Quarterly Report for the period ended June 30, 2007
Table of Contents

FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

x

 

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

For the quarterly period ended JUNE 30, 2007

OR

   

¨

 

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

 

Commission

File Number

  

Exact name of registrant as specified in its charter

and principal office address and telephone number

  

State of

Incorporation

   I.R.S. Employer
ID. Number

1-14514

  

Consolidated Edison, Inc.

4 Irving Place, New York, New York 10003

(212) 460-4600

   New York    13-3965100

1-1217

  

Consolidated Edison Company of New York, Inc.

4 Irving Place, New York, New York 10003

(212) 460-4600

   New York    13-5009340

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨

 

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

 

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

 

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
Con Edison of New York        Yes  ¨    No  x

 

As of the close of business on July 31, 2007, Con Edison had outstanding 270,975,263 Common Shares ($.10 par value). All of the outstanding common equity of Con Edison of New York is held by Con Edison.

 

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Table of Contents

Filing Format

 

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

 

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Table of Contents

TABLE OF CONTENTS

 

          PAGE

Glossary of Terms

   4

PART I—Financial Information

    

Item 1

   Financial Statements (Unaudited)     
    

Con Edison

    
    

Consolidated Balance Sheet

   6
    

Consolidated Income Statement

   8
    

Consolidated Statement of Comprehensive Income

   9
    

Consolidated Statement of Common Shareholders’ Equity

   10
    

Consolidated Statement of Cash Flows

   11
    

Con Edison of New York

    
    

Consolidated Balance Sheet

   12
    

Consolidated Income Statement

   14
    

Consolidated Statement of Comprehensive Income

   15
    

Consolidated Statement of Common Shareholder’s Equity

   16
    

Consolidated Statement of Cash Flows

   17
    

Notes to Financial Statements (Unaudited)

   18

Item 2

  

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

  

43

Item 3

  

Quantitative and Qualitative Disclosures About Market Risk

   71

Item 4

  

Controls and Procedures

   71

PART II—Other Information

    

Item 1

  

Legal Proceedings

   72

Item 1a

  

Risk Factors

   72

Item 4

  

Submission of Matters to a Vote of Security Holders

   73

Item 6

  

Exhibits

   75

Signatures

   76

 

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Table of Contents

GLOSSARY OF TERMS

 

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

 

Con Edison Companies

    

Con Edison

   Consolidated Edison, Inc.

Con Edison Communications

   Con Edison Communications, LLC

Con Edison Development

   Consolidated Edison Development, Inc.

Con Edison Energy

   Consolidated Edison Energy, Inc.

Con Edison of New York

   Consolidated Edison Company of New York, Inc.

Con Edison Solutions

   Consolidated Edison Solutions, Inc.

O&R

   Orange and Rockland Utilities, Inc.

Pike

   Pike County Light & Power Company

RECO

   Rockland Electric Company

The Companies

   Con Edison and Con Edison of New York

The Utilities

   Con Edison of New York and O&R

Regulatory and State Agencies

    

DEC

   New York State Department of Environmental Conservation

EPA

   Environmental Protection Agency

FERC

   Federal Energy Regulatory Commission

IRS

   Internal Revenue Service

ISO-NE

   ISO New England

NJBPU

   New Jersey Board of Public Utilities

NJDEP

   New Jersey Department of Environmental Protection

NYAG

   New York Attorney General

NYISO

   New York Independent System Operator

NYPA

   New York Power Authority

NYSERDA

   New York State Energy Research and Development Authority

NYSRC

   New York State Reliability Council

PJM

   PJM Interconnection

PSC

   New York State Public Service Commission

PPUC

   Pennsylvania Public Utility Commission

SEC

   Securities and Exchange Commission

Other

    

ABO

   Accumulated Benefit Obligation

APB

   Accounting Principles Board

AFDC

   Allowance for funds used during construction

CO2

   Carbon dioxide

COSO

   Committee of Sponsoring Organizations of the Treadway Commission

DIG

   Derivatives Implementation Group

District Court

   The United States District Court for the Southern District of New York

dths

   Dekatherms

EITF

   Emerging Issues Task Force

EMF

   Electric and magnetic fields

 

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Table of Contents

Other

    

ERRP

   East River Repowering Project

FASB

   Financial Accounting Standards Board

FIN

   FASB Interpretation No.

First Quarter Form 10-Q

   The Companies’ combined Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007

Fitch

   Fitch Ratings

Form 10-K

   The Companies’ combined Annual Report on Form 10-K for the year ended December 31, 2006

FSP

   FASB Staff Position

GHG

   Greenhouse gases

kV

   Kilovolts

kWh

   Kilowatt-hour

LILO

   Lease In/Lease Out

LTIP

   Long Term Incentive Plan

MD&A

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

mdths

   Thousand dekatherms

MGP Sites

   Manufactured gas plant sites

mmlbs

   Million pounds

Moody’s

   Moody’s Investors Service

MVA

   Megavolt amperes

MW

   Megawatts or thousand kilowatts

MWH

   Megawatt hour

NUGs

   Non-utility generators

OCI

   Other Comprehensive Income

PCBs

   Polychlorinated biphenyls

PPA

   Power purchase agreement

PRP

   Potentially responsible party

S&P

   Standard & Poor’s Rating Services

SFAS

   Statement of Financial Accounting Standards

SO2

   Sulfur dioxide

SSCM

   Simplified service cost method

Second Quarter Form 10-Q

   The Companies’ combined Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007

Superfund

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

VaR

   Value-at-Risk

VIE

   Variable interest entity

 

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Table of Contents

Consolidated Edison, Inc.

 

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30, 2007    December 31, 2006
     (Millions of Dollars)

ASSETS

             

UTILITY PLANT, AT ORIGINAL COST

             

Electric

   $ 15,417    $ 14,775

Gas

     3,307      3,233

Steam

     1,717      1,691

General

     1,675      1,635

TOTAL

     22,116      21,334

Less: Accumulated depreciation

     4,684      4,583

Net

     17,432      16,751

Construction work in progress

     858      872

NET UTILITY PLANT

     18,290      17,623

NON-UTILITY PLANT

             

Generating assets, less accumulated depreciation of $140 and $127 in 2007 and 2006, respectively

     773      785

Non-utility property, less accumulated depreciation of $39 and $36 in 2007 and 2006, respectively

     31      34

Construction work in progress

     3      3

NET PLANT

     19,097      18,445

CURRENT ASSETS

             

Cash and temporary cash investments

     186      94

Restricted cash

     17      18

Accounts receivable - customers, less allowance for uncollectible accounts of $45 in 2007 and 2006

     867      825

Accrued unbilled revenue

     138      122

Other receivables, less allowance for uncollectible accounts of $6 and $4 in 2007 and 2006, respectively

     446      522

Fuel oil, at average cost

     52      56

Gas in storage, at average cost

     188      253

Materials and supplies, at average cost

     141      157

Prepayments

     125      157

Fair value of derivative assets

     52      122

Recoverable energy costs

     206      235

Deferred derivative losses

     177      237

Other current assets

     56      139

TOTAL CURRENT ASSETS

     2,651      2,937

INVESTMENTS

     381      366

DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS

             

Goodwill

     408      406

Intangible assets, less accumulated amortization of $39 and $34 in 2007 and 2006, respectively

     75      80

Regulatory assets

     4,110      4,179

Other deferred charges and noncurrent assets

     428      286

TOTAL DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS

     5,021      4,951

TOTAL ASSETS

   $ 27,150    $ 26,699

 

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

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Consolidated Edison, Inc.

 

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30, 2007    December 31, 2006
     (Millions of Dollars)

CAPITALIZATION AND LIABILITIES

             

CAPITALIZATION

             

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

   $ 8,806    $ 8,004

Preferred stock of subsidiary

     213      213

Long-term debt

     7,778      8,298

TOTAL CAPITALIZATION

     16,797      16,515

MINORITY INTERESTS

     42      41

NONCURRENT LIABILITIES

             

Obligations under capital leases

     24      26

Provision for injuries and damages

     156      155

Pension and retiree benefits

     857      737

Superfund and other environmental costs

     330      292

Uncertain income taxes

     147     

Asset retirement obligations

     99      97

Fair value of derivative liabilities

     57      97

Other noncurrent liabilities

     92      93

TOTAL NONCURRENT LIABILITIES

     1,762      1,497

CURRENT LIABILITIES

             

Long-term debt due within one year

     536      374

Notes payable

     315      117

Accounts payable

     1,119      1,126

Customer deposits

     240      228

Accrued taxes

     51      36

Accrued interest

     136      139

Accrued wages

     87      79

Fair value of derivative liabilities

     185      395

Deferred derivative gains

     9      6

Deferred income taxes - recoverable energy costs

     84      96

Other current liabilities

     252      276

TOTAL CURRENT LIABILITIES

     3,014      2,872

DEFERRED CREDITS AND REGULATORY LIABILITIES

             

Deferred income taxes and investment tax credits

     4,104      4,095

Regulatory liabilities

     1,411      1,657

Other deferred credits

     20      22

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES

     5,535      5,774

TOTAL CAPITALIZATION AND LIABILITIES

   $ 27,150    $ 26,699

 

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

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Consolidated Edison, Inc.

 

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
         2007             2006             2007             2006      
     (Millions of Dollars/Except Share Data)  

OPERATING REVENUES

                                

Electric

   $ 1,896     $ 1,666     $ 3,683     $ 3,425  

Gas

     422       349       1,271       1,192  

Steam

     128       106       422       381  

Non-utility

     583       434       1,071       874  

TOTAL OPERATING REVENUES

     3,029       2,555       6,447       5,872  

OPERATING EXPENSES

                                

Purchased power

     1,251       1,019       2,361       2,203  

Fuel

     181       145       450       400  

Gas purchased for resale

     250       189       764       745  

Other operations and maintenance

     504       437       1,002       877  

Depreciation and amortization

     167       153       331       305  

Taxes, other than income taxes

     318       299       647       617  

Income taxes

     78       65       229       172  

TOTAL OPERATING EXPENSES

     2,749       2,307       5,784       5,319  

OPERATING INCOME

     280       248       663       553  

OTHER INCOME (DEDUCTIONS)

                                

Investment and other income

     21       8       36       20  

Allowance for equity funds used during construction

     2       1       3       2  

Preferred stock dividend requirements of subsidiary

     (3 )     (3 )     (6 )     (6 )

Other deductions

     (13 )     (4 )     (18 )     (9 )

Income taxes

     5       6       10       1  

TOTAL OTHER INCOME (DEDUCTIONS)

     12       8       25       8  

INTEREST EXPENSE

                                

Interest on long-term debt

     126       119       254       232  

Other interest

     14       12       29       25  

Allowance for borrowed funds used during construction

     (2 )     (1 )     (5 )     (2 )

NET INTEREST EXPENSE

     138       130       278       255  

INCOME FROM CONTINUING OPERATIONS

     154       126       410       306  

INCOME FROM DISCONTINUED OPERATIONS (NET OF INCOME TAXES)

           (2 )           (1 )

NET INCOME

   $ 154     $ 124     $ 410     $ 305  

EARNINGS PER COMMON SHARE - BASIC

                                

Continuing operations

   $ 0.58     $ 0.51     $ 1.57     $ 1.24  

Discontinued operations

           (0.01 )            

Net income

   $ 0.58     $ 0.50     $ 1.57     $ 1.24  

EARNINGS PER COMMON SHARE - DILUTED

                                

Continuing operations

   $ 0.58     $ 0.51     $ 1.56     $ 1.24  

Discontinued operations

           (0.01 )            

Net income

   $ 0.58     $ 0.50     $ 1.56     $ 1.24  

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

   $ 0.580     $ 0.575     $ 1.160     $ 1.150  

AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC (IN MILLIONS)

     264.9       245.9       261.9       245.7  

AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED (IN MILLIONS)

     266.2       246.7       263.1       246.7  

 

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

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Table of Contents

Consolidated Edison, Inc.

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2007     2006     2007     2006  
     (Millions of Dollars)  

NET INCOME

   $ 154     $ 124     $ 410     $ 305  

OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES

                                

Pension plan liability adjustments, net of $1, $0, $2 and $(3) taxes in 2007 and 2006, respectively

     2             3       (4 )

Unrealized gains/(losses) on derivatives qualified as cash flow hedges, net of $(11), $(8), $3 and $(40) taxes in 2007 and 2006, respectively

     (19 )     (11 )     4       (57 )

Less: Reclassification adjustment for losses included in net income, net of $(5), $(10), $(14) and $(28) taxes in 2007 and 2006, respectively

     (8 )     (14 )     (20 )     (40 )

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

     (9 )     3       27       (21 )

COMPREHENSIVE INCOME

   $ 145     $ 127     $ 437     $ 284  

 

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

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Table of Contents

Consolidated Edison, Inc.

 

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS’ EQUITY

 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

 

    Common Stock  

Additional
Paid-

In Capital

   

Retained

Earnings

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

BALANCE AS OF
DECEMBER 31, 2005

  245,286,058   $ 27   $ 2,768     $ 5,605     23,210,700   $ (1,001 )   $ (55 )   $ (34 )   $ 7,310  

Net income

                      181                                   181  

Common stock dividends

                      (141 )                                 (141 )

Issuance of common
shares—dividend reinvestment and employee stock plans

  456,347           24                                           24  

Stock options

              (23 )     35                                   12  

Other comprehensive loss

                                                  (24 )     (24 )

BALANCE AS OF MARCH 31, 2006

  245,742,405   $ 27   $ 2,769     $ 5,680     23,210,700   $ (1,001 )   $ (55 )   $ (58 )   $ 7,362  

Net income

                      124                                   124  

Common stock dividends

                      (142 )                                 (142 )

Issuance of common
shares—dividend reinvestment and employee stock plans

  491,822           28                                           28  

Other comprehensive income

                                                  3       3  

BALANCE AS OF JUNE 30, 2006

  246,234,227   $ 27   $ 2,797     $ 5,662     23,210,700   $ (1,001 )   $ (55 )   $ (55 )   $ 7,375  

BALANCE AS OF
DECEMBER 31, 2006

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

Net income

                      256                                   256  

Common stock dividends

                      (150 )                                 (150 )

Issuance of common
shares—dividend reinvestment and employee stock plans

  1,327,669           61                                           61  

Other comprehensive income

                                                  36       36  

BALANCE AS OF MARCH 31, 2007

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

Net income

                      154                                   154  

Common stock dividends

                      (156 )                                 (156 )

Issuance of common
shares—public offering

  11,000,000     1     559                           (2 )             558  

Issuance of common
shares—dividend reinvestment and employee stock plans

  1,089,068           52                                           52  

Other comprehensive loss

                                                  (9 )     (9 )

BALANCE AS OF JUNE 30, 2007

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

 

10

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


Table of Contents

Consolidated Edison, Inc.

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

     For the Six Months
Ended June 30,
 
         2007    

        2006    

 
     (Millions of Dollars)  

OPERATING ACTIVITIES

                

Net Income

   $ 410     $ 305  

PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME

                

Depreciation and amortization

     331       305  

Deferred income taxes

     89       11  

Rate case amortization and accruals

     (254 )     (137 )

Common equity component of allowance for funds used during construction

     (3 )     (2 )

Prepaid pension costs (net of capitalized amounts)

     71       15  

Other non-cash items (net)

     (55 )     122  

CHANGES IN ASSETS AND LIABILITIES

                

Accounts receivable - customers, less allowance for uncollectibles

     (42 )     347  

Materials and supplies, including fuel oil and gas in storage

     85       22  

Other receivables and other current assets

     143       (104 )

Prepayments

     32       286  

Recoverable energy costs

     74       89  

Accounts payable

     (7 )     (273 )

Pensions and retiree benefits

     13       61  

Accrued taxes

     22       (63 )

Accrued interest

     (3 )     23  

Deferred charges, noncurrent assets and other regulatory assets

     (257 )     (125 )

Deferred credits and other regulatory liabilities

     146       (9 )

Other assets

     (10 )     8  

Other liabilities

     36       (78 )

NET CASH FLOWS FROM OPERATING ACTIVITIES

     821       803  


INVESTING ACTIVITIES

                

Utility construction expenditures (excluding capitalized support costs of $(30) and $(22) in 2007 and 2006, respectively)

     (891 )     (872 )

Cost of removal less salvage

     (73 )     (83 )

Non-utility construction expenditures

     (3 )     (2 )

Common equity component of allowance for funds used during construction

     3       2  

Restricted cash

     1       (3 )

Proceeds from sale of properties

     30       60  

Proceeds from sale of Con Edison Communications

           39  

NET CASH FLOWS USED IN INVESTING ACTIVITIES

     (933 )     (859 )


FINANCING ACTIVITIES

                

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

     198       (403 )

Retirement of long-term debt

     (359 )     (109 )

Issuance of long-term debt

           800  

Issuance of common stock

     651       20  

Debt issuance costs

           (7 )

Common stock dividends

     (286 )     (263 )

NET CASH FLOWS FROM FINANCING ACTIVITIES

     204       38  


CASH AND TEMPORARY CASH INVESTMENTS:

                

NET CHANGE FOR THE PERIOD

     92       (18 )

BALANCE AT BEGINNING OF PERIOD

     94       81  


BALANCE AT END OF PERIOD

   $ 186     $ 63  

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

                

Cash paid during the period for:

                

Interest

   $ 226     $ 212  

Income taxes

   $ 75     $ 171  

 

 

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

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Table of Contents

Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30, 2007    December 31, 2006
     (Millions of Dollars)

ASSETS

             

UTILITY PLANT, AT ORIGINAL COST

             

Electric

   $ 14,479    $ 13,872

Gas

     2,915      2,848

Steam

     1,717      1,691

General

     1,546      1,510

TOTAL

     20,657      19,921

Less: Accumulated depreciation

     4,267      4,173

Net

     16,390      15,748

Construction work in progress

     833      832

NET UTILITY PLANT

     17,223      16,580

NON-UTILITY PROPERTY

             

Non-utility property, less accumulated depreciation of $17 in 2007 and 2006

     13      15

NET PLANT

     17,236      16,595

CURRENT ASSETS

             

Cash and temporary cash investments

     60      47

Accounts receivable - customers, less allowance for uncollectible accounts of $41 and $40 in 2007 and 2006, respectively

     719      716

Other receivables, less allowance for uncollectible accounts of $5 and $3 in 2007 and 2006, respectively

     333      365

Accounts receivable from affiliated companies

     104      138

Fuel oil, at average cost

     45      47

Gas in storage, at average cost

     149      193

Materials and supplies, at average cost

     127      126

Prepayments

     77      84

Fair value of derivative assets

     3     

Recoverable energy costs

     185      213

Deferred derivative losses

     167      213

Other current assets

     3      14

TOTAL CURRENT ASSETS

     1,972      2,156

INVESTMENTS

     101      91

DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS

             

Regulatory assets

     3,710      3,764

Other deferred charges and noncurrent assets

     340      210

TOTAL DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS

     4,050      3,974

TOTAL ASSETS

   $ 23,359    $ 22,816

 

12

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


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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED BALANCE SHEET

(UNAUDITED)

 

     June 30, 2007    December 31, 2006
     (Millions of Dollars)

CAPITALIZATION AND LIABILITIES

             

CAPITALIZATION

             

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

   $ 7,761    $ 7,132

Preferred stock

     213      213

Long-term debt

     6,743      6,925

TOTAL CAPITALIZATION

     14,717      14,270

NONCURRENT LIABILITIES

             

Obligations under capital leases

     24      26

Provision for injuries and damages

     150      148

Pensions and retiree benefits

     553      449

Superfund and other environmental costs

     282      243

Uncertain income taxes

     134     

Asset retirement obligations

     99      96

Fair value of derivative liabilities

     21      35

Other noncurrent liabilities

     76      72

TOTAL NONCURRENT LIABILITIES

     1,339      1,069

CURRENT LIABILITIES

             

Long-term debt due within one year

     510      330

Accounts payable

     852      866

Accounts payable to affiliated companies

     15      14

Customer deposits

     225      214

Accrued taxes

     147      118

Accrued interest

     122      121

Accrued wages

     81      71

Fair value of derivative liabilities

     83      193

Deferred derivative gains

     7      5

Deferred income taxes - recoverable energy costs

     75      87

Other current liabilities

     215      233

TOTAL CURRENT LIABILITIES

     2,332      2,252

DEFERRED CREDITS AND REGULATORY LIABILITIES

             

Deferred income taxes and investment tax credits

     3,680      3,682

Regulatory liabilities

     1,274      1,524

Other deferred credits

     17      19

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES

     4,971      5,225

TOTAL CAPITALIZATION AND LIABILITIES

   $ 23,359    $ 22,816

 

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

13


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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
         2007             2006             2007             2006      
     (Millions of Dollars)  

OPERATING REVENUES

                                

Electric

   $ 1,731     $ 1,543     $ 3,374     $ 3,176  

Gas

     377       316       1,113       1,052  

Steam

     128       106       422       381  

TOTAL OPERATING REVENUES

     2,236       1,965       4,909       4,609  

OPERATING EXPENSES

                                

Purchased power

     713       642       1,369       1,417  

Fuel

     123       100       335       293  

Gas purchased for resale

     216       169       650       628  

Other operations and maintenance

     431       364       863       739  

Depreciation and amortization

     147       135       292       268  

Taxes, other than income taxes

     303       282       615       581  

Income taxes

     61       55       197       168  

TOTAL OPERATING EXPENSES

     1,994       1,747       4,321       4,094  

OPERATING INCOME

     242       218       588       515  

OTHER INCOME (DEDUCTIONS)

                                

Investment and other income

     15       5       25       15  

Allowance for equity funds used during construction

     2       1       3       2  

Other deductions

     (3 )     (3 )     (7 )     (7 )

Income taxes

     (2 )     3             2  

TOTAL OTHER INCOME (DEDUCTIONS)

     12       6       21       12  

INTEREST EXPENSE

                                

Interest on long-term debt

     105       96       209       185  

Other interest

     9       10       23       20  

Allowance for borrowed funds used during construction

     (2 )     (1 )     (4 )     (2 )

NET INTEREST EXPENSE

     112       105       228       203  

NET INCOME

     142       119       381       324  

PREFERRED STOCK DIVIDEND REQUIREMENTS

     3       3       6       6  

NET INCOME FOR COMMON STOCK

   $ 139     $ 116     $ 375     $ 318  

 

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


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Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

 

     For the Three Months
Ended June 30,
   For the Six Months
Ended June 30,
 
     2007    2006    2007    2006  
     (Millions of Dollars)  

NET INCOME

   $ 142    $ 119    $ 381    $ 324  

OTHER COMPREHENSIVE LOSS, NET OF TAXES

                             

Pension plan liability adjustments, net of $0, $0, $0 and $(3) taxes in 2007 and 2006, respectively

                    (4 )

Unrealized losses on derivatives qualified as cash flow hedges

                    (1 )

TOTAL OTHER COMPREHENSIVE LOSS, NET OF TAXES

                    (5 )

COMPREHENSIVE INCOME

   $ 142    $ 119    $ 381    $ 319  

 

    The accompanying notes are an integral part of these financial statements.   15


Table of Contents

Consolidated Edison Company of New York, Inc.

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS EQUITY

 

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

 

    Common Stock   Additional
Paid- In
Capital
 

Retained

Earnings

   

Repurchased
Con Edison

Stock

   

Capital
Stock

Expense

   

Accumulated
Other
Comprehensive

Loss

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

BALANCE AS OF DECEMBER 31, 2005

  235,488,094   $ 589   $ 1,802   $ 5,074     $ (962 )   $ (55 )   $ (11 )   $ 6,437  

Net income

                    205                               205  

Common stock dividend to parent

                    (113 )                             (113 )

Cumulative preferred dividends

                    (3 )                             (3 )

Other comprehensive loss

                                            (5 )     (5 )

BALANCE AS OF MARCH 31, 2006

  235,488,094   $ 589   $ 1,802   $ 5,163     $ (962 )   $ (55 )   $ (16 )   $ 6,521  

Net income

                    119                               119  

Common stock dividend to parent

                    (115 )                             (115 )

Cumulative preferred dividends

                    (3 )                             (3 )

BALANCE AS OF JUNE 30, 2006

  235,488,094   $ 589   $ 1,802   $ 5,164     $ (962 )   $ (55 )   $ (16 )   $ 6,522  

BALANCE AS OF DECEMBER 31, 2006

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

Net income

                    239                               239  

Common stock dividend to parent

                    (131 )                             (131 )

Cumulative preferred dividends

                    (3 )                             (3 )

BALANCE AS OF MARCH 31, 2007

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

Net income

                    142                               142  

Common stock dividend to parent

                    (131 )                             (131 )

Capital contribution by parent

              518                     (2 )             516  

Cumulative preferred dividends

                    (3 )                             (3 )

BALANCE AS OF JUNE 30, 2007

  235,488,094   $ 589   $ 2,770   $ 5,433     $ (962 )   $ (60 )   $ (9 )   $ 7,761  
16    The accompanying notes are an integral part of these financial statements.    


Table of Contents

Consolidated Edison Company of New York, Inc.

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

     For the Six Months
Ended June 30,
 
     2007     2006  
     (Millions of Dollars)  

OPERATING ACTIVITIES

                

Net income

   $ 381     $ 324  

PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME

                

Depreciation and amortization

     292       268  

Deferred income taxes

     86       31  

Rate case amortization and accruals

     (254 )     (137 )

Common equity component of allowance for funds used during construction

     (3 )     (2 )

Prepaid pension costs (net of capitalized amounts)

     12       15  

Other non-cash items (net)

     (32 )     (1 )

CHANGES IN ASSETS AND LIABILITIES

                

Accounts receivable - customers, less allowance for uncollectibles

     (3 )     308  

Materials and supplies, including fuel oil and gas in storage

     45       4  

Other receivables and other current assets

     89       (39 )

Prepayments

     7       350  

Recoverable energy costs

     69       85  

Accounts payable

     (18 )     (289 )

Pensions and retiree benefits

     (7 )     35  

Accrued taxes

     35       (94 )

Accrued interest

     1       23  

Deferred charges, noncurrent assets and other regulatory assets

     (248 )     (125 )

Deferred credits and other regulatory liabilities

     156       (4 )

Other assets

     (1 )      

Other liabilities

     48       (67 )

NET CASH FLOWS FROM OPERATING ACTIVITIES

     655       685  

INVESTING ACTIVITIES

                

Utility construction expenditures (excluding capitalized support costs of $(30) and $(22) in 2007 and 2006, respectively)

     (852 )     (823 )

Cost of removal less salvage

     (71 )     (82 )

Common equity component of allowance for funds used during construction

     3       2  

Proceeds from sale of properties

     30       60  

NET CASH FLOWS USED IN INVESTING ACTIVITIES

     (890 )     (843 )

FINANCING ACTIVITIES

                

Net payments of short-term debt

           (323 )

Retirement of long-term debt

           (100 )

Issuance of long-term debt

           800  

Debt issuance costs

           (7 )

Capital contribution by parent

     516        

Dividend to parent

     (262 )     (228 )

Preferred stock dividends

     (6 )     (6 )

NET CASH FLOWS FROM FINANCING ACTIVITIES

     248       136  

CASH AND TEMPORARY CASH INVESTMENTS:

                

NET CHANGE FOR THE PERIOD

     13       (22 )

BALANCE AT BEGINNING OF PERIOD

     47       61  

BALANCE AT END OF PERIOD

   $ 60     $ 39  

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

                

Cash paid during the period for:

                

Interest

   $ 203     $ 161  

Income taxes

   $ 102     $ 183  

 

    The accompanying notes are an integral part of these financial statements.   17


Table of Contents

NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)

 

General

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

 

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

 

The separate interim consolidated financial statements of each of the Companies are unaudited but, in the opinion of their respective managements, reflect all adjustments (which include only normally recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The Companies’ separate interim consolidated financial statements should be read together with their separate audited financial statements (including the combined notes thereto) included in Item 8 of their combined Annual Report on Form 10-K for the year ended December 31, 2006 (the Form 10-K) and their separate unaudited financial statements (including the combined notes thereto) included in Part I, Item 1 of their combined Quarterly Report Form 10-Q for the quarterly period ended March 31, 2007 (the First Quarter Form 10-Q). Information in the notes to the consolidated financial statements in the Form 10-K and the First Quarter Form 10-Q referred to in these notes is incorporated by reference herein. The use of terms such as “see” or “refer to” shall be deemed to incorporate by reference into this discussion and analysis the information to which reference is made. Certain prior period amounts have been reclassified to conform to the current period presentation. Results for interim periods are not necessarily indicative of results for the entire fiscal year.

 

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

 

18


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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

Solutions, Inc. (Con Edison Solutions), a retail energy services company that sells electricity and also offers energy-related services; Consolidated Edison Energy, Inc. (Con Edison Energy), a wholesale energy supply company; and Consolidated Edison Development, Inc. (Con Edison Development), a company that owns, leases or operates generating plants and participates in other infrastructure projects.

 

Note A - Earnings Per Common Share

Reference is made to “Earnings Per Common Share” in Note A to the financial statements included in Item 8 of the Form 10-K. For the three and six months ended June 30, 2007 and 2006, Con Edison’s basic and diluted EPS are calculated as follows:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
(Millions of Dollars, except per share amounts/Shares in Millions)        2007            2006             2007            2006      

Income from continuing operations

   $ 154    $ 126     $ 410    $ 306  

Income from discontinued operations, net of tax

          (2 )          (1 )

Net income

   $ 154    $ 124     $ 410    $ 305  

Weighted average common shares outstanding - Basic

     264.9      245.9       261.8      245.7  

Add: Incremental shares attributable to effect of potentially dilutive securities

     1.3      0.8       1.3      1.0  

Adjusted weighted average common shares outstanding - Diluted

     266.2      246.7       263.1      246.7  

EARNINGS PER COMMON SHARE - BASIC

                              

Continuing operations

   $ 0.58    $ 0.51     $ 1.57    $ 1.24  

Discontinued operations

          (0.01 )           

Net income

   $ 0.58    $ 0.50     $ 1.57    $ 1.24  

EARNINGS PER COMMON SHARE - DILUTED

                              

Continuing operations

   $ 0.58    $ 0.51     $ 1.56    $ 1.24  

Discontinued operations

          (0.01 )           

Net income

   $ 0.58    $ 0.50     $ 1.56    $ 1.24  

 

Note B - Regulatory Matters

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

 

Rate Agreements

O&R - Electric

In March 2007, the PSC ordered that O&R’s rates be made temporary, the effect of which is that amounts collected by O&R for electric service rendered in New York State after March 1, 2007 will be subject to refund pending the conclusion of a proceeding, which is now ongoing, to set new rates

 

19


Table of Contents

NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

effective July 1, 2007. In the order, the PSC confirmed that no issues had been raised regarding the company’s service adequacy or operations. In June 2007, O&R commenced an action in New York State Supreme Court seeking to have the order annulled.

 

Con Edison of New York - Gas

On June 1, 2007, Con Edison of New York entered into a Joint Proposal with the staff of the PSC and other parties with respect to the rates the company can charge its customers for gas service. The Joint Proposal is subject to PSC approval.

 

The Joint Proposal covers the three-year period from October 1, 2007 through September 30, 2010, and provides for rate increases of $67.4 million, $32.7 million and $42.7 million, effective October 1, 2007, 2008 and 2009, respectively. In addition, under the Joint Proposal revenues will increase $17.1 million starting in the first rate year because certain costs that are currently recovered in rates will instead be recovered under the provisions pursuant to which the company recovers its gas supply-related costs.

 

Additional provisions of the Joint Proposal include:

   

earnings in excess of a 10.9 percent return on equity for the first rate year and a 10.7 percent return on equity for the second and third rate years (based upon the actual average equity ratio, subject to a maximum equity ratio of 50 percent of capitalization) would be shared equally with customers, with 20 basis points of the first rate year’s earnings sharing threshold predicated on achieving certain energy efficiency goals and the earnings subject to sharing for each rate year being determined after reflecting in earnings the effects of any reduction in expense deferrals (discussed below);

 

   

a revenue decoupling mechanism for the first rate year (which may be continued or modified for the second or third rate years) under which the company’s revenues from most firm customer classifications would be determined by multiplying the forecasted delivery revenue per customer reflected in gas rates times the actual number of customers and a regulatory asset for recovery from customers would be recorded if actual delivery revenues billed to customers are less than the forecasted amount or a regulatory liability for future customer benefit would be recorded if the actual revenues are more than the forecasted amount;

 

   

opportunities to retain for shareholders annual gas net revenues from non-firm customer transactions: 20 percent of any net revenues between $35 million and $50 million and 25 percent of any net revenues above $50 million;

 

   

continuation of provisions for the recovery from customers on a current basis of the cost of purchased gas and supply-related costs;

 

20


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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

   

annual reconciliation of the difference between the actual annual average amount of gas utility plant (excluding plant additions resulting from moving facilities to avoid interfering with government projects), net of depreciation, up to a maximum annual average amount, and the annual average amounts reflected in gas rates, with the revenue requirement impact of the difference recorded as a regulatory asset or a regulatory liability, as the case may be, and a separate reconciliation of interference plant additions that would not be subject to a maximum annual average amount;

 

   

annual reconciliations of the differences between the actual amounts of pension and other post-retirement benefit expenses, environmental remediation expenses, property taxes and non-capital expenses resulting from the moving of facilities to avoid interfering with government projects and the amounts reflected for such expenses in gas rates, with the differences (or in the case of property taxes and interference expenses, 90 percent of the differences) deferred as a regulatory asset or accrued as a regulatory liability, as the case may be; provided that earnings above the earnings sharing threshold (discussed above) would reduce the deferral as a regulatory asset of the differences in pension and other post-employment benefit expenses, property taxes and interference expenses by up to 50 percent (but not to the extent the reduction would cause the resulting earnings to decrease below the threshold); and

 

   

potential penalties of up to $7.5 million for each rate year if the company does not meet certain standards for leak management, emergency response, prevention of damage to facilities, gas main replacement and customer satisfaction.

 

21


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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

Regulatory Assets and Liabilities

Regulatory assets and liabilities at June 30, 2007 and December 31, 2006 were comprised of the following items:

 

     Con Edison    Con Edison of
New York
(Millions of Dollars)    2007    2006    2007    2006

Regulatory assets

                           

Unrecognized pension and other postretirement costs

   $ 1,935    $ 1,929    $ 1,799    $ 1,776

Future federal income tax

     1,034      995      978      941

Environmental remediation costs

     367      318      304      255

World Trade Center restoration costs

     148      147      148      147

Pension and other postretirement benefits deferrals

     118      157      54      98

Revenue taxes

     71      68      70      67

O&R transition bond charges

     65      67          

Net T&D reconciliation

     53      94      53      94

Electric rate increase accrual

     45      44      45      44

Unbilled gas revenue

     44      44      44      44

Workers’ compensation

     43      42      43      42

Other retirement program costs

     18      20      18      20

Recoverable energy costs

     14      55      14      55

Asbestos-related costs

     10      10      10      10

Deferred derivative losses - long-term

     5      18      4      15

Other

     140      171      126      156

Regulatory assets

     4,110      4,179      3,710      3,764

Deferred derivative losses - current

     177      237      167      213

Recoverable energy costs - current

     206      235      185      213

Total Regulatory Assets

   $ 4,493    $ 4,651    $ 4,062    $ 4,190

Regulatory liabilities

                           

Allowance for cost of removal less salvage

   $ 473    $ 492    $ 412    $ 432

Gain on sale of First Avenue properties

     144      144      144      144

Net electric deferrals

     139      164      139      164

Prior year deferred tax amortization

     81      81      81      81

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

     53      85      53      85

NYS tax law changes

     53      38      43      28

Interest on federal income tax refund

     41      41      41      41

Net steam deferrals

     35      48      35      48

O&R refundable energy costs

     34      40          

Gain on sale of W. 24th St. property

     32      46      32      46

Transmission congestion contracts

     19      96      19      96

Deferred derivative gains - long-term

     16      2      6      1

Property tax reconciliation

     15      39      15      39

EPA SO2 allowance proceeds - electric and steam

     12      106      12      106

DC service incentive

     11      13      11      13

Gas interruptible sales credits

     10      8      10      8

Other

     243      214      221      192

Regulatory liabilities

     1,411      1,657      1,274      1,524

Deferred derivative gains - current

     9      6      7      5

Total Regulatory Liabilities

   $ 1,420    $ 1,663    $ 1,281    $ 1,529

 

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In March 2007, in accordance with the 2005 Electric Rate Agreement, the company offset $265 million of regulatory liabilities against an equal amount of regulatory assets. The regulatory liabilities settled related primarily to proceeds from the sale of sulfur dioxide allowances, prior year’s transmission congestion contracts auction proceeds, gains from the sale of properties, penalties related to customer outages, and the cost reconciliations for property taxes and interference costs. The regulatory assets recovered related primarily to the Net T&D reconciliation and cost reconciliations for pension and other postretirement benefit costs.

 

Power Outage Proceedings

During a July 2006 heat wave, electric service was interrupted to a number of Con Edison of New York’s customers, predominantly in the company’s Long Island City distribution network in Queens, New York. Also, a number of the company’s customers in Westchester County, New York, experienced weather-related outages in 2006.

 

In April 2007, the PSC expanded its ongoing proceeding investigating the Queens outage to also consider the prudence of the company’s conduct with respect to the outage. The investigation has been reviewing the circumstances surrounding the outage, the company’s response, communication and restoration efforts, the need for changes to the company’s practices and procedures and the costs incurred by the company related to the outage. The PSC indicated that the prudence examination should consider and address, among other things: (i) the reasonableness of the company’s response to the outage, its monitoring of its distribution system, its use of available information, its procedures for determining whether to shut down the Long Island City network (and the prudence of its decision not to do so) and its operation and maintenance of equipment in the Long Island City network; and (ii) whether and to what extent, the expenses and capital expenditures associated with the outage that the company has incurred, or may incur, should be borne by the company’s customers. In February 2007, the PSC staff issued a report on the outage which, among other things, includes the PSC staff’s (i) finding that the overriding cause of the outage was the company’s failure to adequately operate, maintain and oversee the Long Island City network, (ii) conclusion that the company should have, but failed to, shut down the Long Island City network to minimize the impact of the outage to customers, and (iii) recommendation that the PSC initiate a proceeding to consider the prudence of the company’s actions or inactions during the outage.

 

The PSC is also reviewing the Westchester outages, and has ordered the company to show cause why it should not be liable for certain food spoilage claims in connection with the September 2006 outage in Westchester resulting from Tropical Storm Ernesto.

 

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The PSC has engaged an independent third party consultant to audit the company’s performance in response to outage emergencies and planning for restoration of service.

 

As of June 30, 2007, Con Edison of New York had paid $14 million, $5 million of which was reimbursed by insurers, to compensate customers for spoilage of food and other perishables resulting from the Queens outage, incurred estimated operating costs of $39 million, net of $1 million of insurance reimbursement, invested $48 million in capital assets and retirements in the Long Island City network after the Queens outage, and accrued penalties under its 2005 electric rate agreement of $18 million relating to customer outages.

 

In July 2007, the PSC issued a notice requesting comments on the tariff provisions pursuant to which the company is required to reimburse its electric customers for losses resulting from service interruptions in certain circumstances. The current provisions provide for reimbursement to affected residential and commercial customers for food spoilage of up to $450 and $9,000, respectively, with a maximum aggregate of $15 million for an outage. The Company is not required to provide reimbursement for outages caused by certain events such as storms, provided the company makes reasonable efforts to restore service as soon as practicable.

 

The Companies are unable to predict whether the outages and any related proceedings will have any further material adverse effect on their results of operations or have a material adverse effect on their financial position or liquidity.

 

Note C - Short-Term Borrowing and Credit Agreements

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

 

In June 2007, the Companies’ credit agreement, which was to expire in June 2011, was extended for an additional year, with a maximum of $2.2 billion available to Con Edison of New York and $1 billion available to Con Edison in the additional year.

 

At June 30, 2007, Con Edison had $314 million of commercial paper outstanding at a weighted average interest rate of 5.5 percent, none of which was outstanding under Con Edison of New York’s program. At June 30, 2006, Con Edison had $352 million of commercial paper outstanding of which $197 million was outstanding under Con Edison of New York’s program. The weighted average interest rate at June 30, 2006 was 5.4 percent and 5.3 percent for Con Edison and Con Edison of New York, respectively. At June 30, 2007 and 2006, no loans were outstanding under the Companies’ credit agreements and $47 million and $15 million of letters of credit were outstanding, respectively.

 

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Note D - Pension Benefits

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

 

Net Periodic Benefit Cost

The components of the Companies’ net periodic benefit costs for the three and six months ended June 30, 2007 and 2006 were as follows:

 

     For the Three Months Ended June 30,  
     Con Edison      Con Edison of
New York
 
(Millions of Dollars)    2007     2006      2007     2006  

Service cost - including administrative expenses

   $ 33     $ 33      $ 31     $ 31  

Interest cost on projected benefit obligation

     123       115        115       108  

Expected return on plan assets

     (162 )     (155 )      (155 )     (149 )

Amortization of net actuarial loss

     40       32        34       26  

Amortization of prior service costs

     3       4        3       3  

NET PERIODIC BENEFIT COST

   $ 37     $ 29      $ 28     $ 19  

Amortization of regulatory asset*

     1       1        1       1  

TOTAL PERIODIC BENEFIT COST

   $ 38     $ 30      $ 29     $ 20  

Cost capitalized

     (11 )     (9 )      (8 )     (7 )

Cost deferred

     (20 )     (28 )      (18 )     (24 )

Cost charged/(credited) to operating expenses

   $ 7     $ (7 )    $ 3     $ (11 )
* Relates to increases in Con Edison of New York’s pension obligations of $33 million from a 1993 special retirement program and $45 million from a 1999 special retirement program.

 

     For the Six Months Ended June 30,  
     Con Edison      Con Edison of
New York
 
(Millions of Dollars)    2007     2006      2007     2006  

Service cost - including administrative expenses

   $ 66     $ 67      $ 61     $ 62  

Interest cost on projected benefit obligation

     246       229        230       215  

Expected return on plan assets

     (323 )     (310 )      (309 )     (298 )

Amortization of net actuarial loss

     80       63        69       52  

Amortization of prior service costs

     5       7        5       6  

NET PERIODIC BENEFIT COST

   $ 74     $ 56      $ 56     $ 37  

Amortization of regulatory asset*

     2       2        2       2  

TOTAL PERIODIC BENEFIT COST

   $ 76     $ 58      $ 58     $ 39  

Cost capitalized

     (23 )     (17 )      (18 )     (13 )

Cost deferred

     (49 )     (58 )      (45 )     (51 )

Cost charged/(credited) to operating expenses

   $ 4     $ (17 )    $ (5 )   $ (25 )
* Relates to increases in Con Edison of New York’s pension obligations of $33 million from a 1993 special retirement program and $45 million from a 1999 special retirement program.

 

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Note E - Other Postretirement Benefits

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

 

Net Periodic Benefit Cost

The components of the Companies’ net periodic postretirement benefit costs for the three and six months ended June 30, 2007 and 2006 were as follows:

 

     For the Three Months Ended June 30,  
     Con Edison      Con Edison of
New York
 
(Millions of Dollars)      2007         2006          2007         2006    

Service cost

   $ 5     $ 5      $ 4     $ 4  

Interest cost on accumulated other postretirement benefit obligation

     23       22        21       19  

Expected return on plan assets

     (20 )     (20 )      (19 )     (18 )

Amortization of net actuarial loss

     16       15        14       12  

Amortization of prior service cost

     (3 )     (4 )      (3 )     (4 )

Amortization of transition obligation

     1       1        1       1  

NET PERIODIC POSTRETIREMENT BENEFIT COST

   $ 22     $ 19      $ 18     $ 14  

Cost capitalized

     (8 )     (5 )      (6 )     (4 )

Cost deferred

     (9 )     (9 )      (9 )     (7 )

Cost charged to operating expenses

   $ 5     $ 5      $ 3     $ 3  
     For the Six Months Ended June 30,  
     Con Edison      Con Edison of
New York
 
(Millions of Dollars)      2007         2006          2007         2006    

Service cost

   $ 9     $ 9      $ 7     $ 7  

Interest cost on accumulated other postretirement benefit obligation

     46       43        41       38  

Expected return on plan assets

     (40 )     (39 )      (37 )     (36 )

Amortization of net actuarial loss

     33       29        29       24  

Amortization of prior service cost

     (7 )     (7 )      (7 )     (7 )

Amortization of transition obligation

     2       2        2       2  

NET PERIODIC POSTRETIREMENT BENEFIT COST

   $ 43     $ 37      $ 35     $ 28  

Cost capitalized

     (15 )     (11 )      (12 )     (9 )

Cost deferred

     (20 )     (15 )      (18 )     (12 )

Cost charged to operating expenses

   $ 8     $ 11      $ 5     $ 7  

 

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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 environmental damages. Liability under these laws can be material and may be imposed for contamination from past acts, even though such past acts may have been lawful at the time they occurred. The sites at which the Utilities have been asserted to have liability under these laws, including their manufactured gas plant sites, 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 in 2006 dollars of the amount the Utilities will need to pay to discharge their related obligations. For Superfund Sites (including the manufactured gas plant sites) for which one of the Utilities is managing the investigation and remediation, the accrued liability represents an estimate in 2006 dollars of the company’s share of undiscounted cost to investigate the sites and, for sites that have been investigated in whole or in part, the cost to remediate the sites. Remediation costs are estimated in light of the information available, applicable remediation standards, and experience with similar sites.

 

The accrued liabilities and regulatory assets related to Superfund Sites at June 30, 2007 and December 31, 2006 were as follows:

 

     Con Edison    Con Edison of
New York
(Millions of Dollars)    2007    2006    2007    2006

Accrued Liabilities:

                           

Manufactured gas plant sites

   $ 268    $ 228    $ 221    $ 180

Other Superfund Sites

     62      64      61      63

Total

   $ 330    $ 292    $ 282    $ 243

Regulatory assets

   $ 367    $ 318    $ 304    $ 255

 

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

 

Environmental remediation payments and insurance recoveries received related to Superfund Sites for the three and six months ended June 30, 2007 and 2006 were as follows:

 

     For the Three Months Ended June 30,
     Con Edison    Con Edison of
New York
(Millions of Dollars)      2007        2006        2007        2006  

Remediation payments

   $ 9    $ 17    $ 7    $ 13

Insurance recoveries received

     1      3      1      3
     For the Six Months Ended June 30,
     Con Edison    Con Edison of
New York
(Millions of Dollars)    2007    2006    2007    2006

Remediation payments

   $ 18    $ 29    $ 16    $ 24

Insurance recoveries received

     1      3      1      3

 

In 2006, Con Edison of New York estimated that for its manufactured gas plant sites, its aggregate undiscounted potential liability for the investigation and remediation of coal tar and/or other manufactured gas plant-related environmental contaminants could range up to $1.1 billion. In 2006, 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 $96 million. These estimates were based on the assumption that there is contamination at the sites that have not yet been investigated and additional assumptions about these and the other sites regarding the extent of contamination and the type and extent of remediation that may be required. Actual experience may be materially different.

 

Asbestos Proceedings

Suits have been brought in New York State and federal courts against the Utilities and many other defendants, wherein a large number of plaintiffs sought large amounts of compensatory and punitive damages for deaths and injuries allegedly caused by exposure to asbestos at various premises of the Utilities. The suits that have been resolved, which are many, have been resolved without any payment

 

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

 

     Con Edison    Con Edison of
New York
(Millions of Dollars)        2007            2006            2007            2006    

Accrued liability - asbestos suits

   $ 10    $ 10    $ 10    $ 10

Regulatory assets - asbestos suits

   $ 10    $ 10    $ 10    $ 10

Accrued liability - workers’ compensation

   $ 119    $ 117    $ 114    $ 112

Regulatory assets - workers’ compensation

   $ 43    $ 42    $ 43    $ 42

 

Note G - Other Material Contingencies

Manhattan Steam Main Rupture

In July 2007, a Con Edison of New York steam main located in midtown Manhattan ruptured for reasons that have not yet been determined. It has been reported that one person died and others were injured as a result of the incident. Debris from the incident included dirt and mud containing asbestos. The response to the incident has required the closing of several buildings and streets for various periods. The company has notified its insurers of the incident and believes that the policies currently in force will cover most of the company’s costs, which could be substantial, to satisfy its liability to others in connection with the incident.

 

Lease In/Lease Out Transactions

In each of 1997 and 1999, Con Edison Development entered into a transaction in which it leased property and then immediately subleased it back to the lessor (termed “Lease In/Lease Out,” or LILO transaction). The transactions respectively involve gas distribution and electric generating 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

 

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accordance with Statement of Financial Accounting Standards (SFAS) No. 13, “Accounting for Leases,” Con Edison is accounting for the two LILO transactions as leveraged leases. Accordingly, the company’s investment in these leases, net of non-recourse debt, is carried as a single amount in Con Edison’s consolidated balance sheet and income is recognized pursuant to a method that incorporates a level rate of return for those years when net investment in the lease is positive, based upon the after-tax cash flows projected at the inception of the leveraged leases. At June 30, 2007 and December 31, 2006, the company’s investment in these leveraged leases ($234 million and $232 million, respectively) net of deferred tax liabilities ($217 million and $208 million, respectively), amounted to $17 million and $24 million, respectively.

 

On audit of Con Edison’s tax return for 1997, the Internal Revenue Service (IRS) disallowed the tax losses in connection with the 1997 LILO transaction. In December 2005, Con Edison paid a $0.3 million income tax deficiency asserted by the IRS for the tax year 1997 with respect to the 1997 LILO transaction. In April 2006, the company paid interest of $0.2 million associated with the deficiency and commenced an action in the United States Court of Federal Claims, entitled Consolidated Edison Company of New York, Inc. v. United States, to obtain a refund of this tax payment and interest. In September 2006, at the audit level, the IRS also disallowed $151 million of net tax deductions taken with respect to both of the LILO transactions for the tax years 1998 through 2001. In November 2006, Con Edison filed an appeal of this disallowance with the Appeals Office of the IRS, where consideration of this matter is pending. In March 2007, at the audit level, the IRS disallowed $43 million of net tax deductions taken with respect to both of the LILO transactions for the tax year 2005. Con Edison filed an appeal of this disallowance with the Appeals Office of the IRS, where consideration of this matter is pending.

 

Con Edison believes that its LILO transactions have been correctly reported, and has not recorded any reserve with respect to the disallowance of tax losses, or related interest, in connection with its LILO transactions. Con Edison’s estimated tax savings, reflected in its financial statements, from the two LILO transactions through June 30, 2007, in the aggregate, was $163 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 $53 million.

 

Northeast Utilities Litigation

Con Edison and Northeast Utilities are pursuing claims against each other for damages as a result of the alleged breach of their agreement and plan of merger, dated as of October 13, 1999, as amended and restated as of January 11, 2000. The litigation, entitled Consolidated Edison, Inc. v. Northeast Utilities, was commenced in March 2001 and is pending in the United States District Court for the Southern District of New York. The parties are seeking to recover from each other fees and expenses

 

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each incurred in connection with the merger agreement and preparing for the merger. In addition, Con Edison is seeking to recover from Northeast Utilities compensation for synergies that were lost when the merger did not occur, together with the attorney’s fees it has incurred in connection with the litigation. Con Edison does not expect that the lawsuit will have a material adverse effect on its financial position, results of operations or liquidity.

 

Mirant Litigation

In June 2007, the United States Bankruptcy Court for the Northern District of Texas approved the settlement of the legal proceedings relating to the June 1999 sale of generating assets by Con Edison of New York and O&R to affiliates of Mirant Corporation (which had filed a petition for reorganization under the U.S. Bankruptcy Code). Pursuant to the settlement, the proceedings against Con Edison of New York and O&R were dismissed, with prejudice, and they paid certain amounts to the Mirant affiliates, which, in aggregate, were not material to the Companies.

 

Guarantees

Con Edison and its subsidiaries enter into various agreements providing financial or performance assurance primarily to third parties on behalf of their subsidiaries. In addition, a Con Edison Development subsidiary has issued a guarantee on behalf of an entity in which it has an equity interest. Maximum amounts guaranteed by Con Edison totaled $1.3 billion and $1.2 billion at June 30, 2007 and December 31, 2006, respectively.

 

A summary, by type and term, of Con Edison’s total guarantees at June 30, 2007 is as follows:

 

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

Commodity transactions

   $ 893    $ 33    $ 211    $ 1,137

Affordable housing program

          22           22

Intra-company guarantees

     45           1      46

Other guarantees

     44      42           86

TOTAL

   $ 982    $ 97    $ 212    $ 1,291

 

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

 

Note H - Income Tax

Uncertain Tax Positions

Reference is made to Note H to the financial statements in Part I, Item 1 of the First Quarter Form 10-Q for information about the Companies’ January 2007 adoption of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48).

 

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The Companies’ uncertain tax positions include use of the “simplified service cost method” (SSCM) to determine the extent to which construction-related costs could be deducted in 2002 through 2005. The Companies expect that they will be required to repay, with interest, a portion of their past SSCM tax benefits ($331 million, of which $303 million is attributable to Con Edison of New York) and to capitalize and depreciate over a period of years costs they previously deducted under SSCM. Interest on all past SSCM tax benefits for Con Edison and Con Edison of New York could be approximately $99 million and $90 million, respectively. Repayment of the SSCM tax benefits would not otherwise affect the Companies’ results of operations because deferred taxes have been previously provided for the related temporary differences between the SSCM deductions taken for federal income tax purposes and the corresponding amounts charged to expense for financial reporting purposes.

 

At June 30, 2007, the liabilities for uncertain tax positions for Con Edison and Con Edison of New York were $147 million and $134 million, respectively, and accrued interest on the liabilities amounted to $32 million and $28 million, respectively. The Companies recognize interest accrued related to the liability for uncertain tax positions in interest expense and penalties, if any, in operating expenses in the Companies’ consolidated income statements. The Companies’ recognized interest expense for uncertain tax positions for the three and six months ended June 30, 2007 were as follows:

 

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

Interest expense

   $ 6    $ 3    $ 10    $ 7

 

In June 2007, Con Edison paid $160 million to the Internal Revenue Service, $147 million of which is attributable to Con Edison of New York, as a deposit for the repayment, including related interest, that the Companies expect will be required with respect to the past SSCM benefits. As a result, for federal income tax purposes, interest will continue to accrue only on the portion of the liability, if any, that exceeds the deposit. Con Edison and Con Edison of New York have recorded the deposit as a noncurrent asset on their consolidated balance sheet.

 

The Companies do not expect the total amounts of uncertain tax positions to significantly increase or decrease within the next 12 months.

 

Note I - Stock-Based Compensation

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

 

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In accordance with SFAS No. 123(R), “Share-Based Payment” (SFAS No. 123(R)), the Companies have recognized the cost of stock-based compensation as an expense using a fair value measurement method. The following table summarizes stock-based compensation expense recognized by the Companies in the three and six months ended June 30, 2007 and 2006:

 

     For the Three Months Ended June 30,
     Con Edison    Con Edison of
New York
(Millions of Dollars)      2007        2006        2007        2006  

Stock options

   $    $ 3    $    $ 2

Restricted stock units

     1      1      1      1

Performance-based restricted stock

     1      1      1      1

Total

   $ 2    $ 5    $ 2    $ 4
     For the Six Months Ended June 30,
     Con Edison    Con Edison of
New York
(Millions of Dollars)    2007    2006    2007    2006

Stock options

   $ 1    $ 6    $ 1    $ 5

Restricted stock units

     1      1      1      1

Performance-based restricted stock

     2      9      2      8

Total

   $ 4    $ 16    $ 4    $ 14

 

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Stock Options

A summary of changes in the status of stock options during the three and six months ended June 30, 2007 and 2006 were as follows:

 

     Con Edison    Con Edison of
New York
     Shares     Weighted
Average
Exercise
Price
   Shares     Weighted
Average
Exercise
Price

Outstanding at 12/31/05

   7,867,151     $ 41.913    6,697,401     $ 42.000

Granted

   804,000       46.880    699,000       46.880

Exercised

   (67,500 )     37.560    (60,800 )     37.404

Forfeited

   (20,900 )     42.691    (5,000 )     44.688

Outstanding at 3/31/06

   8,582,751     $ 42.412    7,330,601     $ 42.503

Granted

   859,900       43.500    711,700       43.500

Exercised

   (64,725 )     35.935    (55,725 )     35.538

Forfeited

   (19,000 )     44.353    (13,000 )     44.765

Outstanding at 6/30/06

   9,358,926     $ 42.553    7,973,576     $ 42.637

Outstanding at 12/31/06

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

Granted

                 

Exercised

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

Forfeited

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

Outstanding at 3/31/07

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

Granted

                 

Exercised

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

Forfeited

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

Outstanding at 6/30/07

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

 

The change in the fair value of all outstanding options from their grant dates to June 30, 2007 and 2006 (aggregate intrinsic value) for Con Edison were $15 million and $18 million, respectively. The change in the fair value of all outstanding options from their grant dates to June 30, 2007 and 2006 (aggregate intrinsic value) for Con Edison of New York were $12 million and $14 million, respectively. The aggregate intrinsic value of options exercised in the period ended June 30, 2007 and 2006 were $6 million and $1 million and the cash received by Con Edison for payment of the exercise price were $30 million and $3 million, respectively. The weighted average remaining contractual life of options outstanding is five years as of June 30, 2007.

 

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The following table summarizes stock options outstanding at June 30, 2007 for each plan year for the Companies:

 

          Con Edison    Con Edison of New York
Plan Year    Remaining
Contractual
Life
  

Options

Outstanding

   Weighted
Average
Exercise
Price
   Options
Exercisable
  

Options

Outstanding

   Weighted
Average
Exercise
Price
   Options
Exercisable

2006

   9    1,645,600    $ 45.151       1,401,700    $ 45.186   

2005

   8    1,262,400      42.740       1,022,750      42.721   

2004

   7    950,950      43.776    950,950    756,850      43.769    756,850

2003

   6    810,600      39.916    810,600    637,900      39.941    637,900

2002

   5    959,850      42.510    959,850    822,350      42.510    822,350

2001

   4    506,050      37.750    506,050    438,050      37.750    438,050

2000

   3    145,350      32.500    145,350    109,850      32.500    109,850

1999

   2    561,450      47.938    561,450    544,050      47.938    544,050

1998/97

   1    111,550      42.563    111,550    110,050      42.563    110,050

Total

        6,953,800    $ 42.931    4,045,800    5,843,550    $ 43.033    3,419,100

 

There were no new awards granted in 2007. The exercise prices of options awarded in 2006 range from $43.50 to $46.88. The total expense to be recognized in future periods for unvested stock options outstanding as of June 30, 2007 is $3 million for Con Edison, including $2 million for Con Edison of New York.

 

Restricted Stock Units

At June 30, 2007 and 2006, there were 115,055 and 222,500 units outstanding for Con Edison employees, of which 63,055 and 171,700 units are outstanding for Con Edison of New York employees. The weighted average fair value as of the grant date of the outstanding units for June 30, 2007 and 2006 were $42.87 and $36.59 per unit for Con Edison, respectively. The weighted average fair value as of the grant date of the outstanding units for June 30, 2007 and 2006 were $45.88 and $36.31 per unit for Con Edison of New York, respectively. The total expense to be recognized by the Companies in future periods for unvested awards outstanding as of June 30, 2007 for Con Edison and Con Edison of New York were $1.5 million and $1 million, respectively.

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

A summary of changes in the status of the Performance RSUs’ Total Shareholder Return (TSR) portion during the three and six months ended June 30, 2007 and 2006 were as follows:

 

     Con Edison   

Con Edison of

New York

     Units     Weighted
Average
Fair
Value*
   Units     Weighted
Average
Fair
Value*

Non-vested at 12/31/05

   204,425     $ 31.461    171,950     $ 31.581

Granted

   99,300       43.830    87,400       43.830

Vested and Exercised

   (156,450 )     46.477    (144,475 )     46.455

Forfeited

                 

Non-vested at 3/31/06

   147,275     $ 29.313    114,875     $ 29.530

Granted

                 

Vested and Exercised

                 

Forfeited

                 

Non-vested at 6/30/06

   147,275     $ 31.250    114,875     $ 44.440

Non-vested at 12/31/06

   126,425     $ 13.992    94,025     $ 14.420

Granted

   113,600       45.730    81,848       45.730

Vested and Exercised

   (31,400 )        (21,475 )    

Forfeited

                 

Non-vested at 3/31/07

   208,625     $ 36.108    154,398     $ 35.709

Granted

   33,280       48.060    30,805       48.060

Vested and Exercised

                 

Forfeited

                 

Non-vested at 6/30/07

   241,905     $ 20.152    185,203     $ 20.155
* Fair value is determined using the Monte Carlo simulation.

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

A summary of changes in the status of the Performance RSUs’ Executive Incentive Plan (EIP) portion during the three and six months ended June 30, 2007 and 2006 were as follows:

 

     Con Edison    Con Edison of
New York
     Units     Weighted
Average
Price
   Units     Weighted
Average
Price

Non-vested at 12/31/05

   204,425     $ 43.297    171,950     $ 43.300

Granted

   99,300       46.880    87,400       46.880

Vested and Exercised

   (156,450 )     46.477    (144,475 )     46.455

Forfeited

                 

Non-vested at 3/31/06

   147,275     $ 43.500    114,875     $ 43.500

Granted

                 

Vested and Exercised

                 

Forfeited

                 

Non-vested at 6/30/06

   147,275     $ 44.440    114,875     $ 44.440

Non-vested at 12/31/06

   126,425     $ 48.070    94,025     $ 48.070

Granted

   113,600       47.815    81,848       47.807

Vested and Exercised

   (31,400 )     47.530    (21,475 )     47.530

Forfeited

                 

Non-vested at 3/31/07

   208,625     $ 51.060    154,398     $ 51.060

Granted

   33,280       51.060    30,805       51.060

Vested and Exercised

                 

Forfeited

                 

Non-vested at 6/30/07

   241,905     $ 45.120    185,203     $ 45.120

 

The total expense to be recognized by Con Edison in future periods for unvested Performance RSUs outstanding as of June 30, 2007 is $9 million, including $7 million for Con Edison of New York.

 

Stock Purchase Plan

In the three months ended June 30, 2007 and 2006, 155,415 shares and 162,533 shares were purchased under the Stock Purchase Plan at a weighted average price of $49.56 and $44.06 per share, respectively. In the six months ended June 30, 2007 and 2006, 304,812 shares and 312,117 shares were purchased under the Stock Purchase Plan at a weighted average price of $49.04 and $45.07 per share, respectively.

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

Note J - 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 June 30,
    

Operating

Revenues

    Inter-segment
revenues
    Depreciation and
amortization
   

Operating

Income

(Millions of Dollars)    2007    2006     2007     2006     2007    2006     2007    2006

Con Edison of New York

                                                           

Electric

   $ 1,731    $ 1,543     $ 3     $ 2     $ 111    $ 103     $ 191    $ 180

Gas

     377      316       1       1       21      20       43      30

Steam

     128      106       23       19       15      12       8      8

Consolidation adjustments

                (27 )     (22 )                    

Total Con Edison of New York

   $ 2,236    $ 1,965     $     $     $ 147    $ 135     $ 242    $ 218

O&R

                                                           

Electric

   $ 165    $ 123     $     $     $ 7    $ 6     $ 15    $ 9

Gas

     45      34                   3      3       1     

Total O&R

   $ 210    $ 157     $     $     $ 10    $ 9     $ 16    $ 9

Competitive energy businesses

   $ 583    $ 434     $ 1     $ 18     $ 10    $ 10     $ 22    $ 20

Other*

          (1 )     (1 )     (18 )          (1 )          1

Total Con Edison

   $ 3,029    $ 2,555     $     $     $ 167    $ 153     $ 280    $ 248
* Parent company expenses, primarily interest, and consolidation adjustments. Other does not represent a business segment.

 

     For the Six Months Ended June 30,
    

Operating

Revenues

   Inter-segment
revenues
    Depreciation and
amortization
  

Operating

Income

(Millions of Dollars)    2007    2006    2007     2006     2007    2006    2007     2006

Con Edison of New York

                                                          

Electric

   $ 3,374    $ 3,176    $ 5     $ 5     $ 220    $ 204    $ 363     $ 317

Gas

     1,113      1,052      2       1       42      40      155       129

Steam

     422      381      40       38       30      24      70       69

Consolidation adjustments

               (47 )     (44 )                    

Total Con Edison of New York

   $ 4,909    $ 4,609    $     $     $ 292    $ 268    $ 588     $ 515

O&R

                                                          

Electric

   $ 309    $ 249    $     $     $ 13    $ 12    $ 25     $ 18

Gas

     158      140                  5      5      17       10

Total O&R

   $ 467    $ 389    $     $     $ 18    $ 17    $ 42     $ 28

Competitive energy businesses

   $ 1,071    $ 874    $ 3     $ 34     $ 20    $ 20    $ 36     $ 10

Other*

               (3 )     (34 )     1           (3 )    

Total Con Edison

   $ 6,447    $ 5,872    $     $     $ 331    $ 305    $ 663     $ 553
* Parent company expenses, primarily interest, and consolidation adjustments. Other does not represent a business segment.

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

Note K - Derivative Instruments and Hedging Activities

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

 

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 June 30, 2007 and December 31, 2006 were as follows:

 

       Con Edison      Con Edison of
New York
 
(Millions of Dollars)      2007      2006      2007      2006  

Fair value of net assets

     $ (141 )    $ (319 )    $ (88 )    $ (206 )

 

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.

 

Con Edison and Con Edison of New York had $198 million and $50 million credit exposure in connection with energy supply and hedging activities, net of collateral and reserves, at June 30, 2007, respectively. Con Edison’s net credit exposure consisted of $118 million with investment-grade counterparties (a portion of which is insured through credit insurance and hedged with credit default swaps), $78 million with commodity exchange brokers and $2 million with entities which lacked ratings or whose ratings were not investment grade. Con Edison of New York’s net credit exposure was primarily with commodity exchange brokers.

 

Cash Flow Hedges

Con Edison’s subsidiaries, primarily the competitive energy businesses, designate a portion of derivative instruments as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133). Under cash flow hedge accounting, to the extent a hedge is determined to be “effective,” the unrealized gain or loss on the hedge is recorded in OCI and reclassified to earnings at the time the underlying transaction is completed. A gain or loss relating to any portion of the hedge determined to be “ineffective” is recognized in earnings in the period in which such determination is made.

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

The following table presents selected information related to these cash flow hedges included in accumulated OCI at June 30, 2007:

 

     Maximum Term    Accumulated Other
Comprehensive Income/
(Loss) Net of Tax
   Portion Expected to be
Reclassified to Earnings
during the Next 12 Months
(Term in Months/Millions of
Dollars)
   Con Edison    Con Edison of
New York
   Con Edison     Con Edison of  
New York
   Con Edison     Con Edison of
New York

Energy Price Hedges

   42    $    $ (16 )   $    $ (18 )   $

 

The actual amounts that will be reclassified to earnings may vary from the expected amounts presented above as a result of changes in market prices. The effect of reclassification from accumulated OCI to earnings will generally be offset by the recognition of the hedged transaction in earnings.

 

The unrealized net gains and losses relating to the hedge ineffectiveness of these cash flow hedges that were recognized in net earnings for the three and six months ended June 30, 2007 and 2006 were immaterial to the results of operations of the Companies for those periods.

 

Other Derivatives

The Companies enter into certain derivative instruments that do not qualify or are not designated as hedges under SFAS No. 133. However, management believes these instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices. The Utilities are permitted by their respective regulators to reflect in rates all reasonably incurred gains and losses on these instruments. See “Recoverable Energy Costs” in Note A to the financial statements in Item 8 of the Form 10-K. Con Edison’s competitive energy businesses record unrealized gains and losses on these derivative contracts in earnings in the reporting period in which they occur. Generally, 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. For the three months ended June 30, 2007 and 2006, Con Edison recorded in non-utility operating revenues an unrealized pre-tax gain amounting to $3 million and a pre-tax loss of $8 million, respectively. For the six months ended June 30, 2007 and 2006, Con Edison recorded in non-utility operating revenues unrealized pre-tax losses of $13 million and $59 million, respectively.

 

Interest Rate Hedging

Con Edison’s subsidiaries use interest rate swaps to manage interest rate exposure associated with debt. The fair values of these interest rate swaps at June 30, 2007 and December 31, 2006 were as follows:

 

       Con Edison      Con Edison of
New York
 
(Millions of Dollars)      2007      2006      2007      2006  

Fair value of interest rate swaps

     $ (15 )    $ (15 )    $ (5 )    $ (3 )

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

Fair Value Hedges

Con Edison of New York’s swap (related to its $225 million of Series 2001A tax-exempt debt) is designated as a fair value hedge, which qualifies for “short-cut” hedge accounting under SFAS No. 133. Under this method, changes in fair value of the swap are recorded directly against the carrying value of the hedged bonds and have no impact on earnings.

 

Cash Flow Hedges

Con Edison Development’s and O&R’s swaps are designated as cash flow hedges under SFAS No. 133. Any gain or loss on the hedges is recorded in OCI and reclassified to interest expense and included in earnings during the periods in which the hedged interest payments occur. See “Interest Rate Hedging” in Note O to the financial statements in Item 8 of the Form 10-K for the contractual components of the interest rate swaps accounted for as cash flow hedges.

 

Note L - New Financial Accounting Standards

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

 

In June 2007, the FASB issued Emerging Issues Task Force (EITF) Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to be used in Future Research and Development Activities.” The EITF concluded that nonrefundable advance payments for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the related services are performed. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. The guidance in this EITF becomes effective for fiscal years beginning after December 15, 2007. The Companies do not expect this EITF to have a material effect on their financial position, results of operations or liquidity.

 

In May 2007, the FASB issued FASB Staff Position (FSP) No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes.” The guidance in this FSP clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The guidance in this FSP becomes effective upon adoption of the FASB Interpretation No. 48, which the Companies adopted in January 2007. See Note H. The application of this FSP did not have a material impact on the Companies’ financial position, results of operations or liquidity.

 

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115.” This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The guidance in this Statement becomes

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

 

effective for fiscal periods beginning after November 15, 2007. The Companies are currently evaluating the impact of this Statement on their financial position, results of operations or liquidity.

 

In September 2006, the FASB issued EITF Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements.” This Issue requires employers to record a liability for future benefits for endorsement split-dollar life insurance arrangements that provide a postretirement benefit to an employee. The guidance in this EITF becomes effective for fiscal periods beginning after December 15, 2007. The Companies do not expect this EITF to have a material impact on their financial position, results of operations or liquidity.

 

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value and expands the disclosures about fair value measurements. It applies to other accounting pronouncements that require fair value measurements and, accordingly, does not require any new fair value measurements. The guidance in this Statement becomes effective for financial statements issued for fiscal years beginning after November 15, 2007. The Companies are currently evaluating the impact of this Statement on their financial position, results of operations or liquidity.

 

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ITEM 2.   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON AND CON EDISON OF NEW YORK)

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

 

This MD&A should be read in conjunction with the Second 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, 2006 (File Nos. 1-14514 and 1-1217, the Form 10-K) and the MD&A in Part I, Item 2 of their combined Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007 (File Nos. 1-14514 and 1-1217, the First Quarter Form 10-Q).

 

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

 

Corporate Overview

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

 

   

Three Months Ended

June 30, 2007

 

Six Months Ended

June 30, 2007

  At June 30, 2007
(Millions of Dollars)   Operating
Revenues
  Net Income   Operating
Revenues
  Net Income   Assets

Con Edison of New York

  $ 2,236     74 %   $ 139     90 %   $ 4,909     76 %   $ 375     91 %   $ 23,359   86 %

O&R

    210     7 %     6     4 %     467     7 %     26     6 %     1,746   6 %

Total Utilities

    2,446     81 %     145     94 %     5,376     83 %     401     97 % &nbs