.3 )     (61 )   (7.2 )     (2 )   (4.3 )     60     Large  

Gain on sale of generation projects, net of tax***

    270     Large       N/A     N/A       N/A     N/A       270     Large  

Income from discontinued operations, net of tax ***

    -     -       N/A     N/A       N/A     N/A       -     -  

Net income

  $ 267     28.7 %   $ (61 )   (7.2 )%   $ (2 )   (4.3 )%   $ 330     Large  

 

* Represents the consolidated financial results of Con Edison and its businesses.
** Includes inter-company and parent company accounting.
*** See Note V to the financial statements.

 

46


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Con Edison of New York

Electric

Con Edison of New York’s electric sales and deliveries, excluding off-system sales, in 2008 compared with 2007 were:

 

    Millions of kWhs Delivered     Revenues in Millions  
    Twelve Months Ended               Twelve Months Ended            
Description   December 31,
2008
  December 31,
2007
  Variation     Percent
Variation
    December 31,
2008
  December 31,
2007
  Variation     Percent
Variation
 

Residential/Religious

  11,720   12,312   (592 )   (4.8 )%   $ 2,834   $ 2,657   $ 177     6.7 %

Commercial/Industrial

  12,852   12,918   (66 )   (0.5 )     2,720     2,486     234     9.4  

Retail access customers

  22,047   21,532   515     2.4       1,507     1,334     173     13.0  

NYPA, Municipal Agency and other sales

  11,704   11,499   205     1.8       413     342     71     20.8  

Other operating revenues

  -   -   -     -       404     621     (217 )   (34.9 )

Total

  58,323   58,261   62     0.1 %   $ 7,878   $ 7,440   $ 438     5.9 %

 

Con Edison of New York’s electric operating revenues increased $438 million in 2008 compared with 2007 due primarily to the electric rate plans ($201 million), increased recoverable fuel costs ($52 million) and an increase in recoverable purchased power costs ($163 million). Effective April 2008, Con Edison of New York’s revenues from electric sales are subject to a revenue decoupling mechanism, as a result of which revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved. Other electric operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plans. See Note B to the financial statements.

Electric delivery volumes in Con Edison of New York’s service area increased 0.1 percent in 2008 compared with 2007. After adjusting for variations, principally weather and billing days, electric delivery volumes in Con Edison of New York’s service area increased 0.5 percent in 2008 compared with 2007.

 

Con Edison of New York’s electric fuel costs increased $52 million in 2008 compared with 2007 due primarily to an increase in unit costs ($56 million), offset by lower sendout volumes from the company’s generating facilities ($4 million). Electric purchased power costs increased $163 million in 2008 compared with 2007 reflecting an increase in unit costs ($265 million), offset by a decrease in purchased volumes ($102 million).

Con Edison of New York’s electric operating income increased $4 million in 2008 compared with 2007. The increase reflects primarily higher net revenues ($223 million, due primarily to the electric rate plan), offset in part by higher operations and maintenance costs ($102 million, due primarily to a reserve associated with the Long Island City power outage ($23 million) and increased pension expenses ($67 million)), depreciation ($73 million), income taxes ($24 million) and taxes other than income taxes ($19 million, principally state and local taxes on revenue).

 

47


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Gas

Con Edison of New York’s gas sales and deliveries, excluding off-system sales, in 2008 compared with 2007 were:

 

    Thousands of dths Delivered     Revenues in Millions  
    Twelve Months Ended               Twelve Months Ended            
Description   December 31,
2008
  December 31,
2007
  Variation     Percent
Variation
    December 31,
2008
  December 31,
2007
  Variation     Percent
Variation
 

Residential

  40,195   42,573   (2,378 )   (5.6 )%   $ 850   $ 842   $ 8     1.0 %

General

  28,748   31,162   (2,414 )   (7.7 )     482     499     (17 )   (3.4 )

Firm transportation

  43,245   39,016   4,229     10.8       202     168     34     20.2  

Total firm sales and transportation

  112,188   112,751   (563 )   (0.5 )     1,534     1,509     25     1.7  

Interruptible sales

  11,220   10,577   643     6.1       138     88     50     56.8  

NYPA

  44,694   42,085   2,609     6.2       4     4     -     -  

Generation plants

  74,082   79,942   (5,860 )   (7.3 )     55     52     3     5.8  

Other

  20,004   15,318   4,686     30.6       30     24     6     25.0  

Other operating revenues

  -   -   -     -       78     82     (4 )   (4.9 )

Total

  262,188   260,673   1,515     0.6 %   $ 1,839   $ 1,759   $ 80     4.5 %

 

Con Edison of New York’s gas operating revenues increased $80 million in 2008 compared with 2007 due primarily to an increase in recoverable purchased gas costs ($21 million), the gas rate plans ($58 million) and sales growth ($2 million). Con Edison of New York’s revenues from gas sales are subject to a weather normalization clause and, effective October 2007, a revenue decoupling mechanism as a result of which revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved. Other gas operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plans. See Note B to the financial statements.

Con Edison of New York’s sales and transportation volumes for firm customers decreased 0.5 percent in 2008 compared with 2007, reflecting primarily the impact of the milder winter weather in 2008 compared with 2007. After adjusting for variations, principally weather and billing days firm gas sales and transportation volumes in the company’s service area increased 0.6 percent in 2008.

Con Edison of New York’s purchased gas cost increased $21 million in 2008 compared with 2007 due to higher unit costs ($159 million), offset by lower sendout volumes ($138 million).

Con Edison of New York’s gas operating income decreased $3 million in 2008 compared with 2007. The decrease reflects primarily higher operations and maintenance expense ($38 million, due primarily to higher transmission and distribution expenses ($22 million) and higher pension expense ($9 million)), taxes other than income taxes ($20 million, principally property taxes) and depreciation ($5 million), offset in part by higher net revenues ($59 million) and lower income taxes ($3 million).

 

48


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Steam

Con Edison of New York’s steam sales and deliveries in 2008 compared with 2007 were:

 

    Millions of Pounds Delivered     Revenues in Millions  
    Twelve Months Ended               Twelve Months Ended            
Description   December 31,
2008
  December 31,
2007
  Variation     Percent
Variation
    December 31,
2008
  December 31,
2007
  Variation     Percent
Variation
 

General

  785   589   196     33.3 %   $ 23   $ 23   $ -     - %

Apartment house

  6,614   7,519   (905 )   (12.0 )     186     188     (2 )   (1.1 )

Annual power

  16,577   17,696   (1,119 )   (6.3 )     468     443     25     5.6  

Other operating revenues

  -   -   -     -       30     32     (2 )   (6.3 )

Total

  23,976   25,804   (1,828 )   (7.1 )%   $ 707   $ 686   $ 21     3.1 %

Con Edison of New York’s steam operating revenues increased $21 million in 2008 compared with 2007 due primarily to the net change in rates under the steam rate plan ($25 million). Other steam operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plans. See Note B to the financial statements.

Steam sales and delivery volumes decreased 7.1 percent in 2008 compared with 2007, reflecting primarily the impact of weather. After adjusting for variations, principally weather and billing days, steam sales and deliveries decreased 3.0 percent in 2008, reflecting primarily lower customer usage.

Con Edison of New York’s steam fuel costs increased $20 million in 2008 compared with 2007 due primarily to higher unit costs ($43 million), offset by lower sendout volumes ($23 million). Steam purchased power costs increased $8 million in 2008 compared with 2007 due primarily to higher unit costs ($17 million), offset by a decrease in purchased volumes ($9 million).

Steam operating income decreased $7 million in 2008 compared with 2007. The decrease reflects primarily higher operations and maintenance expense ($15 million, due primarily to higher distribution expense ($12 million)), taxes other than income taxes ($2 million, principally property taxes) and lower net revenues ($7 million), offset by lower income taxes ($17 million).

Taxes Other Than Income Taxes

At over $1 billion, taxes other than income taxes remain one of Con Edison of New York’s largest operating expenses. The

 

principal components of, and variations in, taxes other than income taxes were:

 

(Millions of Dollars)    2008     2007    

Increase/

(Decrease)

 

Property taxes

   $ 955     $ 936     $ 19  

State and local taxes related
to revenue receipts

     283       262       21  

Payroll taxes

     58       55       3  

Other taxes

     9       10       (1 )

Total

   $ 1,305 (a)   $ 1,263 (a)   $ 42  

 

(a) Including sales tax on customers’ bills, total taxes other than income taxes, billed to customers in 2008 and 2007 were $1.7 billion and $1.6 billion, respectively.

Income Taxes

Operating income taxes increased $4 million in 2008 compared with 2007 due primarily to higher taxable income in the 2008 period.

Other Income (Deductions)

Other income (deductions) decreased $21 million in 2008 compared with 2007 due primarily to lower interest income in 2008.

Net Interest Expense

Net interest expense increased $34 million in 2008 compared with 2007 due primarily to new debt issuances, higher interest rates on floating-rate debt and lower principal amounts of commercial paper outstanding in 2008.

 

49


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

O&R

Electric

O&R’s electric sales and deliveries, excluding off-system sales, in 2008 compared with 2007 were:

 

    Millions of kWhs Delivered     Revenues in Millions  
    Twelve Months Ended               Twelve Months Ended          
Description   December 31,
2008
  December 31,
2007
  Variation     Percent
Variation
    December 31,
2008
  December 31,
2007
  Variation   Percent
Variation
 

Residential/Religious

  1,892   1,913   (21 )   (1.1 )%   $ 330   $ 298   $ 32   10.7 %

Commercial/Industrial

  2,082   2,191   (109 )   (5.0 )     303     283     20   7.1  

Retail access customers

  1,814   1,687   127     7.5       80     73     7   9.6  

Public authorities

  119   120   (1 )   (0.8 )     17     15     2   13.3  

Other operating revenues

  -   -   -     -       3     2     1   50.0  

Total

  5,907   5,911   (4 )   (0.1 )%   $ 733   $ 671   $ 62   9.2 %

O&R’s electric operating revenues increased $62 million in 2008 compared with 2007 due primarily to increased recoverable purchased power costs ($49 million) and the impact of the electric rate plan that went into effect July 1, 2008 ($8 million). Effective July 2008, O&R’s revenues from electric sales are subject to a revenue decoupling mechanism, as a result of which, revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved. Other electric operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s electric rate plan. See Note B to the financial statements.

Electric delivery volumes in O&R’s service area decreased 0.1 percent in 2008 compared with 2007. After adjusting for weather

 

variations and unbilled volumes, electric delivery volumes in O&R’s service area decreased 1.0 percent in 2008 compared with 2007.

Electric operating income decreased by $6 million in 2008 compared with 2007. The decrease reflects primarily higher operations and maintenance expense ($19 million, due primarily to higher maintenance costs ($6 million), pension expense ($4 million) and demand management program expenses ($3 million)), depreciation ($1 million) and taxes other than income taxes ($1 million, principally property taxes), offset by higher net revenues ($13 million) and lower income taxes ($1 million).

 

Gas

O&R’s gas sales and deliveries, excluding off-system sales, in 2008 compared with 2007 were:

 

    Thousands of dths Delivered     Revenues in Millions  
    Twelve Months Ended               Twelve Months Ended            
Description   December 31,
2008
  December 31,
2007
  Variation     Percent
Variation
    December 31,
2008
  December 31,
2007
  Variation     Percent
Variation
 

Residential

  8,068   8,768   (700 )   (8.0 )%   $ 142   $ 152   $ (10 )   (6.6 )%

General

  1,816   2,066   (250 )   (12.1 )     30     34     (4 )   (11.8 )

Firm transportation

  10,471   10,248   223     2.2       45     39     6     15.4  

Total firm sales and transportation

  20,355   21,082   (727 )   (3.4 )     217     225     (8 )   (3.6 )

Interruptible sales

  5,409   5,983   (574 )   (9.6 )     27     25     2     8.0  

Generation plants

  2,327   4,552   (2,225 )   (48.9 )     4     3     1     33.3  

Other

  1,007   1,044   (37 )   (3.5 )     -     -     -     -  

Other gas revenues

  -   -   -     -       10     12     (2 )   (16.7 )

Total

  29,098   32,661   (3,563 )   (10.9 )%   $ 258   $ 265   $ (7 )   (2.6 )%

 

50


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

O&R’s gas operating revenues decreased $7 million in 2008 compared with 2007 due primarily to the decrease in gas purchased for resale in 2008 ($7 million).

Sales and transportation volumes for firm customers decreased 3.4 percent in 2008 compared with 2007, reflecting the impact of the weather in 2008. After adjusting for weather and other variations, total firm sales and transportation volumes were the same in 2008 compared with 2007. O&R’s revenues from gas sales are subject to a weather normalization clause that moderates, but does not eliminate, the effect of weather-related changes on net income.

Gas operating income decreased by $3 million in 2008 compared with 2007. The decrease reflects primarily higher depreciation ($1 million), income taxes ($1 million) and taxes other than income taxes ($1 million, principally state and local taxes).

Taxes Other Than Income Taxes

Taxes, other than income taxes, increased $2 million in 2008 compared with 2007. The principal components of taxes, other than income taxes, were:

 

(Millions of Dollars)    2008     2007    

Increase/

(Decrease)

 

Property taxes

   $ 27     $ 25     $ 2  

State and local taxes related to revenue receipts

     12       13       (1 )

Payroll taxes

     5       4       1  

Total

   $ 44 (a)   $ 42 (a)   $ 2  

 

(a) Including sales tax on customers’ bills, total taxes other than income taxes, billed to customers in 2008 and 2007 were $78 million and $71 million, respectively.

Income Taxes

Operating income taxes decreased $1 million in 2008 compared with 2007.

Other Income (Deductions)

Other income (deductions) increased $3 million in 2008 compared with 2007 due primarily to higher interest income in 2008.

Net Interest Expense

Net interest expense decreased $4 million in 2008 compared with 2007 due primarily to interest accrued for the potential repayment of tax benefits from the timing of tax deductions of certain construction related costs in 2007 (see Note L to the financial statements).

Competitive Energy Businesses

The competitive energy businesses’ earnings from continuing operations increased $15 million in 2008 compared with 2007 due primarily to a $131 million gain on the sale of Con Edison Development’s generation projects, offset by lower net income from generation projects, lower gross margins from electric wholesale and retail sales and mark-to-market losses. Income from continuing operations reflects a pre-tax gain of $261 million and income taxes of $130 million, related to the sale of Con Edison Development’s generation projects.

Operating revenues decreased $108 million in 2008 compared with 2007, due primarily to decreased electric generation and retail revenues. Revenue from the sale of electricity from the competitive energy businesses’ generation facilities decreased $87 million in 2008 as compared with 2007 due to the sale of Con Edison Development’s generation projects during the second quarter of 2008. Electric retail revenues decreased $54 million in 2008 as compared with 2007, due primarily to lower sales volumes ($181 million), offset by higher unit prices ($127 million). Electric retail revenues decreased 4 percent from 2007 to 2008 and gross margins decreased primarily due to lower volumes and lower per unit margins. Electric wholesale revenues increased $76 million, due primarily to higher per unit prices ($104 million), offset by lower sales volume ($28 million). Electric wholesale revenues increased by 9 percent from 2007 to 2008 and gross margin decreased primarily due to lower volumes and lower per unit margins. Net mark-to-market losses increased $91 million in 2008 as compared with 2007 due primarily to lower prices on electric and natural gas contracts, which were economic hedges for retail obligations (but were not accounted for as cash flow hedges). Other revenues increased $47 million in 2008 as compared with 2007 due primarily to energy services revenue.

Operating expenses excluding income taxes increased $69 million in 2008 compared with 2007, reflecting increased purchased power costs ($125 million) and other operations and maintenance costs ($3 million), offset in part by lower depreciation ($9 million), fuel costs ($33 million), gas purchased for resale costs ($14 million) and taxes other than income taxes ($3 million).

Other income decreased $12 million in 2008 as compared with 2007 due primarily to an impairment charge on investments in electric generating plants ($4 million) in 2008 and a gain from the sale of Con Edison Development’s interest in Everpower Wind LLC in 2007 ($6 million).

Income taxes increased $56 million in 2008 as compared with 2007, due primarily to the sale of Con Edison Development’s generation projects.

Discontinued Operations

Net income from discontinued operations was the same in 2008 compared with 2007. See Note V to the financial statements.

 

51


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Other

For Con Edison, “Other” also includes the receipt of $30 million after-tax for a litigation settlement with Northeast Utilities in the nine months ended September 30, 2008 and inter-company eliminations relating to operating revenues and operating expenses.

 

52


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006

The Companies’ results of operations (which were discussed above under “Results of Operations – Summary”) in 2007 compared with 2006 were:

 

    Con Edison*     Con Edison of New York     O&R     Competitive Energy
Businesses and Other**
 
(Millions of Dollars)   Increases
(Decreases)
Amount
  Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
 

Operating revenues

  $ 1,158   9.7 %   $ 597     6.4 %   $ 118     14.4 %   $ 443     23.9 %

Purchased power

    452   9.1       (38 )   (1.2 )     77     25.1       413     25.5  

Fuel

    71   12.8       63     12.0       N/A     N/A       8     28.6  

Gas purchased for resale

    91   8.4       76     8.4       16     10.7       (1 )   (3.3 )

Operating revenues less purchased power, fuel and gas purchased
for resale (net revenues)

    544   10.2       496     10.3       25     6.9       23     12.7  

Other operations and maintenance

    201   10.7       164     10.1       18     9.7       19     24.4  

Depreciation and amortization

    50   8.4       48     8.8       3     8.6       (1 )   (6.7 )

Taxes, other than income taxes

    74   5.9       80     6.8       (5 )   (10.6 )     (1 )   (5.3 )

Income taxes

    45   11.1       37     10.4       (1 )   (4.0 )     9     33.3  

Operating income

    174   14.3       167     15.0       10     14.5       (3 )   (7.1 )

Other income less deductions and related federal income tax

    18   62.1       3     9.1       (3 )   (75.0 )     18     Large  

Net interest expense

    7   1.4       12     2.7       6     21.4       (11 )   (30.6 )

Income from continuing operations

    185   25.0       158     23.0       1     2.2       26     Large  

Discontinued operations ***

    7   Large       N/A     N/A       N/A     N/A       7     Large  

Net income

  $ 192   26.1 %   $ 158     23.0 %   $ 1     2.2 %   $ 33     Large  

 

* Represents the consolidated financial results of Con Edison and its businesses.
** Includes inter-company and parent company accounting.
*** See Note V to the financial statements.

 

53


Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK) – CONTINUED

 

Con Edison of New York

Electric

Con Edison of New York’s electric sales and deliveries, excluding off-system sales, in 2007 compared with 2006 were:

 

     Millions of kWhs Delivered     Revenues in Millions  
     Twelve Months Ended                Twelve Months Ended          
Description    December 31,
2007
   December 31,
2006