FORM 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

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      

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.

 

Consolidated Edison, Inc. (Con Edison)        Yes x           No ¨   
Consolidated Edison of New York, Inc. (CECONY)        Yes x           No ¨   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Con Edison        Yes x           No ¨   
CECONY        Yes x           No ¨   

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

 

Con Edison      
Large accelerated filer x     Accelerated filer ¨        Non-accelerated filer ¨        Smaller reporting company ¨   
CECONY      
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 Exchange Act).

 

Con Edison        Yes ¨           No x   
CECONY        Yes ¨           No x   

As of April 29, 2011, Con Edison had outstanding 292,577,516 Common Shares ($.10 par value). All of the outstanding common equity of CECONY is held by Con Edison.

Filing Format

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


Table of Contents

Table of Contents

 

 

          PAGE  
PART I—Financial Information  
ITEM 1  

Financial Statements (Unaudited)

 
 

Con Edison

 
 

Consolidated Income Statement

    6   
 

Consolidated Statement of Cash Flows

    7   
 

Consolidated Balance Sheet

    8   
 

Consolidated Statement of Comprehensive Income

    10   
 

Consolidated Statement of Common Shareholders’ Equity

    11   
 

CECONY

 
 

Consolidated Income Statement

    12   
 

Consolidated Statement of Cash Flows

    13   
 

Consolidated Balance Sheet

    14   
 

Consolidated Statement of Common Shareholder’s Equity

    16   
 

Notes to Financial Statements (Unaudited)

    17   
ITEM 2  

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

    32   
ITEM 3  

Quantitative and Qualitative Disclosures About Market Risk

    47   
ITEM 4  

Controls and Procedures

    47   
PART II—Other Information  
ITEM 1  

Legal Proceedings

    48   
ITEM 1A  

Risk Factors

    48   
ITEM 6  

Exhibits

    49   
  Signatures     50   

 

2     


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Glossary of Terms

 

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

 

Con Edison Companies
Con Edison    Consolidated Edison, Inc.
CECONY    Consolidated Edison Company of New York, Inc.
Con Edison Development    Consolidated Edison Development, Inc.
Con Edison Energy    Consolidated Edison Energy, Inc.
Con Edison Solutions    Consolidated Edison Solutions, Inc.
O&R    Orange and Rockland Utilities, Inc.
Pike    Pike County Light & Power Company
RECO    Rockland Electric Company
The Companies    Con Edison and CECONY
The Utilities    CECONY and O&R
Regulatory Agencies, Government Agencies, and Quasi-governmental Not-for-Profits
EPA    U. S. Environmental Protection Agency
FERC    Federal Energy Regulatory Commission
IRS    Internal Revenue Service
ISO-NE    ISO New England Inc.
NJBPU    New Jersey Board of Public Utilities
NJDEP    New Jersey Department of Environmental Protection
NYAG    New York State Attorney General
NYISO    New York Independent System Operator
NYPA    New York Power Authority
NYSDEC    New York State Department of Environmental Conservation
NYSERDA    New York State Energy Research and Development Authority
NYSPSC    New York State Public Service Commission
NYSRC    New York State Reliability Council, LLC
PAPUC    Pennsylvania Public Utility Commission
PJM    PJM Interconnection LLC
SEC    U.S. Securities and Exchange Commission
Accounting
ABO    Accumulated Benefit Obligation
ASU    Accounting Standards Update
FASB    Financial Accounting Standards Board
LILO    Lease In/Lease Out
OCI    Other Comprehensive Income
SFAS    Statement of Financial Accounting Standards
SSCM    Simplified service cost method
VIE    Variable interest entity
Environmental
CO2    Carbon dioxide
GHG    Greenhouse gases
MGP Sites    Manufactured gas plant sites
PCBs    Polychlorinated biphenyls
PRP    Potentially responsible party
SO2    Sulfur dioxide
Superfund    Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes

 

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Units of Measure
dths    Dekatherms
kV    Kilovolts
kWh    Kilowatt-hour
mdths    Thousand dekatherms
MMlbs    Million pounds
MVA    Megavolt amperes
MW    Megawatts or thousand kilowatts
MWH    Megawatt hour
Other
AFDC    Allowance for funds used during construction
COSO    Committee of Sponsoring Organizations of the Treadway Commission
EMF    Electric and magnetic fields
ERRP    East River Repowering Project
Fitch    Fitch Ratings
First Quarter Form 10-Q    The Companies’ combined Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011
Form 10-K    The Companies’ combined Annual Report on Form 10-K for the year ended December 31, 2010
LTIP    Long Term Incentive Plan
Moody’s    Moody’s Investors Service
S&P    Standard & Poor’s Rating Services
VaR    Value-at-Risk

 

4     


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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” in Item 1A of the Form 10-K.

 

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Consolidated Edison, Inc.   

CONSOLIDATED INCOME STATEMENT (UNAUDITED)

 

     For the Three Months
Ended March 31,
 
     2011     2010  
    (Millions of Dollars/
Except Share Data)
 

OPERATING REVENUES

   

Electric

  $ 1,869      $ 1,889   

Gas

    755        773   

Steam

    325        307   

Non-utility

    400        493   

TOTAL OPERATING REVENUES

    3,349        3,462   

OPERATING EXPENSES

   

Purchased power

    865        1,143   

Fuel

    176        150   

Gas purchased for resale

    308        343   

Other operations and maintenance

    698        702   

Depreciation and amortization

    218        204   

Taxes, other than income taxes

    458        428   

TOTAL OPERATING EXPENSES

    2,723        2,970   

OPERATING INCOME

    626        492   

OTHER INCOME (DEDUCTIONS)

   

Investment and other income

    9        6   

Allowance for equity funds used during construction

    4        5   

Other deductions

    (4     (3

TOTAL OTHER INCOME (DEDUCTIONS)

    9        8   

INCOME BEFORE INTEREST AND INCOME TAX EXPENSE

    635        500   

INTEREST EXPENSE

   

Interest on long-term debt

    147        150   

Other interest

    7        2   

Allowance for borrowed funds used during construction

    (2     (3

NET INTEREST EXPENSE

    152        149   

INCOME BEFORE INCOME TAX EXPENSE

    483        351   

INCOME TAX EXPENSE

    169        122   

NET INCOME

    314        229   

Preferred stock dividend requirements of subsidiary

    (3     (3

NET INCOME FOR COMMON STOCK

  $ 311      $ 226   

EARNINGS PER COMMON SHARE—BASIC

   

Net income for common stock

  $ 1.07      $ 0.80   

EARNINGS PER COMMON SHARE—DILUTED

   

Net income for common stock

  $ 1.06      $ 0.80   

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

  $ 0.600      $ 0.595   

AVERAGE NUMBER OF SHARES OUTSTANDING—BASIC (IN MILLIONS)

    292.0        281.4   

AVERAGE NUMBER OF SHARES OUTSTANDING—DILUTED (IN MILLIONS)

    293.6        282.7   

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

 

6     


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Consolidated Edison, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

  

 

     For the Three Months
Ended March 31,
 
       2011         2010    
    (Millions of Dollars)  

OPERATING ACTIVITIES

   

Net Income

  $ 314      $ 229   

PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME

   

Depreciation and amortization

    218        204   

Deferred income taxes

    232        37   

Common equity component of allowance for funds used during construction

    (4     (5

Net derivative (gains)/losses

    (37     64   

Other non-cash items (net)

    2        104   

CHANGES IN ASSETS AND LIABILITIES

   

Accounts receivable – customers, less allowance for uncollectibles

    (5     (139

Materials and supplies, including fuel oil and gas in storage

    103        52   

Other receivables and other current assets

    66        8   

Prepayments

    (217     (289

Refundable energy costs

           (69

Accounts payable

    (154     (100

Pensions and retiree benefits

    (232     58   

Accrued taxes

    (20     70   

Accrued interest

    51        44   

Deferred charges, deferred derivative losses, noncurrent assets and other regulatory assets

    (19     (502

Deferred credits and other regulatory liabilities

    67        178   

Other assets

    (1     (3

Other liabilities

    (2     60   

NET CASH FLOWS FROM OPERATING ACTIVITIES

    362        1   

INVESTING ACTIVITIES

   

Utility construction expenditures

    (398     (430

Cost of removal less salvage

    (39     (34

Non-utility construction expenditures

    (23     (1

Loan to affiliate

    (40  

Common equity component of allowance for funds used during construction

    4        5   

NET CASH FLOWS USED IN INVESTING ACTIVITIES

    (496     (460

FINANCING ACTIVITIES

   

Net proceeds from short-term debt

    464        475   

Retirement of long-term debt

    (1     (45

Issuance of common stock

    25        14   

Common stock dividends

    (173     (155

Preferred stock dividends

    (3     (3

NET CASH FLOWS FROM FINANCING ACTIVITIES

    312        286   

CASH AND TEMPORARY CASH INVESTMENTS:

   

NET CHANGE FOR THE PERIOD

    178        (173

BALANCE AT BEGINNING OF PERIOD

    338        260   

BALANCE AT END OF PERIOD

  $ 516      $ 87   

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

   

Cash paid/(refunded) during the period for:

   

Interest

  $ 90      $ 103   

Income taxes

  $ (172       

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

 

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Consolidated Edison, Inc.

CONSOLIDATED BALANCE SHEET

  

 

     March 31,
2011
    December 31,
2010
 
    (Millions of Dollars)  

ASSETS

   

CURRENT ASSETS

   

Cash and temporary cash investments

  $ 516      $ 338   

Accounts receivable – customers, less allowance for uncollectible accounts of $81 and $76 in 2011 and 2010, respectively

    1,178        1,173   

Accrued unbilled revenue

    413        633   

Other receivables, less allowance for uncollectible accounts of $9 and $8 in 2011 and 2010, respectively

    331        300   

Fuel oil, gas in storage, materials and supplies, at average cost

    245        348   

Prepayments

    558        341   

Regulatory assets

    147        203   

Other current assets

    202        171   

TOTAL CURRENT ASSETS

    3,590        3,507   

INVESTMENTS

    413        403   

UTILITY PLANT, AT ORIGINAL COST

   

Electric

    20,273        19,851   

Gas

    4,392        4,344   

Steam

    2,055        2,038   

General

    1,899        1,911   

TOTAL

    28,619        28,144   

Less: Accumulated depreciation

    5,891        5,808   

Net

    22,728        22,336   

Construction work in progress

    1,253        1,458   

NET UTILITY PLANT

    23,981        23,794   

NON-UTILITY PLANT

   

Non-utility property, less accumulated depreciation of $53 and $51 in 2011 and 2010, respectively

    50        46   

Construction work in progress

    37        23   

NET PLANT

    24,068        23,863   

OTHER NONCURRENT ASSETS

   

Goodwill

    429        429   

Intangible assets, less accumulated amortization $3 in 2011 and 2010

    3        3   

Regulatory assets

    7,374        7,643   

Other deferred charges and noncurrent assets

    309        298   

TOTAL OTHER NONCURRENT ASSETS

    8,115        8,373   

TOTAL ASSETS

  $ 36,186      $ 36,146   

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

 

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Consolidated Edison, Inc.

CONSOLIDATED BALANCE SHEET

  

 

     March 31,
2011
    December 31,
2010
 
    (Millions of Dollars)  

LIABILITIES AND SHAREHOLDERS' EQUITY

   

CURRENT LIABILITIES

   

Long-term debt due within one year

  $ 5      $ 5   

Notes payable

    464          

Accounts payable

    967        1,151   

Customer deposits

    296        289   

Accrued taxes

    70        90   

Accrued interest

    206        155   

Accrued wages

    94        102   

Fair value of derivative liabilities

    117        125   

Other current liabilities

    457        449   

TOTAL CURRENT LIABILITIES

    2,676        2,366   

NONCURRENT LIABILITIES

   

Obligations under capital leases

    5        7   

Provision for injuries and damages

    167        165   

Pensions and retiree benefits

    2,659        3,287   

Superfund and other environmental costs

    511        512   

Asset retirement obligations

    111        109   

Fair value of derivative liabilities

    52        77   

Other noncurrent liabilities

    121        126   

TOTAL NONCURRENT LIABILITIES

    3,626        4,283   

DEFERRED CREDITS AND REGULATORY LIABILITIES

   

Deferred income taxes and investment tax credits

    6,871        6,602   

Regulatory liabilities

    865        915   

Other deferred credits

    34        35   

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES

    7,770        7,552   

LONG-TERM DEBT

    10,670        10,671   

SHAREHOLDERS' EQUITY

   

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

    11,231        11,061   

Preferred stock of subsidiary

    213        213   

TOTAL SHAREHOLDERS' EQUITY

    11,444        11,274   

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

  $ 36,186      $ 36,146   

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

 

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Consolidated Edison, Inc.   

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 

     For the Three Months
Ended March 31,
 
     2011     2010  
    (Millions of Dollars)  

NET INCOME

  $ 314      $ 229   

OTHER COMPREHENSIVE INCOME, NET OF TAXES

   

Pension plan liability adjustments, net of taxes of $2 in 2011 and 2010

    3        3   

TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAXES

    3        3   

COMPREHENSIVE INCOME

  $ 317      $ 232   

Preferred stock dividend requirements of subsidiary

    (3     (3

COMPREHENSIVE INCOME FOR COMMON STOCK

  $ 314      $ 229   

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

 

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Consolidated Edison, Inc.   

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY (UNAUDITED)

 

(Millions of Dollars/Except Share
Data)

  Common Stock    

Additional Paid-

In Capital

   

Retained

Earnings

    Treasury Stock    

Capital
Stock

Expense

   

Accumulated
Other
Comprehensive

Income/(Loss)

       
  Shares     Amount         Shares     Amount         Total  

BALANCE AS OF DECEMBER 31, 2009

    281,123,741      $ 30      $ 4,420      $ 6,904        23,210,700      $ (1,001   $ (62   $ (42   $ 10,249   

Net income for common stock

          226                226   

Common stock dividends

          (167             (167

Issuance of common shares – dividend reinvestment and employee stock plans

    647,731          28                  28   

Other comprehensive income

                                                            3        3   

BALANCE AS OF MARCH 31, 2010

    281,771,472      $ 30      $ 4,448      $ 6,963        23,210,700      $ (1,001   $ (62   $ (39   $ 10,339   

BALANCE AS OF DECEMBER 31, 2010

    291,616,334      $ 31      $ 4,915      $ 7,220        23,210,700      $ (1,001   $ (64   $ (40   $ 11,061   

Net income for common stock

          311                311   

Common stock dividends

          (175             (175

Issuance of common shares – dividend reinvestment and employee stock plans

    656,049        1        30                  31   

Other comprehensive income

                                                            3        3   

BALANCE AS OF MARCH 31, 2011

    292,272,383      $ 32      $ 4,945      $ 7,356        23,210,700      $ (1,001   $ (64   $ (37   $ 11,231   

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

 

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Consolidated Edison Company of New York, Inc.

CONSOLIDATED INCOME STATEMENT (UNAUDITED)

  

 

     For the Three Months
Ended March 31,
 
     2011     2010  
    (Millions of Dollars)  

OPERATING REVENUES

   

Electric

  $ 1,721      $ 1,728   

Gas

    663        683   

Steam

    325        307   

TOTAL OPERATING REVENUES

    2,709        2,718   

OPERATING EXPENSES

   

Purchased power

    483        552   

Fuel

    176        150   

Gas purchased for resale

    263        294   

Other operations and maintenance

    597        608   

Depreciation and amortization

    204        191   

Taxes, other than income taxes

    440        411   

TOTAL OPERATING EXPENSES

    2,163        2,206   

OPERATING INCOME

    546        512   

OTHER INCOME (DEDUCTIONS)

   

Investment and other income

    5        3   

Allowance for equity funds used during construction

    3        4   

Other deductions

    (3     (2

TOTAL OTHER INCOME (DEDUCTIONS)

    5        5   

INCOME BEFORE INTEREST AND INCOME TAX EXPENSE

    551        517   

INTEREST EXPENSE

   

Interest on long-term debt

    132        135   

Other interest

    5        3   

Allowance for borrowed funds used during construction

    (2     (2

NET INTEREST EXPENSE

    135        136   

INCOME BEFORE INCOME TAX EXPENSE

    416        381   

INCOME TAX EXPENSE

    145        135   

NET INCOME

    271        246   

Preferred stock dividend requirements

    (3     (3

NET INCOME FOR COMMON STOCK

  $ 268      $ 243   

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

 

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Consolidated Edison Company of New York, Inc.   

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 

     For the Three Months
Ended March 31,
 
     2011     2010  
    (Millions of Dollars)  

OPERATING ACTIVITIES

   

Net income

  $ 271      $ 246   

PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME

   

Depreciation and amortization

    204        191   

Deferred income taxes

    207        64   

Common equity component of allowance for funds used during construction

    (3     (4

Other non-cash items (net)

    29        29   

CHANGES IN ASSETS AND LIABILITIES

   

Accounts receivable – customers, less allowance for uncollectibles

    22        (110

Materials and supplies, including fuel oil and gas in storage

    84        38   

Other receivables and other current assets

    (77     99   

Prepayments

    (291     (284

Refundable energy costs

           (77

Accounts payable

    (119     (77

Pensions and retiree benefits

    (255     39   

Accrued taxes

    (37     (4

Accrued interest

    44        35   

Deferred charges, deferred derivative losses, noncurrent assets and other regulatory assets

    (63     (346

Deferred credits and other regulatory liabilities

    52        134   

Other liabilities

    4        49   

NET CASH FLOWS FROM OPERATING ACTIVITIES

    72        22   

INVESTING ACTIVITIES

   

Utility construction expenditures

    (379     (412

Cost of removal less salvage

    (37     (33

Common equity component of allowance for funds used during construction

    3        4   

NET CASH FLOWS USED IN INVESTING ACTIVITIES

    (413     (441

FINANCING ACTIVITIES

   

Net proceeds from short-term debt

    464        475   

Capital contribution by parent

           12   

Dividend to parent

    (170     (167

Preferred stock dividends

    (3     (3

NET CASH FLOWS FROM FINANCING ACTIVITIES

    291        317   

CASH AND TEMPORARY CASH INVESTMENTS:

   

NET CHANGE FOR THE PERIOD

    (50     (102

BALANCE AT BEGINNING OF PERIOD

    78        131   

BALANCE AT END OF PERIOD

  $ 28      $ 29   

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

   

Cash paid during the period for:

   

Interest

  $ 82      $ 96   

Income taxes

  $ 35          

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

 

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Consolidated Edison Company of New York, Inc.   

CONSOLIDATED BALANCE SHEET

 

     March 31,
2011
    December 31,
2010
 
    (Millions of Dollars)  

ASSETS

   

CURRENT ASSETS

   

Cash and temporary cash investments

  $ 28      $ 78   

Accounts receivable – customers, less allowance for uncollectible accounts of $73 and $68 in 2011 and 2010, respectively

    1,003        1,025   

Other receivables, less allowance for uncollectible accounts of $8 and $7 in 2011 and 2010, respectively

    122        103   

Accrued unbilled revenue

    288        473   

Accounts receivable from affiliated companies

    310        249   

Fuel oil, gas in storage, materials and supplies, at average cost

    222        306   

Prepayments

    373        82   

Regulatory assets

    116        151   

Other current assets

    108        98   

TOTAL CURRENT ASSETS

    2,570        2,565   

INVESTMENTS

    177        167   

UTILITY PLANT AT ORIGINAL COST

   

Electric

    19,140        18,735   

Gas

    3,891        3,844   

Steam

    2,055        2,038   

General

    1,731        1,746   

TOTAL

    26,817        26,363   

Less: Accumulated depreciation

    5,389        5,314   

Net

    21,428        21,049   

Construction work in progress

    1,143        1,345   

NET UTILITY PLANT

    22,571        22,394   

NON-UTILITY PROPERTY

   

Non-utility property, less accumulated depreciation of $22 in 2011 and 2010

    7        7   

NET PLANT

    22,578        22,401   

OTHER NONCURRENT ASSETS

   

Regulatory assets

    6,813        7,058   

Other deferred charges and noncurrent assets

    258        244   

TOTAL OTHER NONCURRENT ASSETS

    7,071        7,302   

TOTAL ASSETS

  $ 32,396      $ 32,435   

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

 

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Consolidated Edison Company of New York, Inc.   

CONSOLIDATED BALANCE SHEET

 

     March 31,
2011
    December 31,
2010
 
    (Millions of Dollars)  

LIABILITIES AND SHAREHOLDER'S EQUITY

   

CURRENT LIABILITIES

   

Notes payable

  $ 464      $   

Accounts payable

    771        924   

Accounts payable to affiliated companies

    15        13   

Customer deposits

    283        276   

Accrued taxes

    17        34   

Accrued taxes to affiliated companies

    9        29   

Accrued interest

    174        130   

Accrued wages

    87        93   

Other current liabilities

    452        460   

TOTAL CURRENT LIABILITIES

    2,272        1,959   

NONCURRENT LIABILITIES

   

Obligations under capital leases

    5        7   

Provision for injuries and damages

    160        159   

Pensions and retiree benefits

    2,280        2,900   

Superfund and other environmental costs

    392        392   

Asset retirement obligations

    111        109   

Fair value of derivative liabilities

    22        29   

Other noncurrent liabilities

    113        116   

TOTAL NONCURRENT LIABILITIES

    3,083        3,712   

DEFERRED CREDITS AND REGULATORY LIABILITIES

   

Deferred income taxes and investment tax credits

    6,309        6,071   

Regulatory liabilities

    724        783   

Other deferred credits

    31        31   

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES

    7,064        6,885   

LONG-TERM DEBT

    9,743        9,743   

SHAREHOLDER'S EQUITY

   

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

    10,021        9,923   

Preferred stock

    213        213   

TOTAL SHAREHOLDER'S EQUITY

    10,234        10,136   

TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY

  $ 32,396      $ 32,435   

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

 

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Consolidated Edison Company of New York, Inc.   

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDER'S EQUITY (UNAUDITED)

 

    Common Stock     Additional
Paid-In
Capital
   

Retained

Earnings

   

Repurchased
Con Edison

Stock

   

Capital
Stock

Expense

   

Accumulated
Other
Comprehensive

Income/(Loss)

       
(Millions of Dollars/Except Share Data)   Shares     Amount               Total  

BALANCE AS OF DECEMBER 31, 2009

    235,488,094      $ 589      $ 3,877      $ 5,909      $ (962   $ (62   $ (4   $ 9,347   

Net income

          246              246   

Capital contribution from parent

        12                12   

Common stock dividend to parent

          (167           (167

Cumulative preferred dividends

                            (3                             (3

BALANCE AS OF MARCH 31, 2010

    235,488,094      $ 589      $ 3,889      $ 5,985      $ (962   $ (62   $ (4   $ 9,435   

BALANCE AS OF DECEMBER 31, 2010

    235,488,094      $ 589      $ 4,234      $ 6,132      $ (962   $ (64   $ (6   $ 9,923   

Net income

          271              271   

Common stock dividend to parent

          (170           (170

Cumulative preferred dividends

                            (3                             (3

BALANCE AS OF MARCH 31, 2011

    235,488,094      $ 589      $ 4,234      $ 6,230      $ (962   $ (64   $ (6   $ 10,021   

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

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)

 

General

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

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

The separate interim consolidated financial statements of each of the Companies are unaudited but, in the opinion of their respective managements, reflect all adjustments (which include only normally recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The Companies’ separate interim consolidated financial statements should be read together with their separate audited financial statements (including the combined notes thereto) included in Item 8 of their combined Annual Report on Form 10-K for the year ended December 31, 2010 (the Form 10-K). Information in the notes to the consolidated financial statements in the Form 10-K referred to in these notes is incorporated by reference herein. The use of terms such as “see” or “refer to” shall be deemed to incorporate by reference into these notes the information to which reference is made.

Con Edison has two regulated utility subsidiaries: CECONY and O&R. CECONY provides electric service and gas service in New York City and Westchester County. The company also provides steam service in parts of Manhattan. O&R, along with its regulated utility subsidiaries, provides electric service in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service in southeastern New York and adjacent areas of eastern Pennsylvania. Con Edison has the following competitive energy businesses: Consolidated Edison Solutions, Inc. (Con Edison Solutions), a retail energy services company that sells electricity and also offers energy-related services; Consolidated Edison Energy, Inc. (Con Edison Energy), a wholesale energy supply and services company; and Consolidated Edison Development, Inc. (Con Edison Development), a company that develops and participates in infrastructure projects.

 

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Note A — Summary of Significant Accounting Policies

Earnings Per Common Share

Reference is made to “Earnings Per Common Share” in Note A to the financial statements included in Item 8 of the Form 10-K. For the three months ended March 31, 2011 and 2010, Con Edison’s basic and diluted EPS for Con Edison are calculated as follows:

 

(Millions of Dollars, except per share amounts/Shares in Millions)   2011     2010  

Net income for common stock

  $ 311      $ 226   

Weighted average common shares outstanding – Basic

    292.0        281.4   

Add: Incremental shares attributable to effect of potentially dilutive securities

    1.6        1.3   

Adjusted weighted average common shares outstanding – Diluted

    293.6        282.7   

Earnings per Common Share – Basic

   

Net income for common stock

  $ 1.07      $ 0.80   

Earnings per Common Share – Diluted

   

Net income for common stock

  $ 1.06      $ 0.80   

 

Note B — Regulatory Matters

Reference is made to “Accounting Policies” in Note A and “Rate Agreements” in Note B to the financial statements included in Item 8 of the Form 10-K.

Rate Agreements

O&R — Electric

In April 2011, NYSPSC administrative law judges (ALJ) issued a recommended decision with respect to O&R’s July 2010 electric rate filing recommending that the NYSPSC grant the company a $26.6 million rate increase, effective July 2011. The ALJ’s recommended decision reflects a return on common equity of 9.2 percent and a common equity ratio of 49 percent. See “Regulatory Matters – O&R – Electric” in Note B to the financial statements in Item 8 of the Form 10-K.

Other Regulatory Matters

In February 2009, the NYSPSC commenced a proceeding to examine the prudence of certain CECONY expenditures (see “Investigations of Vendor Payments” in Note G). Pursuant to NYSPSC orders, a portion of the company’s revenues (currently, $249 million, $32 million and $6 million on an annual basis for electric, gas and steam service, respectively) is being collected subject to potential refund to customers. At March 31, 2011, the company had collected an estimated $605 million from customers subject to potential refund in connection with this proceeding. In October 2010, a NYSPSC consultant reported its $21 million provisional assessment, which the company has disputed, of potential overcharges for construction work. The potential overcharges related to transactions that involved certain employees who were arrested and a contractor that performed work for the company. The NYSPSC’s consultant is expected to continue to review the company’s expenditures. The company is unable to estimate the amount, if any, of any such refund and, accordingly, has not established a regulatory liability for a refund.

In February 2011, the NYSPSC initiated a proceeding to examine the existing mechanisms pursuant to which utilities recover site investigation and remediation costs and possible alternatives. See Note G to the financial statements in Item 8 of the Form 10-K and Note F to the First Quarter Financial Statements.

 

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Regulatory Assets and Liabilities

Regulatory assets and liabilities at March 31, 2011 and December 31, 2010 were comprised of the following items:

 

     Con Edison     CECONY  
(Millions of Dollars)   2011     2010     2011     2010  

Regulatory assets

         

Unrecognized pension and other postretirement costs

  $ 4,074      $ 4,371      $ 3,873      $ 4,152   

Future federal income tax

    1,622        1,593        1,542        1,515   

Environmental remediation costs

    693        695        573        574   

Surcharge for New York State Assessment

    159        121        148        112   

Net electric deferrals

    134        156        134        156   

Pension and other post retirement benefits deferrals

    183        138        138        90   

Revenue taxes

    152        145        147        140   

Deferred derivative losses – long-term

    57        74        37        48   

Deferred storm costs

    55        57        42        43   

Property tax reconciliation

    32        34        23        27   

O&R transition bond charges

    48        48                 

World Trade Center restoration costs

           45               45   

Workers’ compensation

    33        31        33        31   

Other

    132        135        123        125   

Regulatory assets – long-term

    7,374        7,643        6,813        7,058   

Deferred derivative losses – current

    146        190        116        151   

Recoverable energy costs – current

    1        13                 

Regulatory assets – current

    147        203        116        151   

Total Regulatory Assets

  $ 7,521      $ 7,846      $ 6,929      $ 7,209   

Regulatory liabilities

         

Allowance for cost of removal less salvage

  $ 422      $ 422      $ 349      $ 350   

Refundable energy costs

    91        78        61        50   

Revenue decoupling mechanism

    54        38        54        38   

Net unbilled revenue deferrals

    33        136        33        136   

New York State tax refund

    30        30        30        30   

Gain on sale of properties

    15        31        15        31   

Other

    220        180        182        148   

Regulatory liabilities

    865        915        724        783   

Deferred derivative gains – current

    10        4        8        3   

Total Regulatory Liabilities

  $ 875      $ 919      $ 732      $ 786   

 

Note C — Short-Term Borrowing

Reference is made to Note D to the financial statements in Item 8 of the Form 10-K.

At March 31, 2011, Con Edison had $464 million of commercial paper outstanding, all of which was outstanding under CECONY’s program. The weighted average interest rate was 0.3 percent. At December 31, 2010, Con Edison and CECONY had no commercial paper outstanding.

At March 31, 2011 and December 31, 2010, no loans were outstanding under the Companies’ Credit Agreement and $192 million (including $142 million for CECONY) and $197 million (including $145 million for CECONY) of letters of credit were outstanding under the Credit Agreement, respectively.

Note D — Pension Benefits

Reference is made to Note E to the financial statements in Item 8 of the Form 10-K.

 

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Net Periodic Benefit Cost

The components of the Companies’ net periodic benefit costs for the three months ended March 31, 2011 and 2010 were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2011     2010     2011     2010  

Service cost – including administrative expenses

  $ 47      $ 42      $ 44      $ 39   

Interest cost on projected benefit obligation

    140        139        131        130   

Expected return on plan assets

    (183     (176     (175     (167

Amortization of net actuarial loss

    132        106        125        100   

Amortization of prior service costs

    2        2        2        2   

NET PERIODIC BENEFIT COST

  $ 138      $ 113      $ 127      $ 104   

TOTAL PERIODIC BENEFIT COST

  $ 138      $ 113      $ 127      $ 104   

Cost capitalized

    (48     (41     (45     (39

Cost deferred

    (51     (23     (52     (21

Cost charged to operating expenses

  $ 39      $ 49      $ 30      $ 44   

 

Expected Contributions

Based on estimates as of March 31, 2011, the Companies are not required under funding regulations and laws to make any contributions to the pension plan during 2011. The Companies’ policy is to fund their accounting cost to the extent tax deductible. In 2011, Con Edison expects to make discretionary contributions to the pension plan of $533 million, of which CECONY contributed $491 million during the first quarter. The Companies also expect to fund $11 million for their non-qualified supplemental pension plans in 2011.

 

Note E — Other Postretirement Benefits

Reference is made to Note F to the financial statements in Item 8 of the Form 10-K.

Net Periodic Benefit Cost

The components of the Companies’ net periodic postretirement benefit costs for the three months ended March 31, 2011 and 2010 were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2011     2010     2011     2010  

Service cost

  $ 6      $ 6      $ 5      $ 5   

Interest cost on accumulated other postretirement benefit obligation

    21        23        18        20   

Expected return on plan assets

    (22     (22     (19     (19

Amortization of net actuarial loss

    22        23        20        21   

Amortization of prior service cost

    (2     (3     (3     (4

Amortization of transition obligation

    1        1        1        1   

NET PERIODIC POSTRETIREMENT BENEFIT COST

  $ 26      $ 28      $ 22      $ 24   

Cost capitalized

    (9     (10     (8     (9

Cost deferred

    4        (1     3        (2

Cost charged to operating expenses

  $ 21      $ 17      $ 17      $ 13   

 

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Expected Contributions

Based on estimates as of March 31, 2011, Con Edison expects to make a contribution of $84 million, including $74 million for CECONY, to the other postretirement benefit plans in 2011.

Note F — Environmental Matters

Superfund Sites

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

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

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

The accrued liabilities and regulatory assets related to Superfund Sites at March 31, 2011 and December 31, 2010 were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2011     2010     2011     2010  

Accrued Liabilities:

         

Manufactured gas plant sites

  $ 441      $ 446      $ 323      $ 327   

Other Superfund Sites

    70        66        69        65   

Total

  $ 511      $ 512      $ 392      $ 392   

Regulatory assets

  $ 691      $ 692      $ 571      $ 571   

Most of the accrued Superfund Site liability relates to sites that have been investigated, in whole or in part. However, for some of the sites, the extent and associated cost of the required remediation has not yet been determined. As investigations progress and information pertaining to the required remediation becomes available, the Utilities expect that additional liability may be accrued, the amount of which is not presently determinable but may be material. Under their current rate agreements, the Utilities are permitted to recover or defer as regulatory assets (for subsequent recovery through rates) certain site investigation and remediation costs. In February 2011, the NYSPSC initiated a proceeding to examine the existing mechanisms pursuant to which utilities recover such costs and possible alternatives.

Environmental remediation costs incurred related to Superfund Sites for the three months ended March 31, 2011 and 2010, were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2011     2010     2011     2010  

Remediation costs incurred

  $ 6      $ 9      $ 5      $ 8   

There were no insurance recoveries received related to Superfund Sites for the three months ended March 31, 2011. Insurance recoveries related to Superfund Sites for the three months ended March 31, 2010 were immaterial.

 

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In 2010, CECONY estimated that for its manufactured gas plant sites, its aggregate undiscounted potential liability for the investigation and remediation of coal tar and/or other manufactured gas plant-related environmental contaminants could range up to $1.9 billion. In 2010, O&R estimated that for its manufactured gas plant sites, each of which has been investigated, the aggregate undiscounted potential liability for the remediation of such contaminants could range up to $200 million. These estimates were based on the assumption that there is contamination at all sites, including those that have not yet been fully investigated and additional assumptions about the extent of the contamination and the type and extent of the remediation that may be required. Actual experience may be materially different.

Asbestos Proceedings

Suits have been brought in New York State and federal courts against the Utilities and many other defendants, wherein a large number of plaintiffs sought large amounts of compensatory and punitive damages for deaths and injuries allegedly caused by exposure to asbestos at various premises of the Utilities. The suits that have been resolved, which are many, have been resolved without any payment by the Utilities, or for amounts that were not, in the aggregate, material to them. The amounts specified in all the remaining thousands of suits total billions of dollars; however, the Utilities believe that these amounts are greatly exaggerated, based on the disposition of previous claims. In 2010, CECONY estimated that its aggregate undiscounted potential liability for these suits and additional suits that may be brought over the next 15 years is $10 million. The estimate was based upon a combination of modeling, historical data analysis and risk factor assessment. Actual experience may be materially different. In addition, certain current and former employees have claimed or are claiming workers’ compensation benefits based on alleged disability from exposure to asbestos. Under its current rate agreements, CECONY is permitted to defer as regulatory assets (for subsequent recovery through rates) costs incurred for its asbestos lawsuits and workers’ compensation claims. The accrued liability for asbestos suits and workers’ compensation proceedings (including those related to asbestos exposure) and the amounts deferred as regulatory assets for the Companies at March 31, 2011 and December 31, 2010 were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2011     2010     2011     2010  

Accrued liability – asbestos suits

  $ 10      $ 10      $ 10      $ 10   

Regulatory assets – asbestos suits

  $ 10      $ 10      $ 10      $ 10   

Accrued liability – workers’ compensation

  $ 108      $ 106      $ 103      $ 101   

Regulatory assets – workers’ compensation

  $ 33      $ 31      $ 33      $ 31   

Note G – Other Material Contingencies

Manhattan Steam Main Rupture

In July 2007, a CECONY steam main located in midtown Manhattan ruptured. It has been reported that one person died and others were injured as a result of the incident. Several buildings in the area were damaged. Debris from the incident included dirt and mud containing asbestos. The response to the incident required the closing of several buildings and streets for various periods. Approximately 100 suits are pending against the company seeking generally unspecified compensatory and, in some cases, punitive damages, for personal injury, property damage and business interruption. The company has not accrued a liability for the suits. The company has notified its insurers of the incident and believes that the policies in force at the time of the incident will cover most of the company’s costs, which the company is unable to estimate, but which could be substantial, to satisfy its liability to others in connection with the incident.

Investigations of Vendor Payments

In January 2009, CECONY commenced an internal investigation relating to the arrests of certain employees and retired employees (all of whom have since pleaded guilty) for accepting kickbacks from contractors that performed construction work for the company. The company has retained a law firm, which has retained an accounting firm, to assist in the company’s investigation. The company is providing information

to governmental authorities, which consider the company to be a victim of unlawful conduct, in connection with their investigation of the arrested

 

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employees and contractors. The company has terminated its employment of the arrested employees and its contracts with the contractors. In February 2009, the NYSPSC commenced a proceeding that, among other things, will examine the prudence of certain of the company's expenditures relating to the arrests and consider whether additional expenditures should also be examined (see “Other Regulatory Matters” in Note B).

CECONY is also investigating the September 2010 arrest of a retired employee (who has since pleaded guilty to participating in a bribery scheme in which the employee received payments from two companies that supplied materials to the company) and the January 2011 arrest of an employee (for accepting kickbacks from an engineering firm that performed work for the company). CECONY has provided information to governmental authorities in connection with their ongoing investigations of these matters.

The company, based upon its evaluation of its internal controls for 2010 and previous years, believes that the controls were effective to provide reasonable assurance that its financial statements have been fairly presented, in all material respects, in conformity with generally accepted accounting principles. Because the company’s investigations are ongoing, the company is unable to predict the impact of any of the employees’ unlawful conduct on the company’s internal controls, business, results of operations or financial position.

Lease In/Lease Out Transactions

In each of 1997 and 1999, Con Edison Development entered into a transaction in which it leased property and then immediately subleased it back to the lessor (termed “Lease In/Lease Out,” or LILO transactions). The transactions respectively involve electric generating and gas distribution facilities in the Netherlands, with a total investment of $259 million. The transactions were financed with $93 million of equity and $166 million of non-recourse, long-term debt secured by the underlying assets. In accordance with the accounting rules for leases, Con Edison is accounting for the two LILO transactions as leveraged leases. Accordingly, the company’s investment in these leases, net of non-recourse debt, is carried as a single amount in Con Edison’s consolidated balance sheet and income is recognized pursuant to a method that incorporates a level rate of return for those years when net investment in the lease is positive, based upon the after-tax cash flows projected at the inception of the leveraged leases. The company's investment in these leveraged leases was $(45) million at March 31, 2011 and $(41) million at December 31, 2010 and is comprised of a $234 million gross investment less $279 million deferred tax liabilities at March 31, 2011 and $235 million gross investment less $276 million of deferred tax liabilities at December 31, 2010.

On audit of Con Edison’s tax return for 1997, the IRS disallowed the tax losses in connection with the 1997 LILO transaction. In December 2005, Con Edison paid a $0.3 million income tax deficiency asserted by the IRS for the tax year 1997 with respect to the 1997 LILO transaction. In April 2006, the company paid interest of $0.2 million associated with the deficiency and commenced an action in the United States Court of Federal Claims, entitled Consolidated Edison Company of New York, Inc. v. United States, to obtain a refund of this tax payment and interest. A trial was completed in November 2007. In October 2009, the court issued a decision in favor of the company concluding that the 1997 LILO transaction was, in substance, a true lease that possessed economic substance, the loans relating to the lease constituted bona fide indebtedness, and the deductions for the 1997 LILO transactions claimed by the company in its 1997 federal income tax return are allowable. The IRS is entitled to appeal the decision.

In connection with its audit of Con Edison’s federal income tax returns for 1998 through 2007, the IRS disallowed $416 million of net tax deductions taken with respect to both of the LILO transactions for the tax years. Con Edison is pursuing administrative appeals of these audit level disallowances. In connection with its audit of Con Edison’s federal income tax returns for 2009 and 2008, the IRS has disallowed $41 million and $42 million, respectively, of net tax deductions taken with respect to both of the LILO transactions. When

 

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these audit level disallowances become appealable, Con Edison intends to file an appeal of the disallowances.

Con Edison believes that its LILO transactions have been correctly reported, and has not recorded any reserve with respect to the disallowance of tax losses, or related interest, in connection with its LILO transactions. Con Edison’s estimated tax savings, reflected in its financial statements, from the two LILO transactions through March 31, 2011, in the aggregate, was $225 million. If Con Edison were required to repay all or a portion of these amounts, it would also be required to pay interest of up to $79 million net of tax at March 31, 2011.

Pursuant to the accounting rules for leveraged lease transactions, the expected timing of income tax cash flows generated by Con Edison’s LILO transactions are required to be reviewed at least annually. If the expected timing of the cash flows is revised, the rate of return and the allocation of income would be recalculated from the inception of the LILO transactions, and the company would be required to recalculate the accounting effect of the LILO transactions, which would result in a charge to earnings that could have a material adverse effect on the company’s results of operations.

Guarantees

Con Edison and its subsidiaries enter into various agreements providing financial or performance assurance primarily to third parties on behalf of their subsidiaries. Maximum amounts guaranteed by Con Edison totaled $897 million and $859 million at March 31, 2011 and December 31, 2010, respectively.

 

A summary, by type (described in Note H to the financial statements in Item 8 of the Form 10-K) and term, of Con Edison’s total guarantees at March 31, 2011 is as follows:

 

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

Commodity transactions

  $ 645      $ 29      $ 131      $ 805   

Affordable housing program

  $ 1                    $ 1   

Intra-company guarantees

  $ 30             $ 1      $ 31   

Other guarantees

  $ 47      $ 13             $ 60   

TOTAL

  $ 723      $ 42      $ 132      $ 897   

Note H — Financial Information by Business Segment

Reference is made to Note N to the financial statements in Item 8 of the Form 10-K.

The financial data for the business segments are as follows:

 

     For the Three Months Ended March 31,  
    

Operating

revenues

    Inter-segment
revenues
    Depreciation and
amortization
   

Operating

income

 
(Millions of Dollars)   2011     2010     2011     2010     2011     2010     2011     2010  

CECONY

               

Electric

  $ 1,721      $ 1,728      $ 3      $ 3      $ 161      $ 151      $ 217      $ 195   

Gas

    663        683        1        1        27        25        204        215   

Steam

    325        307        20        18        16        15        125        102   

Consolidation adjustments

                  (24     (22                            

Total CECONY

  $ 2,709      $ 2,718      $      $      $ 204      $ 191      $ 546      $ 512   

O&R

               

Electric

  $ 149      $ 161      $      $      $ 9      $ 8      $ 10      $ 5   

Gas

    92        90                      3        3        28        23   

Total O&R

  $ 241      $ 251      $      $      $ 12      $ 11      $ 38      $ 28   

Competitive energy businesses

  $ 408      $ 500      $ 3      $ 2      $ 2      $ 2      $ 44      $ (48

Other*

    (9     (7     (3     (2                   (2       

Total Con Edison

  $ 3,349      $ 3,462      $      $      $ 218      $ 204      $ 626      $ 492   

 

* Parent company expenses, primarily interest, and consolidation adjustments. Other does not represent a business segment.

 

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Note I — Derivative Instruments and Hedging Activities

Under the accounting rules for derivatives and hedging, derivatives are recognized on the balance sheet at fair value, unless an exception is available under the accounting rules. Certain qualifying derivative contracts have been designated as normal purchases or normal sales contracts. These contracts are not reported at fair value under the accounting rules.

Energy Price Hedging

Con Edison’s subsidiaries hedge market price fluctuations associated with physical purchases and sales of electricity, natural gas, and steam by using derivative instruments including futures, forwards, basis swaps, options, transmission congestion contracts and financial transmission rights contracts. The fair values of these hedges at March 31, 2011 and December 31, 2010 were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2011     2010     2011     2010  

Fair value of net derivative assets/(liabilities) - gross

  $ (150   $ (261   $ (94   $ (156

Impact of netting of cash collateral

    137        176        85        104   

Fair value of net derivative assets/(liabilities) - net

  $ (13   $ (85   $ (9   $ (52

Credit Exposure

The Companies are exposed to credit risk related to transactions entered into primarily for the various energy supply and hedging activities by the Utilities and the competitive energy businesses. The Companies use credit policies to manage this risk, including an established credit approval process, monitoring of counterparty limits, netting provisions within agreements, collateral or prepayment arrangements, credit insurance and credit default swaps.

At March 31, 2011, Con Edison and CECONY had

$178 million and $44 million of credit exposure in connection with energy supply and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $66 million with investment-grade counterparties, $65 million with commodity exchange brokers, $45 million with independent system operators and $2 million with non-investment grade counterparties. CECONY’s net credit exposure consisted of $2 million with investment-grade counterparties and $42 million with commodity exchange brokers.

Economic Hedges

The Companies enter into certain derivative instruments that do not qualify or are not designated as hedges under the accounting rules for derivatives and hedging. However, management believes these instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices.

 

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The fair values of the Companies’ commodity derivatives at March 31, 2011 were:

 

(Millions of Dollars)   Fair Value of Commodity Derivatives(a)
Balance Sheet Location
  Con
Edison
    CECONY  
Derivative Assets  

Current

  Other current assets   $ 173      $ 46   

Long-term

  Other deferred charges and non-current assets     49        21   

Total derivative assets

    $ 222      $ 67   

Impact of netting

        (75     (2

Net derivative assets

      $ 147      $ 65   
Derivative Liabilities  

Current

  Fair value of derivative liabilities   $ 287      $   

Current

  Other current liabilities            115   

Long-term

  Fair value of derivative liabilities     85        46   

Total derivative liabilities

    $ 372      $ 161   

Impact of netting

        (212     (87

Net derivative liabilities

      $ 160      $ 74   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

The fair values of the Companies’ commodity derivatives at December 31, 2010 were:

 

(Millions of Dollars)   Fair Value of Commodity Derivatives(a)
Balance Sheet Location
  Con
Edison
    CECONY  
Derivative Assets  

Current

  Other current assets   $ 184      $ 29   

Long-term

  Other deferred charges and non-current assets     51        19   

Total derivative assets

    $ 235      $ 48   

Impact of netting

        (129       

Net derivative assets

      $ 106      $ 48   
Derivative Liabilities  

Current

  Fair value of derivative liabilities   $ 385      $   

Current

  Other current liabilities            148   

Long-term

  Fair value of derivative liabilities     111        56   

Total derivative liabilities

    $ 496      $ 204   

Impact of netting

        (305     (104

Net derivative liabilities

      $ 191      $ 100   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

 

The Utilities generally recover all of their prudently incurred fuel, purchased power and gas cost, including hedging gains and losses, in accordance with rate provisions approved by the applicable state utility commissions. See “Recoverable Energy Costs” in Note A to the financial statements in Item 8 of the Form 10-K. In accordance with the accounting rules for regulated operations, the Utilities record a regulatory asset or liability to defer recognition of unrealized gains and losses on their electric and gas derivatives. As gains and losses are realized in future periods, they will be recognized as purchased power, gas and fuel costs in the Companies’ consolidated income statements. Con Edison’s competitive energy businesses record realized and unrealized gains and losses on their derivative contracts in earnings in the reporting period in which they occur.

 

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The following table presents the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the three months ended March 31, 2011:

 

Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a)

Deferred or Recognized in Income for the three months ended March 31, 2011

 
(Millions of Dollars)   Balance Sheet Location   Con
Edison
    CECONY  

Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:

  

Current

  Deferred derivative gains   $ 6      $ 5   

Long-term

  Regulatory liabilities     3        3   

Total deferred gains

      $ 9      $ 8   

Current

  Deferred derivative losses   $ 17      $ 11   

Current

  Recoverable energy costs     (49     (42

Long-term

  Regulatory assets     44        35   

Total deferred losses

    $ 12      $ 4   

Net deferred losses

      $ 21      $ 12   
    Income Statement Location                

Pre-tax gain/(loss) recognized in income

  

  Purchased power expense   $ (21 )(b)    $   
  Gas purchased for resale     (6       
    Non-utility revenue     10 (b)        

Total pre-tax gain/(loss) recognized in income

      $ (17   $   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.
(b) For the three months ended March 31, 2011 Con Edison recorded in non-utility operating revenues and purchased power expense an unrealized pre-tax (loss)/gain of $(13) million and $50 million, respectively.

The following table presents the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the three months ended March 31, 2010:

 

Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a)

Deferred or Recognized in Income for the Three Months Ended March 31, 2010

 
(Millions of Dollars)   Balance Sheet Location   Con
Edison
    CECONY  

Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:

  

Current

  Deferred derivative gains   $ (6   $ (6

Total deferred gains

      $ (6   $ (6

Current

  Deferred derivative losses   $ (161   $ (138

Current

  Recoverable energy costs   $ (55   $ (42

Long-term

  Regulatory assets   $ (74   $ (56

Total deferred losses

    $ (290   $ (236

Net deferred losses

      $ (296   $ (242
    Income Statement Location                

Pre-tax gain/(loss) recognized in income

  

  Purchased power expense   $ (70 )(b)    $   
  Gas purchased for resale     5          
    Non-utility revenue     14 (b)        

Total pre-tax gain/(loss) recognized in income

      $ (51   $   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.
(b) For the three months ended March 31, 2010, Con Edison recorded in non-utility operating revenues and purchased power expense an unrealized pre-tax gain/(loss) of $46 million and $(110) million, respectively.

 

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As of March 31, 2011, Con Edison had 1,664 contracts, including 686 CECONY contracts, which were considered to be derivatives under the accounting rules for derivatives and hedging (excluding qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts). The following table presents the number of contracts by commodity type:

 

     Electric Derivatives     Gas Derivatives  
     Number of
Energy
Contracts(a)
    MWhs(b)     Number of
Capacity
Contracts(a)
    MWs(b)     Number  of
Contracts(a)
    Dths(b)    

Total
Number Of

Contracts(a)

 

Con Edison

    915        20,692,742        63        10,164        686        118,524,450        1,664   

CECONY

    183        5,332,425                      503        109,330,000        686   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.
(b) Volumes are reported net of long and short positions.

 

The Companies also enter into electric congestion and gas basis swap contracts to hedge the congestion and transportation charges which are associated with electric and gas contracts and hedged volumes.

The collateral requirements associated with, and settlement of, derivative transactions are included in net cash flows from operating activities in the Companies’ consolidated statement of cash flows. Most derivative instrument contracts contain provisions that may require the Companies to provide collateral on derivative instruments in net liability positions. The amount of collateral to be provided will depend on the fair value of the derivative instruments and the Companies’ credit ratings.

 

The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position and collateral posted at March 31, 2011, and the additional collateral that would have been required to be posted had the lowest applicable credit rating been reduced one level and to below investment grade were:

 

(Millions of Dollars)   Con Edison(a)     CECONY(a)  

Aggregate fair value – net liabilities

  $ 172      $ 92   

Collateral posted

  $ 68      $ 51 (b) 

Additional collateral(c) (downgrade one level from current ratings(d))

  $ 11      $ 6   

Additional collateral(c) (downgrade to below investment grade from current ratings(d))

  $ 140 (e)    $ 52 (e) 

 

(a) Non-derivative transactions for the purchase and sale of electricity and gas and qualifying derivative instruments, which have been designated as normal purchases or normal sales, are excluded from the table. These transactions primarily include purchases of electricity from independent system operators. In the event the Utilities and Con Edison’s competitive energy businesses were no longer extended unsecured credit for such purchases, the Companies would be required to post collateral, which at March 31, 2011, would have amounted to an estimated $127 million for Con Edison, including $33 million for CECONY. For certain other such non-derivative transactions, the Companies could be required to post collateral under certain circumstances, including in the event counterparties had reasonable grounds for insecurity.
(b) Across the Utilities’ energy derivative positions, credit limits for the same counterparties are generally integrated. At March 31, 2011, the Utilities posted combined collateral of $68 million, including an estimated $17 million attributable to O&R.
(c) The Companies measure the collateral requirements by taking into consideration the fair value amounts of derivative instruments that contain credit-risk-related contingent features that are in a net liabilities position plus amounts owed to counterparties for settled transactions and amounts required by counterparties for minimum financial security. The fair value amounts represent unrealized losses, net of any unrealized gains where the Companies have a legally enforceable right of setoff.
(d) The current ratings are Moody’s, S&P and Fitch long-term credit rating of, as applicable, Con Edison (Baa1/BBB+/BBB+), CECONY (A3/A-/A-) or O&R (Baa1/A-/A-). Credit ratings assigned by rating agencies are expressions of opinions that are subject to revision or withdrawal at any time by the assigning rating agency.
(e) Derivative instruments that are net assets have been excluded from the table. At March 31, 2011, if Con Edison had been downgraded to below investment grade, it would have been required to post additional collateral for such derivative instruments of not more than $24 million.

 

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Interest Rate Swap

O&R has an interest rate swap pursuant to which it pays a fixed-rate of 6.09 percent and receives a LIBOR-based variable rate. The fair value of this interest rate swap at March 31, 2011 was an unrealized loss of $10 million, which has been included in Con Edison’s consolidated balance sheet as a noncurrent liability/fair value of derivative liabilities and a regulatory asset. The change in the fair value of the swap for the three months ended March 31, 2011 was not material. In the event O&R’s credit rating was downgraded to BBB- or lower by S&P or Baa3 or lower by Moody’s, the swap counterparty could elect to terminate the agreement and, if it did so, the parties would then be required to settle the transaction.

 

Note J — Fair Value Measurements

Reference is made to Note P to the financial statements in Item 8 of the Form 10-K.

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 are summarized below.

 

     Level 1     Level 2     Level 3    

Netting

Adjustments (4)

    Total  
(Millions of Dollars)   Con
Edison
    CECONY     Con
Edison
    CECONY     Con
Edison
    CECONY     Con
Edison
    CECONY     Con
Edison
    CECONY  

Derivative assets:

                   

Commodity (1)

  $ 2      $ 1      $ 71      $ 27      $ 140      $ 23      $ (67   $ 14      $ 146      $ 65   

Other assets (3)

    68        68                      105        95                      173        163   

Total

  $ 70      $ 69      $ 71      $ 27      $ 245      $ 118      $ (67   $ 14      $ 319      $ 228   

Derivative liabilities:

                   

Commodity

  $ 3      $ 1      $ 184      $ 118      $ 176      $ 26      $ (204   $ (71   $ 159      $ 74   

Transfer in (5) (6)

                  5        5                                    5        5   

Transfer out (5) (6)

                                (5     (5                   (5     (5

Commodity (1)

  $ 3      $ 1      $ 189      $ 123      $ 171      $ 21      $ (204   $ (71   $ 159      $ 74   

Interest rate contract (2)

                                10                             10          

Total

  $ 3      $ 1      $ 189      $ 123      $ 181      $ 21      $ (204   $ (71   $ 169      $ 74   

 

(1) A significant portion of the commodity derivative contracts categorized in Level 3 is valued using either an industry acceptable model or an internally developed model with observable inputs. The models also include some less readily observable inputs resulting in the classification of the entire contract as Level 3. See Note I.
(2) See Note I.
(3) Other assets are comprised of assets such as life insurance contracts within the Deferred Income Plan and Supplemental Retirement Income Plans, held in rabbi trusts.
(4) Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.
(5) The Companies’ policy is to recognize transfers into and transfers out of the levels at the end of the reporting period.
(6) Transferred from Level 3 to Level 2 because of availability of observable market data due to decrease in the terms of certain contracts from beyond one year as of December 31, 2010 to less than one year as of March 31, 2011.

 

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Assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 are summarized below.

 

     Level 1     Level 2     Level 3    

Netting

Adjustments (4)

    Total  
(Millions of Dollars)   Con
Edison
    CECONY     Con
Edison
    CECONY     Con
Edison
    CECONY     Con
Edison
    CECONY     Con
Edison
    CECONY  

Derivative assets:

                   

Commodity (1)

  $ 2      $ 1      $ 72      $ 21      $ 144      $ 13      $ (112   $ 13      $ 106      $ 48   

Other assets (3)

    65        64                      101        92                      166        156   

Total

  $ 67      $ 65      $ 72      $ 21      $ 245      $ 105      $ (112   $ 13      $ 272      $ 204   

Derivative liabilities:

                   

Commodity

  $ 4      $ 2      $ 270      $ 177      $ 205      $ 12      $ (288   $ (91   $ 191      $ 100   

Transfer in (5) (6) (7)

                  (36     (36     (9     (9                   (45     (45

Transfer out (5) (6) (7)

                  9        9        36        36                      45        45   

Commodity (1)

  $ 4      $ 2      $ 243      $ 150      $ 232      $ 39      $ (288   $ (91   $ 191      $ 100   

Interest rate contract (2)

                                10                             10          

Total

  $ 4      $ 2      $ 243      $ 150      $ 242      $ 39      $ (288   $ (91   $ 201      $ 100   
(1) A significant portion of the commodity derivative contracts categorized in Level 3 is valued using either an industry acceptable model or an internally developed model with observable inputs. The models also include some less readily observable inputs resulting in the classification of the entire contract as Level 3. See Note O to the financial statements in Item 8 of the Form 10-K.
(2) See Note O to the financial statements in Item 8 of the Form 10-K.
(3) Other assets are comprised of assets such as life insurance contracts within the Deferred Income Plan and Supplemental Retirement Income Plans, held in rabbi trusts.
(4) Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.
(5) The Companies’ policy is to recognize transfers into and transfers out of the levels at the end of the reporting period.
(6) Transferred from Level 2 to Level 3 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall.
(7) Transferred from Level 3 to Level 2 because of availability of observable market data due to decrease in the terms of certain contracts from beyond one year as of December 31, 2009 to less than one year as of December 31, 2010.

The table listed below provides a reconciliation of the beginning and ending net balances for assets and liabilities measured at fair value as of March 31, 2011 and 2010 and classified as Level 3 in the fair value hierarchy below.

 

     For the Three Months Ended March 31, 2011  
           

Total Gains/(Losses) –

Realized and Unrealized

                                           
(Millions of Dollars)   Beginning
Balance as of
January 1, 2011
    Included in
Earnings
    Included in
Regulatory
Assets and
Liabilities
    Purchases     Issuances     Sales     Settlements     Transfer
In/Out
of Level 3
    Ending Balance
as of
March 31, 2011
 

Con Edison

                 

Derivatives:

                 

Commodity

  $ (88   $ 33      $ 40      $ 10      $      $      $ (21   $ (5   $ (31

Interest rate contract

    (10     (1                                 1               (10

Other assets (1)

    101        2        2                                           105   

Total

  $ 3      $ 34      $ 42      $ 10      $      $      $ (20   $ (5   $ 64   

CECONY

                 

Derivatives:

                 

Commodity

  $ (26   $ (1   $ 27      $ 10      $      $      $ (3   $ (5   $ 2   

Other assets(1)

    92        2        1                                           95   

Total

  $ 66      $ 1      $ 28      $ 10      $      $      $ (3   $ (5   $ 97   

 

(1) Amounts included in earnings are reported in investment and other income on the consolidated income statement.

 

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     For the Three Months Ended March 31, 2010  
           

Total Gains/(Losses) –

Realized and Unrealized

                                           
(Millions of Dollars)   Beginning
Balance as of
January 1,
2010
    Included in
Earnings
    Included in
Regulatory
Assets and
Liabilities
    Purchases     Issuances     Sales     Settlements     Transfer
In/Out
of Level 3
    Ending Balance
as of
March 31, 2010
 

Con Edison

                 

Derivatives:

                 

Commodity

  $ (59   $ (44   $ (72   $      $      $      $ 7      $      $ (168

Interest rate contract

    (11     (1                                 1               (11

Other assets (1)

    92               1                                           93   

Total

  $ 22      $ (45   $ (71   $      $      $      $ 8      $      $ (86

CECONY

                 

Derivatives:

                 

Commodity

  $ (5   $ (5   $ (33   $      $      $      $ (5   $      $ (48

Other assets(1)

    83               1                                           84   

Total

  $ 78      $ (5   $ (32   $      $      $      $ (5   $      $ 36   
(1) Amounts included in earnings are reported in investment and other income on the consolidated income statement.

 

For the Utilities, realized gains and losses on Level 3 commodity derivative assets and liabilities are reported as part of purchased power, gas and fuel costs. The Utilities generally recover these costs in accordance with rate provisions approved by the applicable state public utilities commissions. See Note A to the financial statements in Item 8 of the Form 10-K. Unrealized gains and losses for commodity derivatives are generally deferred on the consolidated balance sheet in accordance with the accounting rules for regulated operations.

For the competitive energy businesses, realized and unrealized gains and losses on Level 3 commodity derivative assets and liabilities are reported in non-utility revenues ($2 million loss and $60 million gain) and purchased power costs ($41 million gain and $89 million loss) on the consolidated income statement for the three months ended March 31, 2011 and 2010, respectively. The change in fair value relating to Level 3 commodity derivative assets held at March 31, 2011 and 2010 is included in non-utility revenues ($12 million loss and $46 million gain), and purchased power costs ($29 million gain and $71 million loss) on the consolidated income statement for the three months ended March 31, 2011 and 2010, respectively.

The accounting rules for fair value measurements and disclosures require consideration of the impact of nonperformance risk (including credit risk) from a market participant perspective in the measurement of the fair value of assets and liabilities. At March 31, 2011, the Companies determined that nonperformance risk would have no material impact on their financial position or results of operations. To assess nonperformance risk, the Companies considered information such as collateral requirements, master netting arrangements, letters of credit and parent company guarantees, and applied a market-based method by using the counterparty’s (for an asset) or the Companies’ (for a liability) credit default swaps rates.

 

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This combined management’s discussion and analysis of financial condition and results of operations (MD&A) relates to the consolidated financial statements (the First Quarter Financial Statements) included in this report of two separate registrants: Consolidated Edison, Inc. (Con Edison) and Consolidated Edison Company of New York, Inc. (CECONY) 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 CECONY. CECONY is a subsidiary of Con Edison and, as such, information in this MD&A about CECONY applies to Con Edison.

This MD&A should be read in conjunction with the First Quarter Financial Statements and the notes thereto and the MD&A in Item 7 of the Companies’ combined Annual Report on Form 10-K for the year ended December 31, 2010 (File Nos. 1-14514 and 1-1217, the Form 10-K).

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

Con Edison, incorporated in New York State in 1997, is a holding company which owns all of the outstanding common stock of CECONY, Orange and Rockland Utilities, Inc. (O&R) and the competitive energy businesses. As used in this report, the term the “Utilities” refers to CECONY and O&R.

 

LOGO

 

CECONY’s principal business operations are its regulated electric, gas and steam delivery businesses. O&R’s principal business operations are its regulated electric and gas delivery businesses. The competitive energy businesses sell electricity to wholesale and retail customers, provide certain energy-related services, and participate in energy infrastructure projects. Con Edison is evaluating additional opportunities to invest in electric and gas-related businesses.

Con Edison’s strategy is to provide reliable energy services, maintain public and employee safety, promote energy efficiency, and develop cost-effective ways of performing its business. Con Edison seeks to be a responsible steward of the environment and enhance its relationships with customers, regulators and members of the communities it serves.

 

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CECONY

Electric

CECONY provides electric service to approximately 3.3 million customers in all of New York City (except part of Queens) and most of Westchester County, an approximately 660 square mile service area with a population of more than nine million.

Gas

CECONY delivers gas to approximately 1.1 million customers in Manhattan, the Bronx and parts of Queens and Westchester County.

Steam

CECONY operates the largest steam distribution system in the United States by producing and delivering more than 23,000 MMlbs of steam annually to approximately 1,760 customers in parts of Manhattan.

O&R

Electric

O&R and its utility subsidiaries, Rockland Electric Company (RECO) and Pike County Power & Light Company (Pike) (together referred to herein as O&R) provide electric service to approximately 0.3 million customers in southeastern New York and in adjacent areas of northern New Jersey and northeastern Pennsylvania, an approximately 1,350 square mile service area.

Gas

O&R delivers gas to over 0.1 million customers in southeastern New York and adjacent areas of northeastern Pennsylvania.

Competitive Energy Businesses

Con Edison pursues competitive energy opportunities through three wholly-owned subsidiaries: Con Edison Solutions, Con Edison Energy and Con Edison Development. These businesses include the sales and related hedging of electricity to wholesale and retail customers, sales of certain energy-related products and services, and participation in energy infrastructure projects. At March 31, 2011, Con Edison’s equity investment in its competitive energy businesses was $361 million and their assets amounted to $841 million.

Certain financial data of Con Edison’s businesses is presented below:

 

    

Three months ended

March 31, 2011

    At March 31, 2011  
(Millions of Dollars, except percentages)   Operating
Revenues
    Net Income for
Common Stock
    Assets  

CECONY

  $ 2,709        81   $ 268        86   $ 32,396        90

O&R

    241        7     19        6     2,318        6

Total Utilities

    2,950        88     287        92     34,714        96

Con Edison Solutions (a)

    344        10     27        9     280        1

Con Edison Energy (a)

    66        2                77       

Con Edison Development

    1                       484        1

Other(b)

    (12         (3     (1 )%      631        2

Total Con Edison

  $ 3,349        100   $ 311        100   $ 36,186        100

 

(a) Net income from the competitive energy businesses for the three months ended March 31, 2011 includes $22 million of net after-tax mark-to-market gains (Con Edison Solutions, $20 million and Con Edison Energy, $2 million).
(b) Represents inter-company and parent company accounting. See “Results of Operations,” below.

 

Con Edison’s net income for common stock for the three months ended March 31, 2011 was $311 million or $1.07 a share ($1.06 on a diluted basis) compared with $226 million or $0.80 a share (basic and diluted basis) for the three months ended March 31, 2010. See “Results of Operations – Summary,” below. For segment financial information, see Note H to the First Quarter Financial Statements and “Results of Operations,” below.

 

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Results of Operations — Summary

Net income for common stock for the three months ended March 31, 2011 and 2010 was as follows:

 

(Millions of Dollars)   2011     2010  

CECONY

  $ 268      $ 243   

O&R

    19        13   

Competitive energy businesses(a)

    27        (28

Other(b)

    (3     (2

Con Edison

  $ 311      $ 226   

 

(a) Includes $22 million and $(38) million of net after-tax mark-to-market gains/(losses) in the three months ended March 31, 2011 and 2010, respectively.
(b) Consists of inter-company and parent company accounting.

 

The Companies’ results of operations for the three months ended March 31, 2011, as compared with the 2010 period, reflect changes in the Utilities’ rate plans. These rate plans provide for additional revenues to cover expected increases in certain operations and maintenance expenses and depreciation and property taxes. The results of operations include the operating results of the competitive energy businesses, including net mark-to-market effects.

 

Operations and maintenance expenses were lower in the three months ended March 31, 2011 compared with the 2010 period reflecting lower costs for employee health insurance, demand management programs and savings from cost control efforts, offset in part by winter storm related emergency response costs and higher regulatory assessments in the 2011 period. Depreciation and property taxes were higher in the 2011 period reflecting primarily the impact from higher utility plant balances.

 

The following table presents the estimated effect on earnings per share and net income for common stock for the three months ended March 31, 2011 as compared with the 2010 period, resulting from these and other major factors:

 

    

Earnings

per Share

    Net Income for
Common Stock
(Millions of Dollars)
 

CECONY

   

Rate plans, primarily to recover increases in certain costs

  $ 0.18      $ 51   

Operations and maintenance expense

    0.02        7   

Depreciation, property taxes and other tax matters

    (0.10     (29

Net interest expense

    0.01        4   

Other (includes dilutive effect of new stock issuances)

    (0.05     (8

Total CECONY

    0.06        25   

O&R

    0.02        6   

Competitive energy businesses

   

Earnings excluding net mark-to-market effects

    (0.02     (5

Net mark-to-market effects

    0.21        60   

Total competitive energy businesses

    0.19        55   

Other, including parent company expenses

           (1

Total variations

  $ 0.27      $ 85   

 

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

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. See “Risk Factors” in Item 1A of the Form 10-K.

 

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Application of Critical Accounting Policies

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

goodwill and leases. See “Application of Critical Accounting Policies” in Item 7 of the Form 10-K.

Liquidity and Capital Resources

The Companies’ liquidity reflects cash flows from operating, investing and financing activities, as shown on their respective consolidated statement of cash flows and as discussed below. See “Liquidity and Capital Resources” in Item 7 of the Form 10-K.

 

Changes in the Companies’ cash and temporary cash investments resulting from operating, investing and financing activities for the three months ended March 31, 2011 and 2010 are summarized as follows:

Con Edison

 

(Millions of Dollars)   2011     2010     Variance  

Operating activities

  $ 362      $ 1      $ 361   

Investing activities

    (496     (460     (36

Financing activities

    312        286        26   

Net change

    178        (173     351   

Balance at beginning of period

    338        260        78   

Balance at end of period

  $ 516      $ 87      $ 429   

CECONY

 

(Millions of Dollars)   2011     2010     Variance  

Operating activities

  $ 72      $ 22      $ 50   

Investing activities

    (413     (441     28   

Financing activities

    291        317        (26

Net change

    (50     (102     52   

Balance at beginning of period

    78        131        (53

Balance at end of period

  $ 28      $ 29      $ (1

 

Cash Flows from Operating Activities

The Utilities’ cash flows from operating activities reflect principally their energy sales and deliveries and cost of operations. The volume of energy sales and deliveries is dependent primarily on factors external to the Utilities, such as growth of customer demand, weather, market prices for energy, economic conditions and measures that promote energy efficiency. Under the revenue decoupling mechanisms in CECONY’s electric and gas rate plans and O&R’s New York electric and gas rate plans, changes in delivery volumes from levels assumed when rates were approved may affect the timing of cash flows but not net income. See Note B to the financial statements in Item 8 of the Form 10-K. 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 in Item 8 of the Form 10-K.

Net income is the result of cash and non-cash (or accrual) transactions. Only cash transactions affect the Companies’ cash flows from operating activities. Principal non-cash charges include depreciation, deferred income tax expense and net derivative losses. Non-cash charges or credits may also be accrued under the revenue decoupling and cost reconciliation mechanisms in the Utilities’ electric and gas rate plans in New York. See “Rate Agreements” in Note B to the financial statements in Item 8 of the Form 10-K.

 

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Net cash flows from operating activities for the three months ended March 31, 2011 for Con Edison and CECONY were $361 million and $50 million higher, respectively, than in the 2010 period. For Con Edison, this increase reflects primarily the receipt of refunds in 2011, at the parent company, for estimated federal income tax payments made in 2010 by the company prior to the determination that the company had no current federal income tax liability for 2010. For Con Edison, this increase also reflects lower cash collateral paid to brokers and counterparties generally reflecting higher commodity prices for derivative transactions.

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

Cash Flows Used in Investing Activities

Net cash flows used in investing activities for Con Edison and CECONY were $36 million higher and $28 million lower, respectively, for the three months ended March 31, 2011 compared with the 2010 period. The increase for Con Edison reflects primarily a loan to an affiliate for a solar project offset in part by lower construction expenditures in the 2011 period. The decrease for CECONY reflects primarily lower construction expenditures in the 2011 period.

Cash Flows from Financing Activities

Net cash flows from financing activities for Con Edison increased $26 million in the three months ended March 31, 2011 compared with the 2010 period. Net cash flows from financing activities for CECONY decreased $26 million in the three months ended March 31, 2011 compared with the 2010 period.

Cash flows from financing activities for the three months ended March 31, 2011 and 2010 reflect the issuance of Con Edison common shares through its dividend reinvestment and employee stock plans (2011: 0.7 million shares for $25 million, 2010: 0.6 million shares for $14 million). In addition, as a result of the stock plan issuances, cash used to pay common stock dividends was reduced by $3 million and $12 million in the 2011 and 2010 periods, respectively.

 

Cash flows from financing activities of the Companies also reflect commercial paper issuance (included on the consolidated balance sheets as “Notes payable”). The commercial paper amounts outstanding at March 31, 2011 and March 31, 2010 and the average daily balances for the three months ended March 31, 2011 and 2010 for Con Edison and CECONY were as follows:

 

     2011     2010  
(Millions of Dollars, except
Weighted Average Yield)
  Outstanding at
March 31
    Daily
average
    Outstanding at
March 31
    Daily
average
 

Con Edison

  $ 464      $ 140      $ 475      $ 297   

CECONY

  $ 464      $ 140      $ 475      $ 296   

Weighted average yield

    0.3     0.3     0.3     0.3

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.

 

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Other Changes in Assets and Liabilities

The following table shows changes in certain assets and liabilities at March 31, 2011, compared with December 31, 2010.

 

     Con Edison     CECONY  
(Millions of Dollars)  

2011 vs. 2010

Variance

   

2011 vs. 2010

Variance

 

Assets

   

Prepayments

  $ 217      $ 291   

Regulatory asset – Unrecognized pension and other postretirement costs

    (297     (279

Accrued unbilled revenue

    (220     (185

Liabilities

   

Deferred income taxes and investment tax credits

    269        238   

Pension and retiree benefits

    (628     (620

Regulatory liability – Net unbilled revenue

    (103     (103

 

Prepayments and Deferred Income Taxes and Investment Tax Credits

The increase in prepayments for Con Edison and CECONY, reflects primarily CECONY’s January 2011 payment of its New York City semi-annual property taxes, offset by three months of amortization, while the December 2010 balance reflects a full amortization of the previous semi-annual prepayment. For Con Edison, this increase is offset by the receipt of refunds in 2011 for estimated federal income tax payments made in 2010 by the company prior to the determination that the company had no current federal income tax liability for 2010. See “Cash Flows from Operating Activities,” above.

The increase in the liability for deferred income taxes and investment tax credits reflects the timing of the deduction of expenditures for utility plant which resulted in amounts being collected from customers to pay income taxes in advance of when the income tax payments will be required. See “Cash Flows from Operating Activities,” above.

Accrued Unbilled Revenues/Net Unbilled Revenues

The decrease in accrued unbilled revenues and the regulatory liability for net unbilled revenues reflects primarily the colder weather in December 2010 compared with March 2011.

Regulatory Asset for Unrecognized Pension and Other Postretirement Costs and Noncurrent Liability for Pension and Retiree Benefits

The decreases in the regulatory asset for unrecognized pension and other postretirement benefit costs and the noncurrent liability for pension and retiree benefits reflect the final actuarial valuation of the underfunding of the pension and other retiree benefit plans as measured at December 31, 2010, in accordance with the accounting rules for pensions and the year’s amortization of accounting costs. The decrease in the noncurrent liability for pension and retiree benefits also reflects the contributions to the pension plan made by CECONY in 2011. See Notes E and F to the First Quarter Financial Statements.

Capital Requirements and Resources

At March 31, 2011, there was no material change in the Companies’ capital requirements and resources compared to those disclosed under “Capital Requirements and Resources – Capital Resources” in Item 1 of the Form 10-K, other than as described below.

 

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For each of the Companies, the ratio of earnings to fixed charges (Securities and Exchange Commission basis) for the three months ended March 31, 2011 and 2010 and the twelve months ended December 31, 2010 was: