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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

ý Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 2003
or

o

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

Commission
File Number

  Exact name of registrant as specified in its charter and
principal office address and telephone number

  State of
Incorporation

  I.R.S. Employer
ID. Number

1-14514   Consolidated Edison, Inc.
4 Irving Place, New York, New York 10003
(212) 460-4600
  New York   13-3965100
1-1217   Consolidated Edison Company of New York, Inc.
4 Irving Place, New York, New York 10003
(212) 460-4600
  New York   13-5009340
1-4315   Orange and Rockland Utilities, Inc.
One Blue Hill Plaza, Pearl River, New York 10965
(914) 352-6000
  New York   13-1727729

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

Title of each class

  Name of each exchange on which registered


Consolidated Edison, Inc.,
Common Shares ($.10 par value)

 

New York Stock Exchange

7.25% Public Income NotES (7.25% Debentures, Series 2002A) due 2042

 

New York Stock Exchange

Consolidated Edison Company of New York, Inc.,
7.35% Public Income NotES (7.35% Debentures, Series 1999A) due 2039

 

New York Stock Exchange

7.50% Public Income NotES (7.50% Debentures, Series 2001A) due 2041

 

New York Stock Exchange

$5 Cumulative Preferred Stock, without par value

 

New York Stock Exchange

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

 

New York Stock Exchange

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

Title of each class

Consolidated Edison Company of New York, Inc.

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

1


Indicate by check mark whether each 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, and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

The aggregate market value of the common equity of Con Edison held by non-affiliates of Con Edison, as of June 30, 2003, was approximately $9.3 billion.

As of January 31, 2004, Con Edison had outstanding 226,014,244 Common Shares ($.10 par value).

All of the outstanding common equity of Con Edison of New York and O&R is held by Con Edison.

O&R meets the conditions specified in general instruction (I) (1) (a) and (b) of the Form 10-K and is therefore filing this form with the reduced disclosure format.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Con Edison's definitive proxy statement and Con Edison of New York's definitive information statement, for their respective Annual Meetings of Stockholders to be held on May 17, 2004, to be filed with the Commission pursuant to Regulation 14A and Regulation 14C, respectively, not later than 120 days after December 31, 2003, are incorporated in Part III of this report.

2


Filing Format

This Annual Report on Form 10-K is a combined report being filed separately by three different registrants: Consolidated Edison, Inc. (Con Edison), Consolidated Edison Company of New York, Inc. (Con Edison of New York) and Orange and Rockland Utilities, Inc. (O&R). Con Edison of New York and O&R are referred to in this report as the "Utilities." The Utilities are subsidiaries of Con Edison and together with Con Edison are referred to in this report as the "Companies." Neither Con Edison of New York nor O&R makes any representation as to the information contained in this report relating to Con Edison or the subsidiaries of Con Edison other than itself.


TABLE OF CONTENTS

 
   
   
  PAGE

 
Glossary of Terms   5  

Part I

 

 

 
Item 1.   Business      
        Con Edison   7  
        Con Edison of New York   9  
        O&R   17  
Item 2.   Properties      
        Con Edison   20  
        Con Edison of New York   20  
        O&R   21  
Item 3.   Legal Proceedings      
        Con Edison   23  
        Con Edison of New York   23  
        O&R   26  
Item 4.   Submission of Matters to a Vote of Security Holders   None  
    Executive Officers of the Registrant      
        Con Edison   28  
        Con Edison of New York   29  
        O&R   Omitted*  

Part II

 

 

 
Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters      
        Con Edison   30  
        Con Edison of New York   30  
        O&R   30  
Item 6.   Selected Financial Data      
        Con Edison   31  
        Con Edison of New York   31  
        O&R   Omitted*  
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations      
        Con Edison of New York   32  
        O&R   43  

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        Unregulated Subsidiaries   68  
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk      
        Con Edison   77  
        Con Edison of New York   77  
        O&R   77  
Item 8.   Financial Statements and Supplementary Data      
        Con Edison   78  
        Con Edison of New York   78  
        O&R   78  
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      
        Con Edison   None  
        Con Edison of New York   None  
        O&R   None  
Item 9A   Controls and Procedures   161  
    Forward-Looking Statements   163  

Part III

 

 

 
Item 10.   Directors and Executive Officers of the Registrant   165 *
Item 11.   Executive Compensation   165 *
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   165 *
Item 13.   Certain Relationships and Related Transactions   165 *
Item 14.   Principal Accounting Fees and Services   165  

Part IV

 

 

 
Item 15.   Exhibits, Financial Statement Schedules and Reports on Form 8-K   167  
    Signatures   175  

*
O&R is omitting this information pursuant to General Instruction I of Form 10-K.

4



Glossary of Terms

The following is a glossary of frequently used abbreviations or acronyms that are found throughout this report:

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, Con Edison of New York and O&R
The Utilities   Con Edison of New York and O&R

Regulatory and State Agencies
DEC   New York State Department of Environmental Conservation
ECAR   East Central Area Reliability Council
EPA   Environmental Protection Agency
FERC   Federal Energy Regulatory Commission
NEPOOL   New England Power Pool
NJBPU   New Jersey Board of Public Utilities
NYISO   New York Independent System Operator
NYPA   New York Power Authority
NYSERDA   New York State Energy Research and Development Authority
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
EITF   Emerging Issues Task Force
ERISA   Employee Retirement Income Security Act of 1974
FASB   Financial Accounting Standards Board
FIN   FASB Interpretation No.
GHG   Greenhouse Gases
KV   Kilovolts
kWh   Kilowatt-hour
MD&A   Management's Discussion and Analysis of Financial Condition and Results of Operations
mdths   Thousand dekatherms
MVA   Megavolt amperes
MW   Megawatts or thousand kilowatts
NJSC   New Jersey Superior Court
NYAG   New York Attorney General
NUGs   Non-utility generators
OCI   Other Comprehensive Income
PCBs   Polychlorinated biphenyls
POLR   Provider of last resort
PRP   Potentially responsible party
PUHCA   Public Utility Holding Company Act of 1935
RTO   Regional Transmission Organizations
SFAS   Statement of Financial Accounting Standards
SMD   Standard Market Design
Superfund   Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes
VaR   Value-at-Risk

5


 
   
   
  PAGE


PART I

 

 
ITEM 1.   BUSINESS CONTENTS OF ITEM 1    
    INCORPORATION BY REFERENCE    
    AVAILABLE INFORMATION    
    CON EDISON   Corporate Overview   7
        Operating Segments   7
        Regulation   7
        Competition   8
        Unregulated Subsidiaries   8
        Capital Requirements   8
        State Anti-takeover Law   8
        Employees   9
    CON EDISON OF NEW YORK   Corporate Overview   9
        Operating Segments   9
        Electric Operations   9
        Gas Operations   10
        Steam Operations   11
        Regulation   12
        Competition   12
        Capital Requirements and Financing   13
        Environmental Matters   13
        Operating Statistics   15
    O&R   General Nature and Scope of Business   17
        Operating Statistics   18

Incorporation by Reference

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

Available Information

Con Edison, Con Edison of New York and O&R file annual, quarterly and current reports, proxy or information statements and other information with the Securities and Exchange Commission (SEC). The public may read and copy any materials that the companies file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

6


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

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

Information on the Companies' websites is not incorporated herein.


CON EDISON

Corporate Overview

Consolidated Edison, Inc. (Con Edison), incorporated in New York State in 1997, owns all of the outstanding common stock of Consolidated Edison Company of New York, Inc. (Con Edison of New York) and Orange and Rockland Utilities, Inc. (O&R). Con Edison of New York and O&R, which are regulated utilities, are referred to in this report as the "Utilities" and, together with Con Edison, the "Companies." Con Edison has no significant business operations other than those of the Utilities and Con Edison's unregulated subsidiaries. See "Corporate Overview" in Item 7.

Operating Segments

Con Edison's principal business segments are Con Edison of New York's regulated electric, gas and steam utility segments, O&R's regulated electric and gas utility segments and the unregulated businesses of Con Edison's other subsidiaries. In 2003, the operating revenues of the Utilities were 90 percent of Con Edison's operating revenues. For a discussion of operating revenues and operating income for each segment, see "Results of Operations" in Item 7. For additional segment information see Note O to the financial statements in Item 8 and the discussions of Utilities below in this Item 1.

Regulation

The Utilities are subject to extensive federal and state regulation, including by state utility commissions and the Federal Energy Regulatory Commission (FERC). Con Edison, itself, is not subject to such regulation except to the extent that the rules or orders of these agencies impose restrictions on relationships between Con Edison and the Utilities. See "Regulation" in the discussion below of Con Edison of New York's business in this Item 1.

Con Edison is a "holding company" under the Public Utility Holding Company Act of 1935 (PUHCA). Con Edison is exempt from all provisions of PUHCA, except Section 9(a)(2) (which requires SEC approval for a direct or indirect acquisition of five percent or more of the voting

7



securities of any other electric or gas utility company) on the basis that Con Edison and the Utilities are organized and carry on their utility businesses substantially in the State of New York and that it does not derive any material part of its income from a public utility company organized outside of the State of New York. This exemption is available even though Con Edison subsidiaries that are neither an "electric utility company" nor a "gas utility company," as defined, under PUHCA engage in interstate activities.

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

Competition

See "Competition," below in the discussion of the businesses of the Utilities in this Item 1 and "Unregulated Subsidiaries," below.

Unregulated Subsidiaries

Con Edison has four unregulated subsidiaries: Consolidated Edison Solutions, Inc. (Con Edison Solutions), a retail energy services company that sells electricity, gas and energy-related services to delivery customers of utilities, including Con Edison of New York and O&R; Consolidated Edison Energy, Inc. (Con Edison Energy), a wholesale energy supply company; Consolidated Edison Development, Inc. (Con Edison Development), a company that owns and operates generating plants and energy and other infrastructure projects; and Con Edison Communications, LLC (Con Edison Communications), a company that builds and operates fiber optic networks to provide telecommunications services. The unregulated subsidiaries participate in competitive supply and services businesses that are subject to different risks than those found in the businesses of the Utilities. The unregulated subsidiaries accounted for almost 10 percent of consolidated operating revenues and a reduction in consolidated net income of 18 percent in 2003, and 7 percent of consolidated total assets at December 31, 2003. For a discussion of the unregulated subsidiaries' operating revenues and operating income, see "Results of Operations—Unregulated Subsidiaries and Other" in Item 7.

Capital Requirements and Financing

For information about Con Edison's capital requirements, financing and securities ratings, see "Liquidity and Capital Resources—Capital Resources, Capital Requirements and Financial Market Risks" in Item 7. Securities ratings assigned by rating organizations are expressions of opinion and are not recommendations to buy, sell or hold securities. A securities rating is subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.

State Anti-takeover Law

New York State law provides that a "domestic corporation," such as Con Edison, may not consummate a merger, consolidation or similar transaction with the beneficial owner of a 20 percent or greater voting stock interest in the corporation, or with an affiliate of the owner, for five

8


years after the acquisition of voting stock interest, unless the transaction or the acquisition of the voting stock interest was approved by the corporation's board of directors prior to the acquisition of the voting stock interest. After the expiration of the five-year period, the transaction may be consummated only pursuant to a stringent "fair price" formula or with the approval of a majority of the disinterested stockholders.

Employees

Con Edison has no employees other than those of Con Edison of New York, O&R and Con Edison's unregulated subsidiaries (which at December 31, 2003 had 12,648, 1,028 and 403 employees, respectively).

The respective collective bargaining agreements covering about two-thirds of each of the Utilities' employees expire in June 2004.


CON EDISON OF NEW YORK

Corporate Overview

Con Edison of New York, incorporated in New York State in 1884, is a subsidiary of Con Edison and has no significant subsidiaries of its own. Con Edison of New York provides electric service in all of New York City (except part of Queens) and most of Westchester County, an approximately 660 square mile service area with a population of more than eight million. It also provides gas service in Manhattan, the Bronx and parts of Queens and Westchester, and steam service in parts of Manhattan.

Operating Segments

Con Edison of New York's principal business segments are its regulated electric, gas and steam businesses. In 2003, electric, gas and steam operating revenues were 78 percent, 16 percent and 6 percent, respectively, of its operating revenues. For a discussion of the company's operating revenues and operating income for each segment, see "Results of Operations" in Item 7. For additional information about the segments, see Note O to the financial statements in Item 8.

Electric Operations

Electric Sales.    Electric operating revenues were $6 billion in 2003 or 78 percent of Con Edison of New York's operating revenues. The percentages were 80 and 78 percent, respectively, in the two preceding years. In 2003, 57 percent of the electricity delivered by Con Edison of New York in its service areas was sold by the company to its full-service customers, 24 percent was sold by other suppliers, including Con Edison Solutions, an unregulated subsidiary of Con Edison, to the company's customers under its electric retail access program and the balance was delivered to the state and municipal customers of the New York Power Authority (NYPA) and the economic development customers of municipal electric agencies. The company charges for the delivery of electricity sold by itself and other suppliers to customers in its service area.

For additional information about electricity sales, see "Operating Statistics," below, and "Results of Operation—Electric" in Item 7.

9


Electric Peak Load.    The electric peak load in Con Edison of New York's service area occurs during the summer air conditioning season. The 2003 service area peak load, which occurred on June 26, was 11,875 thousand kilowatts (MW). The 2003 peak load included an estimated 7,220 MW for Con Edison of New York's full-service customers, 2,725 MW for customers participating in its electric retail access program and 1,930 MW for NYPA's customers and municipal electric agency customers. If adjusted to historical design weather conditions, the 2003 peak load would have been 12,600 MW. The company estimates that, under design weather conditions, the 2004 service area peak load will be 12,825 MW, including an estimated 7,800 MW for its full-service customers, 2,930 for its electric retail access customers and 2,095 MW for NYPA's customers and municipal electric agency customers. "Design weather" for the electric system is a standard to which the actual peak load is adjusted for evaluation and planning purposes.

Electric Supply.    Most of the electricity sold by Con Edison of New York to its customers in 2003 was purchased under firm power contracts or through the wholesale electricity market administered by the New York Independent System Operator (NYISO). The firm power contracts were primarily with non-utility generators (NUGs).

The company plans to meet its continuing obligation to supply electricity to its customers with electric energy purchased under contracts with NUGs or others, generated from its electric generating facilities or purchased through the NYISO's wholesale electricity market.

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

For information about the company's contracts with NUGs for approximately 3,200 MW of electric generating capacity, see Note I to the financial statements in Item 8.

For information about the company's 630 MW of electric generating facilities, see Item 2.

The NYISO is a not-for-profit organization that controls and operates most of the electric transmission facilities in New York State, including those of Con Edison of New York, as an integrated system and administers a wholesale market for electricity in New York State. Pursuant to criteria that are reviewed annually, the NYISO requires that entities supplying electricity to customers in New York State have generating capacity (either owned or contracted for) in an amount that is at least 18 percent above the expected peak load for their customers. In addition, the NYISO has determined that entities that serve customers in New York City must have enough New York City-located capacity to cover 80 percent of their New York City customer peak loads. Con Edison of New York met the requirements applicable to it in 2003 and expects to meet them in 2004.

Gas Operations

Gas Sales.    Gas operating revenues in 2003 were $1 billion or 16 percent of Con Edison of New York's operating revenues. The percentages were 15 percent in each of the two preceding years. In 2003, 51 percent of the gas delivered by the company in its service area was sold by the

10


company to its full-service (firm and interruptible) customers and 49 percent was sold by other suppliers, including Con Edison Solutions. For additional information about gas sales, see "Operating Statistics," below, and "Results of Operations—Gas" in Item 7.

Gas Requirements.    Firm demand for gas in Con Edison of New York's service area peaks during the winter heating season. The "design criteria" for the company's gas system assume severe weather conditions, which have not occurred since the 1933-34 winter. Under these criteria, the company estimated that its requirements to deliver gas to firm customers during the November 2003/March 2004 winter heating season would amount to 78,900 thousand dekatherms (mdths) (including 67,600 mdths to its firm sales customers and 11,300 mdths to its firm transportation customers). Through January 31, 2004, the company's peak throughput day in this heating season occurred on January 26, 2004 when it delivered 1,068 mdths of gas (including 750 mdths to its firm sales customers, 17 mdths to NYPA, 190 mdths to its transportation customers and 111 mdths for use by the company in generating electricity and steam).

Under its design criteria, the company projects that for the November 2004/March 2005 winter heating season, its requirements for firm gas customers will amount to 79,500 mdths (including 67,800 mdths to firm sales customers and 11,700 mdths to firm transportation customers) and that the peak day requirements for these customers will amount to 978 mdths. The company expects to be able to meet these requirements.

Gas Supply.    Con Edison of New York and O&R have established a combined gas supply and capacity portfolio. The combined portfolio is administered by, and related management services are provided by, Con Edison of New York (for itself and as agent for O&R) and costs are allocated between the Utilities in accordance with provisions approved by the New York State Public Service Commission (PSC). See Note U to the financial statements in Item 8.

Charges from suppliers for the firm purchase of gas, which are based on formulas or indexes or are subject to negotiation, are generally designed to approximate market prices. The contracts are for various terms extending to 2008. The Utilities have contracts with interstate pipeline companies for the purchase of firm transportation and storage services. Charges under these contracts are approved by the FERC. The contracts are for various terms extending to 2013. The Utilities are required to pay certain charges under the supply, transportation and storage contracts whether or not the contracted capacity is actually used. These fixed charges amounted to approximately $129 million in 2003. See "Contractual Obligations" in Item 7. In addition, the Utilities purchase gas on the spot market and have interruptible gas transportation contracts. See "Recoverable Energy Costs" in Note A to the financial statements in Item 8.

Steam Operations

Steam Sales.    Con Edison of New York sells steam in Manhattan south of 96th Street, mostly to large office buildings, apartment houses and hospitals. In 2003, steam operating revenues were $537 million or 6 percent of the company's operating revenues. The percentages were 6 percent in the two preceding years.

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

Steam Peak Load and Capacity.    Demand for steam in Con Edison of New York's service area peaks during the winter heating season. The one-hour peak load during the winter of 2003/2004 (through January 31, 2004) occurred on January 16, 2004 when the load reached 10.1 million pounds (mlbs) per hour. The company's estimate for the winter of 2004/2005 peak demand of its steam customers is 10.5 mlbs per hour under design criteria, which assume severe weather.

On December 31, 2003, the steam system had the capability of delivering about 12.6 mlbs of steam per hour. Con Edison of New York estimates that the system will have the capability to deliver 12.8 mlbs of steam per hour in the 2004/2005 winter.

Steam Supply.    52 percent of the steam sold by Con Edison of New York in 2003 was produced in the company's steam-only generating stations; 36 percent was produced in the company's steam/electric generating stations, where it is first used to generate electricity; and 12 percent was purchased from others. See Item 2 for a discussion of Con Edison of New York's steam facilities.

Regulation

The PSC regulates, among other things, Con Edison of New York's electric, gas and steam rates, the siting of its transmission lines and the issuance of its securities. Certain activities of the company are subject to the jurisdiction of the FERC. In addition, various matters relating to the construction and operations of the company's facilities are subject to regulation by other governmental agencies. Changes in regulation or legislation applicable to the company could have a material adverse effect on the company. For additional information, including information about the company's electric, gas and steam rates, see "Regulatory Matters" in Item 7.

The PSC from time to time conducts "generic" proceedings to consider issues relating to all electric and gas utilities operating in New York State. Pending proceedings include those relating to utilities exiting the business of selling electric energy and gas at retail (including an examination of utilities' provider of last resort responsibility and consumer protections); the State's goal of increasing to 25 percent (from approximately 18 percent at the end of 2003) the portion of electricity used in the State provided from renewable energy resources; and addressing any rate disincentives against the promotion of energy efficiency and distributed generation. The company typically is an active participant in such proceedings. The company does not expect that the pending proceedings will have a material adverse effect on its financial position, results of operation or liquidity.

Competition

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

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See "Rates and Restructuring Agreements" in Note B and "Recoverable Energy Costs" in Note A to the financial statements in Item 8.

The company's electric, gas and steam rates are among the highest in the country.

Competition from suppliers of oil and other sources of energy, including distributed generation (such as fuel cells and micro-turbines) may provide alternatives for Con Edison of New York delivery customers. The company does not consider it reasonably likely that another company would be authorized to provide utility delivery service where the company already provides service. Any such other company would need to obtain PSC consent, satisfy applicable local requirements and install facilities to provide the service. The new company would also be subject to extensive ongoing regulation by the PSC.

Capital Requirements and Financing

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

Securities ratings assigned by rating organizations are expressions of opinion and are not recommendations to buy, sell or hold securities. A securities rating is subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.

Environmental Matters

Hazardous substances, such as asbestos, polychlorinated biphenals (PCBs) and coal tar, have been used or generated in the course of operations of Con Edison of New York and its predecessors and are present at sites and in facilities and equipment they currently or previously owned, including sites at which gas was manufactured or stored. See "Asbestos" and "Superfund" in the discussion of Con Edison of New York's legal proceedings in Item 3 and Note G to the financial statements in Item 8.

Con Edison of New York's capital expenditures for environmental protection facilities and related studies were $87 million in 2003 and are estimated to be $76 million in 2004.

In April 2000, Con Edison of New York entered into a Stipulation and Order of Consent with the United States Attorney for the Southern District of New York in connection with its response to the release of PCB's during the September 1998 transformer fire at the Arthur Kill Generating

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Station site that it sold in 1999. Among other things, the company agreed to maintain an effective environmental compliance program.

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

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

Greenhouse Gas Emissions.    The potential for adverse effects from global warming associated with the atmospheric release of greenhouse gases (GHG), particularly carbon dioxide (CO2), from industrial sources may result in legislation or regulations requiring utilities to reduce GHG emissions from power plants and take other steps to offset GHG emissions from other sources. Con Edison of New York minimizes GHG emissions from its generating plants through the use of oil and gas fuels and the application of cogeneration technologies that reduce GHG emissions per unit of energy output. The company's GHG emissions also include sulfur hexafluoride (used for arc suppression at substations) and methane (from operation of its gas delivery system), which the company is working voluntarily with EPA to reduce. The cost to comply with any new legislation or regulations limiting the company's GHG emissions could be substantial.

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Con Edison of New York


OPERATING STATISTICS

 
  Year Ended December 31,

 
  2003

  2002

  2001

  2000

  1999

 
 
ELECTRIC ENERGY (MWH)                    

Generated (a)

 

1,077,681

 

1,259,533

 

6,793,393

 

3,259,790

 

15,266,628
Purchased from others   31,717,254   32,712,723   27,877,154   35,780,429   29,303,386

TOTAL GENERATED AND PURCHASED   32,794,935   33,972,256   34,670,547   39,040,219   44,570,014
Less: Used by Company   175,965   172,873   187,773   191,445   151,090
          Distribution losses and other variances   1,893,403   2,008,530   1,931,694   2,768,249   2,682,632

NET GENERATED AND PURCHASED   30,725,567   31,790,853   32,551,080   36,080,525   41,736,292

Electric Energy Sold

 

 

 

 

 

 

 

 

 

 
  Residential   12,440,663   12,481,689   12,048,743   11,637,167   11,854,995
  Commercial and industrial   18,033,468   19,110,770   19,839,340   19,930,376   20,238,777
  Railroads and railways   18,193   55,186   16,003   95,457   71,447
  Public authorities   135,758   125,651   150,069   257,706   465,287

Con Edison of New York full service customers   30,628,082   31,773,296   32,054,155   31,920,706   32,630,506
Off-System Sales (b)   97,485   17,557   496,925   4,159,819   9,105,786

TOTAL ELECTRIC ENERGY SOLD   30,725,567   31,790,853   32,551,080   36,080,525   41,736,292

ELECTRIC ENERGY DELIVERED                    
Con Edison of New York full service customers   30,628,082   31,773,296   32,054,155   31,920,706   32,630,506
Delivery service for retail access customers   12,636,520   11,925,752   10,520,219   9,321,630   7,935,827
Delivery service to NYPA customers and others   9,823,018   9,504,526   9,815,259   9,631,618   9,335,230
Delivery service for municipal agencies   647,388   762,660   660,220   526,816   624,229

TOTAL DELIVERIES IN FRANCHISE AREA   53,735,008   53,966,234   53,049,853   51,400,770   50,525,792

AVERAGE ANNUAL KWHR USE PER RESIDENTIAL CUSTOMER (c)   4,622   4,652   4,502   4,372   4,487

AVERAGE REVENUE PER KWHR SOLD (CENTS)

 

 

 

 

 

 

 

 

 

 
  RESIDENTIAL (c)   19.4   17.0   18.1   18.5   15.9
  COMMERCIAL AND INDUSTRIAL (c)   16.3   14.4   15.6   15.5   12.7
(a)
Con Edison of New York has sold most of its electric generating assets. See Note J to the financial statements.

(b)
For 2000 and 1999, included sales to Con Edison Solutions. See "Unregulated Subsidiaries," above.

(c)
Includes Municipal Agency sales.

15



Con Edison of New York


OPERATING STATISTICS (CONTINUED)

 
  Year Ended December 31,

 
 
  2003

  2002

  2001

  2000

  1999

 
 
 
 
GAS (DTH)                                

Purchased

 

 

145,325,065

 

 

134,126,768

 

 

140,633,193

 

 

157,800,083

 

 

245,496,798

 
Storage - net change     (5,516,703 )   5,728,684     (6,474,137 )   774,660     1,964,581  
Used as boiler fuel at Electric and Steam Stations (a)     (27,362,620 )   (29,386,788 )   (27,725,598 )   (27,674,312 )   (67,331,325 )

 
GAS PURCHASED FOR RESALE     112,445,742     110,468,664     106,433,458     130,900,431     180,130,054  

Less: Gas used by the company

 

 

383,312

 

 

323,915

 

 

299,057

 

 

294,937

 

 

369,938

 
          Off-System Sales & NYPA     4,007,592     16,120,307     12,666,668     29,563,339     92,072,772  
          Distribution losses and other variances     4,023,631     4,555,763     (2,887,761 )   7,060,117     1,998,637  

 
TOTAL GAS PURCHASED FOR CON EDISON OF NEW YORK CUSTOMERS     104,031,207     89,468,679     96,355,494     93,982,038     85,688,707  

GAS SOLD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Firm Sales                                
  Residential     51,943,706     44,162,920     46,506,365     47,602,792     44,705,689  
  General     36,840,304     32,681,926     35,118,342     30,468,676     27,271,134  

 
TOTAL FIRM SALES     88,784,010     76,844,846     81,624,707     78,071,468     71,976,823  
Interruptible Sales     15,247,197     12,623,833     14,730,787     15,910,570     13,711,884  

 
TOTAL GAS SOLD TO CON EDISON OF NEW YORK CUSTOMERS     104,031,207     89,468,679     96,355,494     93,982,038     85,688,707  

 
Transportation of customer-owned gas                                
  Firm transportation     16,485,309     15,695,403     14,279,816     18,215,120     17,382,490  
  NYPA     23,360,162     25,466,325     13,762,339     19,857,321     11,268,947  
  Other     61,575,954     99,815,203     78,709,049     97,155,425     22,560,029  
Off-System Sales     459,088     8,354,940     6,206,522     23,067,713     32,942,436  

 
TOTAL SALES AND TRANSPORTATION     205,911,720     238,800,550     209,313,220     252,277,617     169,842,609  

 

AVERAGE REVENUE PER DTH SOLD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  RESIDENTIAL   $ 13.02   $ 12.30   $ 14.25   $ 11.62   $ 11.20  
  GENERAL   $ 10.23   $ 8.90   $ 10.76   $ 8.44   $ 7.70  

 
STEAM SOLD (MLBS)     26,248,361     24,519,476     25,327,694     26,733,260     26,532,797  

 
AVERAGE REVENUE PER MLB SOLD   $ 19.47   $ 15.52   $ 18.86   $ 16.37   $ 12.80  

CUSTOMERS - AVERAGE FOR YEAR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Electric     3,137,301     3,117,542     3,100,642     3,078,648     3,054,693  
Gas     1,053,946     1,054,312     1,051,540     1,051,555     1,046,133  
Steam     1,825     1,838     1,853     1,861     1,879  
(a)
Con Edison of New York has sold most of its electric generating assets. See Note J to the financial statements.

16



O&R

General Nature and Scope of Business

O & R, a subsidiary of Con Edison incorporated in New York State in 1926, has two wholly-owned utility subsidiaries, Rockland Electric Company (RECO), a New Jersey corporation, and Pike County Light & Power Company (Pike), a Pennsylvania corporation.

O&R and its utility subsidiaries provide electric service in southeastern New York and in adjacent sections of New Jersey and northeastern Pennsylvania, an approximately 1,350 square mile service area. They also provide gas service in southeastern New York and Pennsylvania. O&R's business is subject to regulation by the PSC, the New Jersey Board of Public Utilities (NJBPU), Pennsylvania Public Utility Commission (PPUC) and the FERC. Changes in regulation or legislation applicable to O&R could have a material adverse effect on the company's financial position, results of operations or liquidity.

O&R's principal business segments are its regulated electric and gas utility businesses. In 2003, electric and gas operating revenues were 73 percent and 27 percent, respectively, of its operating revenues.

Competition

O&R is primarily a "wires and pipes" energy delivery company that:

See "Rates and Restructuring Agreements" in Note B and "Recoverable Energy Costs" in Note A to the financial statements in Item 8.

Competition from suppliers of oil and other sources of energy, including distributed generation (such as fuel cells and micro-turbines) may provide alternatives for O&R delivery customers. The company does not consider it reasonably likely that another company would be authorized to provide utility delivery service where the company already provides service. Any such other company would need to obtain the consent of the applicable state utility commission, satisfy applicable local requirements and install facilities to provide the service. The new company would also be subject to extensive ongoing regulation by the applicable state utility commission.

For additional information about O&R's business, see the discussion of O&R's results of operations in Item 7 and the notes to the financial statements in Item 8. For information about O&R's legal proceedings, see Item 3.

17



O&R

OPERATING STATISTICS

 
  Year Ended December 31,

 
  2003

  2002

  2001

  2000

  1999

 
 
ELECTRIC ENERGY (MWH)                    

Generated (a)

 

-

 

-

 

-

 

-

 

1,871,898
Purchased from others   4,388,804   4,506,217   4,565,551   4,879,400   3,153,359

TOTAL GENERATED AND PURCHASED   4,388,804   4,506,217   4,565,551   4,879,400   5,025,257
Less: Supplied without direct charge   11   9   6   20   23
          Used by company   15,511   13,435   14,572   19,337   134,587
          Distribution losses and other variances   215,615   173,397   101,461   410,469   369,433

NET GENERATED AND PURCHASED   4,157,667   4,319,376   4,449,512   4,449,574   4,521,214

ELECTRIC ENERGY SOLD

 

 

 

 

 

 

 

 

 

 
  Residential   1,769,421   1,815,241   1,772,552   1,881,680   1,942,347
  Commercial and industrial   2,276,973   2,393,039   2,566,651   2,463,744   2,373,415
  Public authorities   111,273   111,096   110,309   104,150   96,294

Total sales to Orange & Rockland customers   4,157,667   4,319,376   4,449,512   4,449,574   4,412,056
Off-System Sales   -   -   -   -   109,158

TOTAL ELECTRIC ENERGY SOLD   4,157,667   4,319,376   4,449,512   4,449,574   4,521,214


Total sales to Orange & Rockland customers

 

4,157,667

 

4,319,376

 

4,449,512

 

4,449,574

 

4,412,056
Delivery service for Retail Choice customers   1,454,794   1,235,048   798,814   606,794   589,223

TOTAL SALES IN FRANCHISE AREA   5,612,461   5,554,424   5,248,326   5,056,368   5,001,279


AVERAGE ANNUAL KWH USE PER RESIDENTIAL CUSTOMER

 

8,955

 

8,801

 

8,506

 

7,854

 

8,065

AVERAGE REVENUE PER KWH SOLD (CENTS)

 

 

 

 

 

 

 

 

 

 
  RESIDENTIAL   12.17   11.23   12.79   12.22   11.84
  COMMERCIAL AND INDUSTRIAL   9.81   8.65   10.04   9.93   8.18
(a)
O&R sold its electric generating facilities prior to its acquisition by Con Edison in July 1999.

18



O&R


OPERATING STATISTICS (CONTINUED)

 
  Year Ended December 31,

 
 
  2003

  2002

  2001

  2000

  1999

 
 
 
 
GAS (DTH)                                

Purchased

 

 

16,546,568

 

 

19,723,917

 

 

18,588,275

 

 

25,042,346

 

 

36,711,658

 
Storage - net change     1,112,011     (2,139,045 )   854,482     (1,099,134 )   890,604  
Used as boiler fuel at O&R electric generating stations (a)     -     -     -     -     (15,252,652 )

 
GAS PURCHASED FOR RESALE     17,658,579     17,584,872     19,442,757     23,943,212     22,349,610  

Less: Gas used by the company

 

 

52,377

 

 

56,939

 

 

45,979

 

 

57,828

 

 

77,613

 
          Distribution losses and other variances     376,605     856,036     578,187     841,295     705,213  

 
TOTAL GAS PURCHASED FOR O&R CUSTOMERS     17,229,597     16,671,897     18,818,591     23,044,089     21,566,784  

 

GAS SOLD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Firm Sales                                
  Residential     10,810,384     10,203,403     11,724,341     14,281,013     13,702,735  
  General     3,314,154     3,294,624     3,750,851     4,080,178     4,389,977  

 
TOTAL FIRM SALES     14,124,538     13,498,027     15,475,192     18,361,191     18,092,712  
Interruptible Sales     3,105,059     3,173,870     3,343,399     3,653,684     3,474,072  
Sales to Con Edison     -     -     -     1,029,214     -  

 
TOTAL GAS SOLD TO O&R CUSTOMERS     17,229,597     16,671,897     18,818,591     23,044,089     21,566,784  
Transportation of customer-owned gas                                
  Firm transportation     8,497,814     6,367,990     4,723,695     3,415,804     2,207,541  
  Interruptible transportation     3,728,018     4,192,062     3,920,901     4,222,835     1,905,807  
  Sales for resale     1,133,649     1,057,156     1,039,083     1,138,937     17,740  
  Sales to divested electric generating stations     2,833,322     13,983,048     11,427,428     11,640,751     -  
Off-System Sales     373,686     2,883,913     2,526,829     4,984,794     264,277  

 
TOTAL SALES AND TRANSPORTATION     33,796,086     45,156,066     42,456,527     48,447,210     25,962,149  

 

AVERAGE REVENUE PER DTH SOLD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  RESIDENTIAL   $ 10.41   $ 8.29   $ 10.29   $ 8.32   $ 7.77  
  GENERAL   $ 10.00   $ 7.87   $ 9.73   $ 7.65   $ 6.92  

CUSTOMERS - AVERAGE FOR YEAR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Electric     288,746     285,519     282,191     278,851     275,640  
Gas     122,565     121,437     120,108     118,707     117,283  
(a)
O&R sold its electric generating facilities prior to its acquisition by Con Edison in July 1999.

19


ITEM 2.   PROPERTIES


CON EDISON

Con Edison has no significant properties other than those of the Utilities and Con Edison's unregulated subsidiaries.

At December 31, 2003, the capitalized cost of the Companies' utility plant, net of accumulated depreciation, was as follows (in millions of dollars):

 
  Con Edison of
New York

  O&R

  Con Edison

 
 
  Amount

  Percent

  Amount

  Percent

  Amount

  Percent

 
 
 
 
Electric                                
  Generation   $ 374   3 % $ -   - % $ 374   3 %
  Transmission     1,200   9 %   106   12 %   1,306   9 %
  Distribution     7,118   53 %   428   50 %   7,546   53 %
Gas     1,941   14 %   242   28 %   2,183   15 %
Steam     607   5 %   -   - %   607   4 %
General     926   7 %   76   9 %   1,002   7 %
Held for future use     5   - %   2   - %   7   - %
Construction work in progress     1,247   9 %   29   3 %   1,276   9 %
Unallocated depreciation reserve     -   - %   (17 ) (2 )%   (17 ) - %

 
NET UTILITY PLANT   $ 13,418   100 % $ 866   100 % $ 14,284   100 %


CON EDISON OF NEW YORK

Electric Facilities

Generating Facilities.    Con Edison of New York's electric generating facilities consist of plants located in New York City with an aggregate capacity of 630 MW. The company expects to have sufficient amounts of gas and fuel oil available in 2004 for use in these facilities. The company intends to add incremental generating capacity of approximately 200 MW based on a winter nominal rating (or approximately 125 MW based on a summer nominal rating) through the repowering of its East River station and the closing of its Waterside station.

Transmission Facilities.    Con Edison of New York's transmission facilities, other than those located underground, are controlled and operated by the NYISO. See "Electric Operations—Electric Supply" in Item 1 (which information is incorporated herein by reference). At December 31, 2003, Con Edison of New York's transmission system had 432 miles of overhead circuits operating at 138, 230, 345 and 500 kV and 138 miles of underground circuits operating at 138 and 345 kV. There are 267 miles of radial subtransmission circuits operating at 69 kV and above. The company's 14 transmission substations supplied by circuits operated at 69kV and above, have a total transformer capacity of 15,731 MVA. The company's transmission facilities are located in New York City and Westchester, Orange, Rockland, Putnam and Dutchess counties in New York State.

Con Edison of New York has transmission interconnections with Niagara Mohawk, Central Hudson Gas & Electric Corporation, O&R, New York State Electric and Gas Corporation, Connecticut Light

20



and Power Company, Long Island Power Authority, NYPA and Public Service Electric and Gas Company.

Distribution Facilities.    Con Edison of New York owns various distribution substations and facilities located throughout New York City and Westchester County. At December 31, 2003, the company's distribution system had a transformer capacity of 24,400 MVA, with 32,840 miles of overhead distribution lines and 90,218 miles of underground distribution lines.

Gas Facilities

Natural gas is delivered by pipeline to Con Edison of New York at various points in its service territory and is distributed to customers by the company through 4,261 miles of mains and 374,622 service lines. The company owns a natural gas liquefaction facility and storage tank at its Astoria property in Queens, New York. The plant can store approximately 1,000 mdth of which a maximum of about 250 mdth can be withdrawn per day. The company has about 1,230 mdth of additional natural gas storage capacity at a field in upstate New York, owned and operated by Honeoye Storage Corporation, a corporation 28.8 percent owned by Con Edison of New York.

Steam Facilities

Con Edison of New York generates steam for distribution at three steam/electric generating stations and five steam-only generating stations and distributes steam to customers through approximately 87 miles of mains and 18 miles of service lines. For information about the planned repowering of the East River steam-electric station, see "Electric Facilities—Generating Facilities," above.


O&R

Electric Transmission and Distribution Facilities

O&R and its utility subsidiaries, RECO and Pike, own, in whole or in part, transmission and distribution facilities which include 602 circuit miles of transmission lines, 14 transmission substations (with a total transformer capacity of 3,762 MVA), 59 distribution substations (with a transformer capacity of 1,987 MVA), 93,536 in-service line transformers, 5,120 pole miles of overhead distribution lines and 2,688 miles of underground distribution lines.

Gas Facilities

O&R and Pike own their gas distribution systems, which include 1,805 miles of mains.

RECO & Pike Mortgages

Substantially all of the utility plant and other physical property of O&R's utility subsidiaries, RECO and Pike, is subject to the liens of the respective indentures securing first mortgage bonds of each company.

21



UNREGULATED SUBSIDIARIES

Con Edison's unregulated subsidiaries own interests of 1,668 MW of capacity in electric generating facilities, most of which use gas and/or oil as fuel. These interests, the capitalized costs of which at December 31, 2003 amounted to $859 million (net of accumulated depreciation), are as follows:

Name

  Power Plant Type
Base/Peak/Intermediate

  Power Pool/Location

  Aggregate Capacity
(in MW)

 

 
Newington   Base   NEPOOL/New Hampshire   525  
ADA   Base   ECAR/Michigan   29 (a)
GENOR   Base   Central America/Guatemala   42  
           
 
Total Base Capacity   596  
           
 

CEEMI

 

Intermediate

 

NEPOOL/Massachusetts

 

185

 
Lakewood   Intermediate   PJM/New Jersey   236 (b)
           
 
Total Intermediate Capacity   421  
           
 

CEEMI

 

Peaking

 

NEPOOL/Massachusetts

 

96

 
Ocean Peaking   Peaking   PJM/New Jersey   330  
Rock Springs   Peaking   PJM/Maryland   335  
           
 
Total Peaking Capacity   761  
           
 

 

 

 

 

 

 

 

 
Total Capacity   1,778 (c)
           
 

(a)
Subject to a power purchase agreement expiring in 2026.

(b)
Subject to a power purchase agreement expiring in 2014.

(c)
Con Edison Development's interest in these facilities amounts to 1,668 MW.

Con Edison's unregulated subsidiaries are also engaged in two leasing transactions involving gas distribution and electric generating facilities in the Netherlands. See Note K to the financial statements in Item 8 (which information is incorporated herein by reference).

Con Edison Communications' properties, the capitalized cost of which at December 31, 2003 amounted to $30 million (net of the impairment charge discussed in Note H to the financial statements in Item 8, which information is incorporated herein by reference), are included in Con Edison's financial statements as non-utility property and construction work in progress. The properties include network facilities and nearly 400 miles of fiber optic cable that has been installed in the New York City metropolitan area primarily through Con Edison of New York underground conduits and other rights of way. Con Edison Communication's pays a fee for the use of such conduits and rights of way.

22



ITEM 3.    LEGAL PROCEEDINGS


CON EDISON

Northeast Utilities

For information about legal proceedings relating to Con Edison's October 1999 agreement to acquire Northeast Utilities, see Note Q to the financial statements in Item 8 (which information is incorporated herein by reference).

Newington Project

For a description of the Newington Project, see Note T to the financial statements included in Item 8 (which information is incorporated herein by reference). In September 2002, Duke/Fluor Daniel, the general contractor for the Newington Project, initiated an arbitration proceeding with respect to its contract claims for an additional payment to it of approximately $100 million for alleged project costs and a 176-day extension of the project's scheduled substantial completion date. In September 2002, the general contractor commenced an action in Superior Court in the State of New Hampshire, and obtained a pre-judgment attachment on the project as security for the payment of its claim for additional project costs. The New Hampshire Superior Court subsequently ruled that the attachment was impermissible and ordered it to be removed. This ruling has been stayed pending an appeal before the New Hampshire Supreme Court.


CON EDISON OF NEW YORK

Nuclear Generation

In February 2004, the PSC approved the December 2003 settlement among Con Edison of New York, the staff of the PSC and other parties regarding the PSC proceeding investigating a February 2000 to January 2001 outage of the nuclear generating unit the company sold in 2001, its causes and the prudence of Con Edison of New York's actions regarding the operation and maintenance of the generating unit. The proceeding covered, among other things, Con Edison of New York's inspection practices, the circumstances surrounding prior outages, the basis for the company's decisions concerning replacement of the unit's steam generators and whether, and to what extent, increased replacement power costs and repair and replacement costs should be borne by Con Edison's shareholders. Pursuant to the settlement, the company will refund $45.5 million to its customers and provide $2.5 million to fund one or more energy efficiency programs for its low-income customers. In 2000, the company accrued a $40 million liability for possible refund to customers in connection with this proceeding. In addition, under the settlement, the company will forego recovery of $89.5 million of replacement power costs that the company had incurred in 2000 but not billed to customers and as to which no customer account receivable or regulatory asset was established and no income previously recognized. The settlement reduced 2003 net income by $8 million ($5 million after tax).

Asbestos

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

23


Plaintiff has agreed with Con Edison of New York to settle for $350,000 the action in New York State Supreme Court, New York County, entitled Robert Croteau v. A.C.& S., Inc. et al. In March 2003, the jury in this action awarded plaintiff $47 million for asbestos-related injuries. The plaintiff was employed by a subcontractor who did work in the 1970s on two power plants being constructed for Con Edison of New York.

Superfund

The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes (Superfund) impose joint and several liability, regardless of fault, upon generators of hazardous substances for investigation, remediation costs and environmental damages. The sites at which Con Edison of New York has been asserted to have liability under Superfund include its and its predecessor companies' former manufactured gas sites, its Astoria PCB storage facility, the Arthur Kill Generating Station site that it sold in 1999 and other Superfund sites discussed below. There may be additional sites as to which assertions will be made that the company has liability. For a further discussion of claims and possible claims against the company under Superfund, including with respect to its manufactured gas sites, estimated liability accrued for Superfund claims and recovery from customers of site investigation and remediation costs, see Note G to the financial statements in Item 8 (which information is incorporated herein by reference).

Manufactured Gas Sites.    Con Edison of New York and its predecessors formerly manufactured gas and maintained storage holders for manufactured gas at sites in New York City and Westchester County, New York (MGP Sites). Many of these sites are now owned by parties other than Con Edison of New York and have been redeveloped by them for other uses, including schools, residential and commercial developments and hospitals. The New York State Department of Environmental Conservation (DEC) is requiring the company to investigate and, if necessary to protect public health and the environment from any MGP-related contamination that may be present at them, and to develop and implement remediation programs for the MGP Sites, which include 33 manufactured gas plant sites and 17 storage holder sites.

The information available to Con Edison of New York for most of the MGP Sites is incomplete as to the extent of contamination and remediation and monitoring methods, if any, to be used. Investigation at most of the MGP Sites has not yet started and has been completed at only two of the MGP Sites. Coal tar and/or other manufactured gas plant-related environmental contaminants have been detected at 12 MGP Sites, including sites in Manhattan and other parts of New York City and in Westchester County.

Astoria Site.    Con Edison of New York is permitted by the DEC to operate a PCB storage facility on property the company owns in the Astoria section of Queens, New York. Apart from the PCB storage facility, portions of the property were the former location of an MGP and have been used or are being used for, among other things, electric generation operations, electric substation operations, the storage of fuel oil and liquefied natural gas, and the maintenance and storage of electric equipment. As a condition of its DEC permit, the company is required to investigate the property and, where environmental contamination is found, and where necessary, to conduct corrective action to remediate the contamination. The company has investigated various sections of the property, but has not yet begun investigating

24



the former MGP area. The company has submitted to the DEC and the New York State Department of Health a report identifying the known areas of PCB contamination. The company estimates that its undiscounted potential liability for the cleanup of the known PCB contamination on the property will be at least $19 million.

Arthur Kill Transformer Site.    Following a September 1998 transformer fire at Con Edison of New York's former Arthur Kill Generating Station, it was determined that oil containing high levels of PCBs was released to the environment during the incident. The company has completed DEC-approved cleanup programs for the station's facilities and various soil and pavement areas of the site affected by the PCB release. Pursuant to a July 1999 DEC consent order, the company completed a DEC-approved Remedial Investigation/Feasibility Program to assess the nature and extent of the contamination in, and to recommend a proposed remediation program for, the waterfront area of the station. DEC has selected the remediation program for the waterfront area and the company will implement it pursuant to an additional consent order expected to be entered into during 2004. The company estimates that its undiscounted potential liability for the cleanup of PCB contamination at the site will be at least $3.5 million. See "Con Edison of New York—Environmental Matters" in Item 1.

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

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

Site
  Location
  Start
  Court or
Agency

  Estimated Liability (a)
  % of Total (a)
 

 
Maxey Flats Nuclear   Morehead, KY   1986   EPA   $ 118,403   0.8 %
Curcio Scrap Metal   Saddle Brook, NJ   1987   EPA     159,712   100 %
Metal Bank of America   Philadelphia, PA   1987   EPA     100,368   1.0 %
Cortese Landfill   Narrowsburg, NY   1987   EPA     744,821   6.0 %
Global Landfill   Old Bridge, NJ   1988   EPA     115,183   0.3 %
PCB Treatment, Inc.   Kansas City, KS & MO   1994   EPA     2,908,126   6.1 %
Borne Chemical   Elizabeth, NJ   1997   NJSC     117,375   0.7 %

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

25


Washington Heights Power Outage

Lawsuits relating to a July 1999 interruption of electric service to customers served by Con Edison of New York's Washington Heights distribution network were brought in New York State Supreme and Civil Courts, New York County. A number of cases, including purported class action lawsuits, have been dismissed, discontinued or settled for de minimis amounts. At December 31, 2003, 14 cases relating to the outage were pending, including suits by the New York City Transit Authority seeking $20 million and by Columbia University and New York and Presbyterian Hospital seeking $23 million. The company does not expect that the remaining cases will have a material adverse effect on its financial position, results of operation or liquidity.

East 11th Street Accident

For a description of the East 11th Street accident, see Note W to the financial statements included in Item 8 (which information is incorporated herein by reference).


O&R

Asbestos

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

Superfund

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

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

O&R has investigated and detected soil and/or groundwater contamination to varying degrees at all of the O&R MGP Sites. In November 2002, O&R initiated an Interim Remedial Measure at one MGP site that is currently 80% complete. In addition, the DEC has developed a proposed remedial action plan for another O&R MGP site that will be distributed for comment in 2004. Additional investigation and determination of the remediation and monitoring methods will be required at the other O&R MGP Sites.

West Nyack Site.    In 1994 and 1997, O&R entered into consent orders with the DEC pursuant to which O&R agreed to conduct a remedial investigation and remediate certain property it owns in West Nyack, New York at which PCBs were discovered. Petroleum contamination related to a leaking

26



underground storage tank was found as well. O&R has completed all remediation at the site that the DEC has required to date. The DEC is expected to determine whether any additional groundwater remediation will be required.

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

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

Site
  Location
  Start
  Court or
Agency

  Estimated Liability (a)
  % of Total(a)
 

 
Metal Bank of America   Philadelphia, PA   1987   EPA   $ 642,701   4.6 %
Borne Chemical   Elizabeth, NJ   1997   EPA     100,000   2.5 %
Orange County Landfill   Goshen, NY   2000   NYAG     125,000   (b )
Ramapo Landfill   Ramapo, NY   2000   DEC     50,000   (b )
Clarkstown Landfill   Clarkstown, NY   2003   NYAG     70,000   (b )

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

(b)
Not ascertainable.


ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information about the executive officers of Con Edison and Con Edison of New York, as of February 1, 2004. As indicated, certain of the executive officers are executive officers of each of Con Edison and Con Edison of New York and others are executive officers of Con Edison or Con Edison of New York. The term of office of each officer is until the next election of directors (trustees) of their company and until his or her successor is chosen and qualifies. Officers are subject to removal at any time by the board of directors (trustees) of their company. Mr. McGrath has an employment agreement with Con Edison, which provides that he will serve as Chairman of the Board and Chief Executive Officer of Con Edison and Con Edison of New York through August 31, 2005

27


(subject to one year extensions unless terminated on six months prior notice). Messrs. Burke and McMahon and Ms. Freilich have employment agreements with Con Edison, which provide that they will serve in senior executive positions through August 31, 2005.

Name

  Age
  Offices and Positions During Past Five Years
Executive Officers of Con Edison and Con Edison of New York
Eugene R. McGrath   62   10/97 to present—Chairman, President, Chief Executive Officer and Director of Con Edison
3/98 to present—Chairman, Chief Executive Officer and Trustee of Con Edison of New York
Kevin Burke   53   9/00 to present—President of Con Edison of New York
7/99 to 8/00—President of O&R
7/98 to 6/99—Senior Vice President—Customer Service of Con Edison of New York
3/98 to 6/98—Senior Vice President—Corporate Planning of Con Edison of New York
Joan S. Freilich   62   3/98 to present—Executive Vice President, Chief Financial Officer and Director (Trustee) of Con Edison and Con Edison of New York
Frances A. Resheske   43   2/02 to present—Senior Vice President—Public Affairs of Con Edison of New York
5/99 to 2/02—Vice President—Public Affairs of Con Edison of New York
2/99 to 4/99—Director—Public Affairs of Con Edison of New York
6/95 to 2/99—General Manager—Government Relations and Community Development, Brooklyn Union
Charles E. McTiernan, Jr.   59   1/03 to present—General Counsel of Con Edison and Con Edison of New York
10/85 to 12/02—Associate General Counsel of Con Edison of New York
Edward J. Rasmussen   55   12/00 to present—Vice President and Controller of Con Edison and Con Edison of New York
12/00 to 12/03—Vice President, Controller and Chief Financial Officer of O&R
4/93 to 11/00—Assistant Controller of Con Edison of New York
Hyman Schoenblum   55   12/00 to present—Vice President—Corporate Planning of Con Edison of New York
12/97 to 11/00—Vice President and Controller of Con Edison and Con Edison of New York
7/99 to 11/00—Vice President and Chief Financial Officer of O&R
Robert P. Stelben   61   12/97 to present—Vice President and Treasurer of Con Edison and Con Edison of New York
7/99 to 3/03—Vice President and Treasurer of O&R
Executive Officers of Con Edison but not Con Edison of New York
Stephen B. Bram   61   1/03 to present—Group President, Energy and Communications of Con Edison
9/00 to 12/02—President and Chief Executive Officer of O&R
4/95 to 8/00—Senior Vice President—Central Operations of Con Edison of New York

28


John D. McMahon   52   1/03 to present—President and Chief Executive Officer of O&R
8/98 to 12/02—Senior Vice President and General Counsel of Con Edison and Con Edison of New York
Executive Officers of Con Edison of New York but not Con Edison
(all offices and positions listed are with Con Edison of New York)
Louis L. Rana   55   2/03 to present—Senior Vice President—Electric Operations
10/01 to 1/03—Vice President—Manhattan Electric Operations
4/00 to 9/01—Vice President—Manhattan Customer Service
3/98 to 3/00—Vice President—System and Transmission Operations
Mary Jane McCartney   55   10/93 to present—Senior Vice President—Gas
Robert A. Saya   62   9/01 to present—Senior Vice President—Central Operations
4/00 to 8/01—Vice President—System and Transmission Operations
1/95 to 3/00—Chief Engineer, Substation and Transmission Engineering
Luther Tai   55   9/01 to present—Senior Vice President—Central Services
9/00 to 8/01—Senior Vice President—Central Operations
7/98 to 8/00—Vice President—Corporate Planning
Marilyn Caselli   49   8/98 to present—Vice President—Customer Operations

29



PART II

ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters


CON EDISON

Con Edison's Common Shares ($.10 par value), the only class of common equity of Con Edison, are traded on the New York Stock Exchange. As of January 31, 2004, there were 93,760 holders of record of Con Edison's Common Shares.

The market price range for Con Edison's Common Shares during 2003 and 2002, as reported in the consolidated reporting system, and the dividends paid by Con Edison in 2003 and 2002 were as follows:

 
  2003

  2002

 
  High

  Low

  Dividends
Paid

  High

  Low

  Dividends
Paid

 
 
1st Quarter   $ 46.02   $ 36.55   $ 0.56   $ 42.66   $ 39.30   $ 0.555
2nd Quarter   $ 44.26   $ 38.20   $ 0.56   $ 45.40   $ 40.10   $ 0.555
3rd Quarter   $ 43.78   $ 38.55   $ 0.56   $ 43.80   $ 32.65   $ 0.555
4th Quarter   $ 43.48   $ 38.80   $ 0.56   $ 45.16   $ 39.02   $ 0.555

On January 22, 2004, Con Edison's Board of Directors declared a quarterly dividend of 561/2 cents per Common Share. The first quarter 2004 dividend will be paid on March 15, 2004.

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

The information required by Item 201(d) of Regulation S-K is incorporated by reference in Item 10 of this report from Con Edison's definitive proxy statement for its Annual Meeting of Stockholders to be held on May 17, 2004.


CON EDISON OF NEW YORK

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

The dividends declared by Con Edison of New York in 2003 and 2002 are shown in its Consolidated Statement of Common Shareholder's Equity included in Item 8 (which information is incorporated herein by reference). For additional information about the payment of dividends by Con Edison of New York, and restrictions thereon, see "Dividends" in Note C to the financial statements in Item 8 (which information is incorporated herein by reference).


O&R

The outstanding shares of O&R's Common Stock ($5.00 par value), the only class of common equity of O&R, are held by Con Edison and are not traded.

The dividends declared by O&R in 2003 and 2002 are shown in its Consolidated Statement of Common Shareholder's Equity included in Item 8 (which information is incorporated herein by reference). See Note C to the financial statements in Item 8 for information about restrictions on the payment of dividends by O&R.

30



ITEM 6.    Selected Financial Data


CON EDISON

 
  For the Year Ended December 31
 
  2003

  2002

  2001

  2000

  1999

 
 
 
  (Millions of Dollars)

Operating revenues   $ 9,827   $ 8,502   $ 9,389   $ 9,317   $ 7,491
Purchased power     3,926     3,201     3,380     3,536     1,824
Fuel     504     289     394     351     430
Gas purchased for resale     847     596     860     789     485
Operating income     934     1,060     1,128     1,016     1,020
Income before cumulative effect of changes in accounting principles     525     668     682     583     701
Cumulative effect of changes in accounting principles     3     (22 )   -     -     -
Net income for common stock     528     646     682     583     701
Total assets     20,966     19,667     17,901     17,661     16,491
Long-term debt     6,733     6,166     5,501     5,415     4,525
Preferred stock subject to mandatory redemption     -     -     37     37     37
Common shareholders' equity     6,423     5,921     5,666     5,472     5,412

BASIC EARNINGS PER SHARE                              
Before cumulative effect of changes in accounting principles   $ 2.37   $ 3.14   $ 3.22   $ 2.75   $ 3.14
Cumulative effect of changes in accounting principles   $ 0.02   $ (0.11 )   -     -     -
After cumulative effect of changes in accounting principles   $ 2.39   $ 3.03   $ 3.22   $ 2.75   $ 3.14
DILUTED EARNINGS PER SHARE                              
Before cumulative effect of changes in accounting principles   $ 2.36   $ 3.13   $ 3.21   $ 2.74   $ 3.13
Cumulative effect of changes in accounting principles   $ 0.02   $ (0.11 )   -     -     -
After cumulative effect of changes in accounting principles   $ 2.38   $ 3.02   $ 3.21   $ 2.74   $ 3.13
Cash dividends per common share   $ 2.24   $ 2.22   $ 2.20   $ 2.18   $ 2.14

Average common shares outstanding (millions)     221     213     212     212     223


CON EDISON OF NEW YORK

 
  For the Year Ended December 31
 
  2003

  2002

  2001

  2000

  1999

 
 
 
  (Millions of Dollars)

Operating revenues   $ 8,166   $ 7,224   $ 8,122   $ 8,001   $ 6,956
Purchased power     3,124     2,622     2,819     2,988     1,669
Fuel     358     232     351     322     430
Gas purchased for resale     715     472     666     491     352
Operating income     942     954     1,047     952     1,002
Net income for common stock     591     605     649     570     698
Total assets     17,764     16,837     15,347     15,405     14,602
Long-term debt     5,435     5,392     5,012     4,915     4,243
Preferred stock subject to mandatory redemption     -     -     37     37     37
Common shareholder's equity     5,482     4,890     4,666     4,480     4,394

31


ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF NEW YORK AND O&R)

This discussion and analysis relate to the consolidated financial statements of Consolidated Edison, Inc. (Con Edison), Consolidated Edison Company of New York, Inc. (Con Edison of New York) and Orange and Rockland Utilities, Inc. (O&R) and should be read in conjunction with the financial statements and the notes thereto. Con Edison of New York and O&R, which are regulated utilities, are subsidiaries of Con Edison and are referred to in this management's discussion and analysis of financial condition and results of operations (MD&A) as the "Utilities." The Utilities, together with Con Edison, are referred to in this MD&A as the "Companies."

Neither Con Edison of New York nor O&R makes any representation as to information in this report relating to Con Edison or the subsidiaries of Con Edison other than itself.

Information in the notes to the consolidated financial statements referred to in this discussion and analysis is hereby 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 the Utilities. Con Edison also has unregulated subsidiaries that compete in energy-related and telecommunications industries.

Certain financial data of Con Edison's subsidiaries is presented below:

 
  Twelve months ended
December 31, 2003

  At December 31, 2003

 
(Millions of Dollars)

  Operating Revenues

  Net Income

  Assets

 

 
Con Edison of New York   $ 8,166   83 % $ 591   112 % $ 17,764   85 %
O&R     727   7 %   45   9 %   1,269   6 %

 
  Total Utilities     8,893   90 %   636   121 %   19,033   91 %

 
Con Edison Communications     19   - %   (108 )(b) (20 )%   35 (b) - %
Con Edison Development     303   3 %   (9 )(b) (2 )%   1,275 (b) 6 %
Con Edison Energy     54   1 %   1   - %   117   - %
Con Edison Solutions     578   6 %   19   3 %   127   1 %
Other(a)     (20 ) - %   (11 ) (2 )%   379   2 %

 
  Total Con Edison   $ 9,827   100 % $ 528   100 % $ 20,966   100 %

 
(a)
Represents inter-company and parent company accounting.

(b)
Reflects impairment charges discussed below.

Con Edison's net income for common stock in 2003 was $528 million or $2.39 a share. Net income for common stock in 2002 and 2001 was $646 million or $3.03 a share and $682 million or $3.22 a share,

32


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

respectively. Included in 2003 net income for common stock were impairment charges for certain unregulated telecommunications and generating assets ($94 million after-tax or $0.43 per share) and the impact of a regulatory settlement ($5 million after-tax charge or $0.03 per share), partially offset by the cumulative effect of changes in accounting principles ($3 million after-tax gain or $0.02 per share). Included in the 2002 results was the cumulative effect of changes in accounting principles ($22 million after-tax charges or $0.11 per share).

For additional segment financial information, see Note O to the financial statements and "Results of Operations," below.

The Companies are each subject to certain material contingencies, including certain Utility environmental matters and Con Edison's legal proceedings relating to its October 1999 agreement to acquire Northeast Utilities. See "Application of Critical Accounting Policies—Accounting for Contingencies," below.

Regulated Utility Subsidiaries

Con Edison of New York provides electric service to over 3.1 million customers and gas service to 1.1 million customers in New York City and Westchester County. The company also provides steam service in parts of Manhattan. O&R, along with its regulated utility subsidiaries, provides electric service to over 285,000 customers in southeastern New York and adjacent sections of New Jersey and northeastern Pennsylvania and gas service to over 120,000 customers in southeastern New York and northeastern Pennsylvania.

The Utilities are primarily "wires and pipes" energy delivery companies that are subject to extensive federal and state regulation. Pursuant to restructuring agreements, the Utilities have sold most of their electric generating capacity and provide their customers the opportunity to buy electricity and gas directly from other suppliers through the Utilities' retail access programs. The Utilities supply more than half of the energy delivered by them in their service areas and provide delivery service to their customers that buy energy from other suppliers. The Utilities purchase substantially all of the energy they supply to customers pursuant to firm contracts or through wholesale energy markets. In general, the Utilities recover on a current basis the fuel and purchased power costs they incur in supplying energy to their full-service customers, pursuant to approved rate plans.

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

Demand for utility service is affected by weather, economic conditions and other factors. The Utilities have experienced increased customer demand in recent years. In June, July and August of 2002, both Con

33


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


Edison of New York and O&R set new three-month electric delivery records of more than 17 million and 1.7 million megawatt hours, respectively. In June 2003, Con Edison of New York and O&R each experienced a new record electric peak load for that month. The June peak was an all-time peak electric load for O&R. In January 2004, Con Edison of New York and O&R each experienced a new winter electricity peak load.

Because the energy delivery infrastructure must be adequate to meet demand in peak periods with a high level of reliability, the Utilities' capital investment plans reflect in great part actual growth in electric peak load adjusted to summer design weather conditions, as well as forecast growth in peak loads. On this basis, Con Edison of New York's weather-adjusted peak load in the summer of 2003 was 12,600 MW, 1.6 percent higher than the adjusted peak load in 2002. The forecast annual growth in the electric peak load over the next five years is 1.6 percent. The company anticipates an ongoing need for substantial capital investment in order to meet this load growth with the exceptionally high level of reliability that it currently provides (see "Capital Requirements," below).

The Utilities have rate plans approved by state utility regulators that cover the rates they can charge their customers. Con Edison of New York has an electric rate agreement (approved in November 2000) that ends March 2005 and gas and steam rate agreements (approved in April 2002 and November 2000, respectively) that end in September 2004. These agreements do not reflect all of the increased construction expenditures and related costs incurred and expected to be incurred to meet increasing customer demand and reliability needs that have been experienced since the date of those agreements (see "Capital Requirements," below). The company filed petitions in November 2003 to increase rates for gas and steam service effective October 2004 and expects to file a petition in April 2004 to increase rates for electric service effective April 2005. O&R has rate agreements for its electric and gas services in New York that extend through October 2006. The rate plans generally require the Utilities to share with customers earnings in excess of specified rates of return on equity. Changes in energy sales and delivery volumes are reflected in operating income (except to the extent that weather-normalization provisions apply to the gas businesses). Rates charged to customers, pursuant to these agreements, may not be changed during the respective terms of these agreements other than for recovery of energy costs and limited other exceptions. See "Regulatory Matters" below and "Recoverable Energy Costs" and "Rate and Restructuring Agreements" in Notes A and B, respectively, to the financial statements.

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

The respective collective bargaining agreements covering about two-thirds of each of the Utilities' employees expire in June 2004.

34


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

Unregulated Businesses

Con Edison's unregulated subsidiaries participate in competitive businesses and are subject to different risks than the Utilities. In view of conditions affecting certain of its competitive activities, the company recognized impairment charges of $159 million ($94 million after-tax) for its unregulated telecommunications and generation businesses in the fourth quarter of 2003. See "Application of Critical Accounting Policies," below and Note H to the financial statements. At December 31, 2003, Con Edison's investment in its unregulated subsidiaries was $703 million and the unregulated subsidiaries' assets amounted to $1.6 billion, including $339 million related to Con Edison Development's Newington project. See Note T to the financial statements.

Consolidated Edison Solutions, Inc. (Con Edison Solutions) sells electricity and gas to delivery customers of Con Edison of New York, O&R and other utilities and also offers energy related services. As of December 31, 2003, the company served approximately 30,000 electric customers with an estimated aggregate peak load of 1,400 MW.

Consolidated Edison Development, Inc. (Con Edison Development) owns and operates generating plants and energy and other infrastructure projects. At December 31, 2003, the company owned interests of 1,668 MW of capacity in electric generating facilities of which 244 MW are sold under long-term purchase power agreements and the balance is sold on the wholesale electricity markets.

Consolidated Edison Energy, Inc. (Con Edison Energy) provides energy and capacity to Con Edison Solutions and others and markets the output of plants owned or operated by Con Edison Development. The company also provides risk management services to Con Edison Solutions and Con Edison Development and offers these services to others.

Con Edison Communications, LLC (Con Edison Communications) builds and operates fiber optic networks to provide telecommunications services. The company's properties (the capitalized cost of which at December 31, 2003 amounted to $30 million, net of the impairment charge discussed above and in Note H to the financial statements) include network facilities and nearly 400 miles of fiber optic cable that has been installed in the New York City metropolitan area primarily through Con Edison of New York's underground conduits and other rights of way. Con Edison is evaluating strategic alternatives for its telecommunications business.

Con Edison anticipates investing $59 million in its unregulated businesses over the next two years and will focus on maximizing the value of their existing assets. See "Capital Requirements" and "Capital Resources," below.

Results of Operations - Summary

Con Edison's earnings per share in 2003 were $2.39 ($2.38 on a diluted basis). Earnings per share in 2002 and 2001 were $3.03 ($3.02 on a diluted basis) and $3.22 ($3.21 on a diluted basis).

35


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

Earnings per share for 2003 and 2002, before the cumulative effect of changes in accounting principles of $3 million and $(22) million after tax, respectively, were $2.37 ($2.36 on a diluted basis) and $3.14 ($3.13 on a diluted basis), respectively.

Earnings for the years ended December 31, 2003, 2002 and 2001 were as follows:

(Millions of Dollars)

  2003
  2002
  2001
 

 
Con Edison of New York   $ 591   $ 605   $ 649  
O&R     45     45     40  
Con Edison Communications     (108 )(b)   (22 )   (12 )
Con Edison Development     (9 )(c)   (4 )(d)   21  
Con Edison Energy     1     2  (e)   5  
Con Edison Solutions     19     22     (2 )
Other(a)     (11 )   (2 )   (19 )

 
  CON EDISON   $ 528   $ 646   $ 682  

 
(a)
Represents inter-company and parent company accounting including interest expense on debt, non-operating income tax expense and goodwill amortization in 2001. See Note L to the financial statements.

(b)
Includes a charge for the impairment of unregulated telecommunications assets in accordance with SFAS No. 144 totaling $84 million after tax. See Note H to the financial statements.

(c)
Includes a charge for the impairment of two unregulated generating assets totaling $10 million after tax. In addition, a benefit for the cumulative effect of changes in accounting principles for mark-to-market gains related to power sales contracts at certain generating plants, partially offset by the impact of the financial statement consolidation of the Newington plant totaling $3 million after tax. See Note H to the financial statements.

(d)
Includes a charge for the cumulative effect of a change in accounting principle for goodwill impairment of certain unregulated generating assets totaling $20 million after tax. See Note L to the financial statements.

(e)
Includes a charge for the cumulative effect of a change in accounting principle for the rescission of Emerging Issues Task Force (EITF) Issue No. 98-10 totaling $2 million after-tax. See Note P to the financial statements.

36


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

Con Edison's earnings in 2003 were $118 million lower than in 2002, reflecting the following factors (after tax, in millions):

Con Edison of New York:        
  Impact of weather in 2003 on net revenues versus 2002 (estimated)   $ (6 )
  Sales, normalized for weather (estimated)     34  
  Lower operating organizational expense     25  
  Regulatory accounting/amortizations     14  
  Reduced net credit for pensions & other postretirement benefits     (54 )
  Higher depreciation and property tax expense     (27 )
  Settlement regarding nuclear generating unit sold in 2001     (5 )
  Regional power outage (estimated)     (6 )
  Lower sales and use tax     7  
  Other     4  
   
 
Total Con Edison of New York     (14 )
O&R     -  
Unregulated subsidiaries including parent company     (34 )
Unregulated telecommunications asset impairment     (84 )
Unregulated generating asset impairments     (10 )
Cumulative effect of changes in accounting principles     25  
Other     (1 )

 
TOTAL   $ (118 )

 

Con Edison's earnings in 2002 were $36 million lower than in 2001, reflecting the following factors (after tax, in millions):

Con Edison of New York:        
  Lower operation and maintenance expenses (excluding nuclear operations)   $ 22  
  Impact of weather in 2002 on net revenues versus 2001 (estimated)     18  
  Reserve for electric excess earnings     (26 )
  Amortization of divestiture gain in 2001     (25 )
  Reduction in gas base rates and lower non-firm gas sales     (21 )
  Economic conditions (estimated)     (8 )
  Other     (4 )
   
 
Total Con Edison of New York     (44 )
O&R     5  
Unregulated subsidiaries including parent company     14  
Cessation of goodwill amortization     11  
Cumulative effect of changes in accounting principles     (22 )

 
Total   $ (36 )

 

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

37



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

The critical accounting policies are as follows:

Accounting for Regulated Public Utilities—SFAS No. 71

The Utilities are subject to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," and, in accordance with SFAS No. 71, are subject to the accounting requirements of the Federal Energy Regulatory Commission (FERC) and state public utility regulatory authorities having jurisdiction.

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

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

Accounting for Pensions and Other Postretirement Benefits

The Utilities provide pensions and other postretirement benefits to substantially all of their employees and retirees. Con Edison's unregulated subsidiaries also provide such benefits to certain of their employees. The Companies account for these benefits in accordance with SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions." In applying these accounting policies, the Companies have made critical estimates related to actuarial assumptions, including assumptions of expected returns on plan assets, future compensation, health care cost trends and appropriate discount rates. See Notes E and F to the financial statements for information about these assumptions, actual performance, amortization of investment and other actuarial gains and losses and calculated plan costs for 2003, 2002 and 2001.

38


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

Primarily because of the amortization of previous years' net investment gains, Con Edison of New York's pension expense for 2003, 2002 and 2001 was negative, resulting in a credit to and increase in net income in each year. Investment gains and losses on plan assets are fully recognized in expense over a 15-year period (20 percent of the gains and losses for each year begin to amortize in each of the following five years and the amortization period for each 20 percent portion of the gains and losses is ten years). This amortization is in accordance with the Statement of Policy issued by the New York Public Service Commission (PSC) and is permitted under SFAS No. 87.

The cost of pension and other postretirement benefits in future periods will depend on actual returns on plan assets and assumptions for future periods. Con Edison's current estimate for 2004 is a reduction, compared with 2003, in the pension and other postretirement benefits net credit of $19 million after tax for Con Edison of New York and an increase, compared to 2003, in pension and other postretirement benefits expense of $1 million for O&R. This reduction reflects, among other factors, the amortization of prior period actuarial losses associated with declines in the market value of assets in recent years, partially offset by the amortization of a gain on plan assets in 2003 and by the estimated impact in 2004 of recently enacted Medicare legislation (reduction in other postretirement benefit costs of $10 million after tax, including $9 million for Con Edison of New York and $1 million for O&R).

Amortization of market gains and losses experienced in previous years is expected to reduce Con Edison of New York's pension and other post retirement benefit net credit by an additional $25 million, after tax, in 2005. A 5.0 percentage point variation in the actual annual return in 2004 as compared with the expected annual asset return of 8.8 percent would change net income for Con Edison and Con Edison of New York by approximately $5 million in 2005, assuming no change in regulatory treatment.

In accordance with SFAS No. 71 and consistent with rate provisions approved by the PSC, O&R defers as a regulatory asset any difference between expenses recognized under SFAS No. 87 and the amounts reflected in rates for such expenses. Con Edison of New York's pending petitions for gas and steam rate increases include, and the company anticipates that its petition for an electric rate increase will include, a proposal for deferred accounting treatment of such expenses. See "Regulatory Matters", below.

Pension benefits are provided through a pension plan maintained by Con Edison to which Con Edison of New York, O&R and the unregulated subsidiaries make contributions for their participating employees. Pension accounting by the Utilities includes an allocation of plan assets. An actuarial valuation of the plan's funded status as of December 31, 2003, showed that the fair value of the plan's assets exceeded, by $712 million, the plan's accumulated benefit obligation (ABO) at that date. However, the fair market value of the plan assets could fall below the plan's ABO in future years. In that event, each of the Utilities would be required, under SFAS No. 87, to accrue a liability equal in amount to the difference between its share of the fair value of the plan assets and its portion of the ABO, plus, in the case of Con Edison of

39


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


New York, its total prepaid pension costs, through a non-cash charge to other comprehensive income (OCI). The charge to OCI, which would be net of taxes, would not affect net income for common stock.

The Companies were not required to make cash contributions to their pension plans in 2003 under funding regulations and tax laws. O&R made a discretionary contribution of $18 million to the plan in 2003. In 2004, O&R and Con Edison's unregulated subsidiaries expect to make discretionary contributions of $22 million and $2 million, respectively. The Companies' policy is to fund its accounting cost to the extent it is tax deductible.

Accounting for Contingencies

SFAS No. 5, "Accounting for Contingencies," applies to an existing condition, situation or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur. Known material contingencies include the Utilities' responsibility for hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar that have been used or generated in the course of operations, workers' compensation claims and Con Edison's legal proceedings relating to its October 1999 merger agreement with Northeast Utilities. See Notes G, K, Q, R, S, T and W to the financial statements. In accordance with SFAS No. 5, the Companies have accrued estimates of losses relating to the contingencies as to which loss is probable and can be reasonably estimated and no liability has been accrued for contingencies as to which loss is not probable or cannot be reasonably estimated.

Accounting for Long-Lived Assets

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

The adverse market conditions affecting Con Edison's unregulated telecommunications and generation businesses led to the testing of their assets for impairment in 2003. A critical element of this test is the forecast of future undiscounted cash flows to be generated from the long-lived assets. Forecast of these cash flows requires complex judgments about future operations, which are particularly difficult to make with respect to evolving industries such as the energy-related and telecommunications businesses. Under SFAS No. 144, if alternative courses of action are under consideration or if a range is estimated for the amount of possible future cash flows, the probability of those possible outcomes must be weighted. As a result of the tests performed in 2003, Con Edison recognized impairment charges of $159 million

40


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


($94 million after-tax) for the assets of its unregulated telecommunications and generation businesses. See Note H to the financial statements.

Accounting for Derivative Instruments

The Companies apply SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, and other related accounting pronouncements to their derivative financial instruments. The Companies use derivative financial instruments to hedge market price fluctuations in related underlying transactions for the physical purchase and sale of electricity and gas and interest rate risk on certain debt securities. See "Financial and Commodity Market Risks" below and Note P to the financial statements.

Accounting for Goodwill

Con Edison adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. In accordance with this standard, Con Edison ceased amortizing goodwill and began testing remaining goodwill balances for impairment on an annual basis. Con Edison completed initial goodwill impairment tests and recorded a loss of $34.1 million ($20.2 million after tax) as of January 1, 2002, relating to certain generation assets owned by an unregulated subsidiary. The unamortized goodwill of $405.8 million, relating to the acquisition of O&R, was tested for impairment and determined not to be impaired. See Note L to the financial statements.

In determining whether or not its goodwill is impaired, Con Edison is required to make certain estimates and assumptions that could affect the results of the goodwill impairment test. Actual results could differ from the estimates used.

Accounting for Leases

The Companies apply SFAS No. 13, "Accounting for Leases" and other related accounting pronouncements to their leasing transactions. See Notes K and T to the financial statements.


LIQUIDITY AND CAPITAL RESOURCES

The Companies' liquidity reflects cash flows from operating, investing and financing activities, as shown on their respective consolidated statement of cash flows and as discussed below.

The principal factors affecting Con Edison's liquidity at the holding company level are its investments in the Utilities, the dividends it pays to its shareholders and the dividends it receives from the Utilities. In addition, in 2003 Con Edison issued 11.9 million shares of common stock for $431 million ($381 million of which it invested in Con Edison of New York) and $200 million of five-year debt. In 2002, the company issued $325 million of 40-year debt (most of which it invested in its unregulated subsidiaries).

The principal factors affecting the Utilities' liquidity are the cash flow generated from operations, construction expenditures and maturities of their debt securities. In addition, Con Edison of New York in 2003 received a $381 million capital contribution from Con Edison; in 2002 and 2001 issued $225 million and $95 million, respectively, of additional debt net of redemptions; and in 2001 received

41


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


net proceeds of $597 million from the sale of generating assets, net of a contribution to its nuclear decommissioning trust (see Note J to the financial statements). Also, since 2001, Con Edison of New York has incurred substantial, primarily capital, costs in connection with the attack on the World Trade Center and the subsequent restoration of lower Manhattan and to date has received reimbursement of such costs of $29 million from the federal government (see Note R to the financial statements). In 2003, O&R redeemed $35 million of debt at maturity with commercial paper.

The Companies each believes that it will be able to meet its reasonably likely short-term and long-term cash requirements, assuming that the Utilities' rate plans reflect their costs of service, including a return on invested capital. See "Regulatory Matters," below and "Application of Critical Accounting Policies—Accounting for Contingencies," above.

Changes in the Companies' cash and temporary cash investments resulting from operating, investing and financing activities for the years ended December 31, 2003, 2002 and 2001 are summarized as follows:


CON EDISON

(Millions of Dollars)

  2003
  2002
  Variance
2003 vs. 2002

  2001
  Variance
2002 vs. 2001

 

 
Operating activities   $ 1,319   $ 1,522   $ (203 ) $ 1,587   $ (65 )
Investing activities     (1,527 )   (1,634 )   107     (941 )   (693 )
Financing activities     143     (115 )   258     (382 )   267  

 
  Net change for the period     (65 )   (227 )   162     264     (491 )

 
Balance at beginning of period     132     359     (227 )   95     264  

 
Balance at end of period (including restricted cash)   $ 67   $ 132   $ (65 ) $ 359   $ (227 )

 


CON EDISON OF NEW YORK

(Millions of Dollars)

  2003
  2002
  Variance
2003 vs. 2002

  2001
  Variance
2002 vs. 2001

 

 
Operating activities   $ 1,169   $ 1,310   $ (141 ) $ 1,306   $ 4  
Investing activities     (1,337 )   (1,273 )   (64 )   (569 )   (704 )
Financing activities     113     (214 )   327     (542 )   328  

 
  Net change for the period     (55 )   (177 )   122     195     (372 )

 
Balance at beginning of period     88     265     (177 )   70     195  

 
Balance at end of period (including restricted cash)   $ 33   $ 88   $ (55 ) $ 265   $ (177 )

 

42


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


O&R

(Millions of Dollars)

  2003
  2002
  Variance
2003 vs. 2002

  2001
  Variance
2002 vs. 2001

 

 
Operating activities   $ 128   $ 104   $ 24   $ 107   $ (3 )
Investing activities     (71 )   (60 )   (11 )   (61 )   1  
Financing activities     (49 )   (44 )   (5 )   (52 )   8  

 
  Net change for the period     8     -     8     (6 )   6  

 
Balance at beginning of period     2     2     -     8     (6 )

 
Balance at end of period (including restricted cash)   $ 10   $ 2   $ 8   $ 2   $ -  

 

Cash Flows from Operating Activities

The Utilities' cash flows from operating activities reflect principally their energy sales and deliveries and cost of operations. The volume of energy sales and deliveries is dependent primarily on factors external to the Utilities, such as weather and economic conditions. The prices at which the Utilities provide energy to their customers are determined in accordance with rate plans approved by the state public utility regulatory authority having jurisdiction—the PSC, the New Jersey Board of Public Utilities (NJBPU) and the Pennsylvania Public Utility Commission (PPUC). See "Regulatory Matters" below. In general, changes in the Utilities' cost of purchased power, fuel and gas may affect the timing of cash flows but not net income because the costs are recovered in accordance with rate plans. See "Recoverable Energy Costs" in Note A to the financial statements.

Net income for common stock is the result of cash and non-cash (or accrual) transactions. Only cash transactions affect the Companies' cash flows from operating activities. Principal non-cash charges include depreciation and deferred taxes, and for Con Edison in 2003, impairment charges. For Con Edison of New York, principal non-cash credits include prepaid pension costs. Pension credits result from past favorable performance in Con Edison of New York's pension fund and assumptions about future performance. See "Application of Critical Accounting Policies—Accounting for Pensions and Other Postretirement Benefits" and Notes E and F to the financial statements.

Net cash flows from operating activities in 2003 for Con Edison and Con Edison of New York were $203 million and $141 million lower than 2002, respectively. This decrease reflects lower net income at Con Edison of New York (due to a certain extent to costs not reflected in current rates) and for Con Edison (due to greater losses at the unregulated subsidiaries). This decrease also reflects Con Edison of New York's increase in the value of gas in storage (reflecting both higher unit costs and higher volumes) and a higher level of accrued construction commitments at year-end 2002 that were paid for in 2003. This decrease was partially offset by an increase in deferred income tax expense.

43


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

Net cash flows from operating activities in 2003 for O&R were $24 million higher than in 2002 due primarily to increased deferred income tax expense, partially offset by the increased value of gas in storage (resulting from higher unit costs and volumes).

Net cash flows from operating activities in 2002 for Con Edison were $65 million lower than in 2001. This decrease was due principally to higher energy costs and sales at the Utilities in December 2002 as compared with December 2001, resulting in increased customer accounts receivable and recoverable energy costs, offset in part by increased accounts payable balances. The net benefit to cash flows from these activities in 2001 was greater than the benefit in 2002 because high energy costs at year-end 2000 were collected in 2001 and energy purchases at year-end 2001 were lower than the prior year. The change in cash flows also reflects the timing of federal income tax payments and refunds for the Utilities and net cash received related to regulatory liabilities, such as transmission congestion contracts, offset by increased cash expended related to regulatory assets.

Net cash flows from operating activities in 2002 for Con Edison of New York were $4 million higher than in 2001. The change in cash flows reflects the aforementioned impact of the timing of energy sales and cost recovery, the timing of federal income tax payments and refunds, and cash received or expended related to regulatory liabilities and regulatory assets, respectively.

Cash Flows Used in Investing Activities

Net cash flows used in investing activities for Con Edison were $107 million lower in 2003 than in 2002, due primarily to lower construction expenditures by its unregulated subsidiaries, partially offset by increased construction expenditures by the Utilities. Cash flows used in investing activities were $64 million and $11 million higher in 2003 than in 2002 for Con Edison of New York and O&R, respectively, due primarily to increased construction expenditures.

Net cash flows used in investing activities for Con Edison and Con Edison of New York were $693 million and $704 million higher in 2002 compared with 2001, respectively, due primarily to the receipt in 2001 of net proceeds from generation divestiture. See Note J to the financial statements. In addition, Con Edison of New York construction expenditures increased in 2002 compared with 2001, principally to meet load growth on the company's electric distribution system, to effect permanent restoration of portions of the electric, gas and steam systems in lower Manhattan following the World Trade Center attack and for the ongoing project to add incremental generating capacity at Con Edison of New York's East River steam-electric generating plant (the East River Repowering Project).

Deferred real estate sale costs related to the demolition and remediation of a nine-acre development site in midtown Manhattan along the East River were $134 million at December 31, 2002, compared with $105 million at December 31, 2001. In 2000, Con Edison of New York agreed to sell this site for an expected price of $576 million to $680 million, depending on zoning and other adjustments. The sale is subject to PSC approval and other conditions. The buyer paid Con Edison of New York $50 million in

44


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


2000 as a down payment, which Con Edison used to fund a portion of the demolition and remediation expenses. The down payment has been recorded as a regulatory liability.

Net cash flows used in investing activities for O&R were $1 million lower in 2002 than in 2001.

Cash Flows from/(used in) Financing Activities

Net cash flows from financing activities in 2003 for Con Edison and Con Edison of New York increased $258 million and $327 million, respectively in 2003 compared with 2002.

Con Edison's cash flows from financing activities for the year ended December 31, 2003, reflect the issuance of 9.6 million Con Edison common shares (resulting in proceeds of $381 million, which was invested by Con Edison in Con Edison of New York) and $200 million of Con Edison's 3.625 percent 5-year Series 2003A Debentures (most of which was invested in the unregulated subsidiaries). Cash flows from financing activities in 2002 reflect the issuance of $325 million of Con Edison's 7.25 percent 40-year Series 2002A Debentures (the proceeds of which were used to repay commercial paper). Cash flows from financing activities in both 2003 and 2002 also reflect the issuance of Con Edison common shares through its dividend reinvestment and employee stock plans (2003: 2.3 million shares for $50 million; 2002: 1.7 million shares for $25 million). In addition, common stock dividends paid in 2003 and 2002 were reduced by $46 million and $44 million, respectively, to reflect the amount of dividends reinvested in Con Edison common shares through the dividend reinvestment and employee stock plans.

Net cash flows used in financing activities for Con Edison and Con Edison of New York decreased $267 million and $328 million in 2002 compared with 2001, respectively. This decrease reflects principally increased debt financing for construction expenditures at Con Edison of New York and a reduction in the dividends paid by Con Edison of New York to Con Edison. In addition, in September 2001, Con Edison of New York used the proceeds from the sale of its nuclear plant to repay outstanding short-term borrowing.

Net cash flows used in financing activities for O&R were $8 million lower in 2002 than 2001, due primarily to the retirement of short-term debt in excess of proceeds from issuances.

Net cash flows from financing activities during the years ending December 31, 2003, 2002 and 2001 also reflect Con Edison of New York's (unless otherwise noted) refunding and issuance of long-term debt and preferred stock as follows:

2003

45


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


2002

2001

In 2002, Con Edison of New York changed the interest rate method applicable to $224.6 million aggregate principal amount of its tax-exempt Facilities Revenue Bonds, Series 2001A from a variable weekly rate mode to a 10-year term mode, callable at par after three years with a 4.7 percent annual interest rate. In addition, Con Edison of New York entered into a swap agreement in connection with these bonds pursuant to which the company pays interest at a variable rate equal to the three-month LIBOR and is paid interest at a fixed rate of 5.375 percent. See Note P to the financial statements.

Cash flows from financing activities of the Companies also reflect commercial paper issuance (included on the consolidated balance sheets as "Notes payable"). The commercial paper amounts outstanding at

46


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


December 31, 2003, 2002 and 2001 and the average daily balance for 2003, 2002 and 2001 for Con Edison, Con Edison of New York and O&R were as follows:

 
  2003

  2002

  2001

 

 
(Millions of Dollars, except Weighted Average Yield)

  Outstanding
at December
31

  Daily average

  Outstanding
at December
31

  Daily average

  Outstanding
at December
31

  Daily average

 

 
Con Edison   $ 156   $ 326   $ 151   $ 256   $ 176   $ 242  
Con Edison of New York   $ 99   $ 179   $ -   $ 157     -   $ 164  
O&R   $ 15   $ 33   $ 1   $ 1   $ 17   $ 28  
Weighted average yield     1.0 %   1.2 %   1.2 %   1.7 %   2.0 %   4.6 %

 

External borrowings are a source of liquidity that could be affected by changes in credit ratings, financial performance and capital markets. For information about the Companies' credit rating and certain financial ratios, see "Capital Resources," below.

In January 2004, Con Edison of New York issued $245.3 million of its variable rate, tax-exempt Facilities Revenue Bonds, Series 2004A and B, the proceeds of which are being used to redeem in advance of maturity its fixed rate, tax-exempt Facilities Revenue Bonds, Series 1993A, B and C.

In February 2004, Con Edison of New York issued $200 million of 4.7 percent 10-year Series 2004A Debentures and $200 million of 5.7 percent 30-year Series 2004B Debentures, the proceeds of which were used to redeem in advance of maturity the company's $150 million 7.125 percent Series 1994A Debentures and for general corporate purposes.

Changes in Assets and Liabilities

The following table shows changes in assets and liabilities at December 31, 2003, compared with December 31, 2002, that have impacted the Companies' consolidated statements of cash flows. The changes in these balances are utilized to reconcile income to cash flow from operations. With respect to regulatory liabilities, see Note B to the financial statements.

(Millions of Dollars)

  Con Edison
2003 vs. 2002
Variance

  Con Edison of New York
2003 vs. 2002
Variance

  O&R
2003 vs. 2002
Variance


Accounts receivable—customers, less allowance for uncollectible accounts   $ 107   $ 90   $ 3
Gas in storage     69     52     13
Prepaid pension costs     233     233     -
Accounts payable     (20 )   (30 )   11
Superfund and other environmental liabilities     50     45     5
Deferred income taxes—liability     391     333     44
Regulatory liabilities—transmission congestion contracts     159     159     -

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

Accounts receivable—customers, less allowance for uncollectible accounts increased due primarily to higher electric and gas sales revenue for the Utilities and higher electric purchased power and gas unit costs (which are recoverable from customers) for Con Edison of New York during December 2003 compared with December 2002. Energy sales and purchased power costs are discussed below under "Results of Operations."

Gas in storage increased at December 31, 2003 as compared with year-end 2002 due primarily to higher unit costs and volumes of gas in storage at December 31, 2003 as compared with year-end 2002.

Prepaid pension costs for Con Edison and Con Edison of New York increased at December 31, 2003 as compared with year-end 2002 due to the recognition of the current period's pension credits.

Accounts payable for Con Edison and Con Edison of New York decreased at December 31, 2003 as compared with year-end 2002 due primarily to a higher level of accrued construction commitments at year-end 2002. This decrease was offset in part by increased electric purchased power costs for Con Edison of New York at December 31, 2003 as compared with year-end 2002, reflecting higher unit costs.

Superfund and other environmental liabilities for the Companies increased at December 31, 2003 as compared with year-end 2002 reflecting increased estimates for investigation, removal and remediation costs.

Deferred income taxes—liability increased at December 31, 2003 as compared with year-end 2002 due primarily to accelerating tax deductions for capitalized indirect costs.

Transmission congestion contracts (See "Regulatory Assets and Liabilities" in Note B to the financial statements) increased at December 31, 2003 compared with year-end 2002 reflecting proceeds from the sale through the New York Independent System Operator (NYISO) of transmission rights on Con Edison of New York's transmission system. These proceeds are being retained for customer benefit.

Capital Resources

Con Edison is a holding company that operates only through its subsidiaries and has no material assets other than its interests in its subsidiaries. Con Edison expects to finance its capital requirements primarily from dividends it receives from its subsidiaries and through the sale of securities, including commercial paper. In addition, Con Edison's ability to make payments on its external borrowings and dividends on its common shares is dependent on its receipt of dividends from its subsidiaries or proceeds from the sale of its securities or its interests in its subsidiaries.

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

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

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

The Utilities expect to finance their operations, capital requirements and payment of dividends to Con Edison from internally generated funds and external borrowings.

In December 2001, the PSC authorized the Utilities to issue up to $1.95 billion of debt securities prior to 2006, of which Con Edison of New York issued $195 million and $525 million of debt securities in 2003 and 2002, respectively. In addition, the PSC authorized the refunding of the Utilities' outstanding debt securities and preferred stock.

Con Edison's unregulated subsidiaries have financed their operations and capital requirements primarily with capital contributions from Con Edison, internally generated funds and external borrowings. See Note T to the financial statements.

In August 2002, Congress appropriated funds for which Con Edison of New York is eligible to apply, to recover costs it incurred in connection with the World Trade Center attack. In accordance with procedural guidelines for disbursement of the federal funds, Con Edison of New York submitted its initial application for funds in October 2003 and received the first installment of $29 million on October 31, 2003. The Company will submit additional applications when appropriate. See Note R to the financial statements.

For each of the Companies, the ratio of earnings to fixed charges (Securities and Exchange Commission basis) for the years ended December 31, 2003, 2002, 2001, 2000 and 1999 was:

 
  Earnings to Fixed Charges

 
  2003

  2002

  2001

  2000

  1999

 
 
Con Edison   2.7   3.1   3.3   3.0   3.8
Con Edison of New York   3.4   3.4   3.7   3.2   4.2
O&R   4.4   3.3   3.5   3.4   2.5

For each of the Companies, the common equity ratio at December 31, 2003, 2002 and 2001 was:

 
  As of December 31,

 
  2003

  2002

  2001

 
 
Con Edison   48.0   48.1   49.8
Con Edison of New York   49.3   46.6   47.2
O&R   55.1   53.6   50.0

The commercial paper of the Companies is rated P-1, A-1 and F1, respectively, by Moody's Investor Service, Inc. (Moody's), Standard & Poor's Rating Services (S&P) and Fitch Ratings (Fitch). Con Edison's unsecured debt is rated A2, A- and A-, respectively, by Moody's, S&P and Fitch. The unsecured debt of the Utilities is rated A1, A and A+, respectively, by Moody's, S&P and Fitch. A securities rating is subject to revision or withdrawal at any time by the assigning rating organization.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

Capital Requirements

The following table compares the Companies' capital requirements for the years 2001 through 2003 and estimated amounts for 2004 and 2005.

(Millions of Dollars)

  2001

  2002

  2003

  2004

  2005


Regulated utility construction expenditures                              
  Con Edison of New York   $ 984   $ 1,082   $ 1,167   $ 1,060   $ 1,362
  O&R     59     58     71     83     81

Total regulated construction expenditures   $ 1,043   $ 1,140   $ 1,238   $ 1,143   $ 1,443
Unregulated subsidiaries construction expenditures     154     282     105     30     29

    Sub-total     1,197     1,422     1,343     1,173     1,472

Retirement of long-term securities at maturity                              
  Con Edison of New York     628     337     805     150     450
  O&R             35        
  Unregulated subsidiaries     10     11     16     16     17

Total retirement of long-term securities at maturity     638     348     856     166     467

    Total   $ 1,835   $ 1,770   $ 2,200   $ 1,339   $ 1,939

Con Edison of New York's utility construction expenditures in 2003 and 2004 reflect programs to meet electric load growth and reliability needs, gas infrastructure expenditures, the East River Repowering Project and expenditures for permanent electric, gas and steam system restoration following the World Trade Center attack (see Note R to the financial statements). The increase for 2005 reflects an anticipated higher level of expenditures for electric substations and ongoing improvements and reinforcements of the electric distribution system.

The unregulated subsidiaries' construction expenditures declined in 2003 and are expected to continue to decline, consistent with there being no major construction or acquisition expected for those businesses. At December 31, 2003 and 2002, Con Edison's investment balance in these subsidiaries, on an unconsolidated basis, was $703 million and $790 million, respectively.

Contractual Obligations

The following tables summarize the Companies' material obligations at December 31, 2003, to make payments pursuant to contracts. Long-term debt, capital lease obligations and other long-term liabilities are included on their balance sheets. Operating leases and non-utility generator (NUG) contracts (for

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

which undiscounted future annual payments are shown) are disclosed in the notes to the financial statements.

 
  Payments Due by Period

(Millions of Dollars)

   
   
   
   

Contractual Obligations

  Total

  Less than 1 year

  1-3 years

  4-5 years

  After 5 years


Long-term debt (Note C)                              
Con Edison of New York   $ 5,609   $ 150   $ 450   $ 610   $ 4,399
O&R     302             20     282
Unregulated subsidiaries and parent     1,012     16     37     245     714

Total Long-term debt   $ 6,923   $ 166   $ 487   $ 875   $ 5,395

Capital lease obligations (Note K)                              
Con Edison of New York   $ 65   $ 8   $ 14   $ 15   $ 28
Unregulated subsidiaries     6     6            

Total Capital lease obligations   $ 71   $ 14   $ 14   $ 15   $ 28

Operating leases (Notes K and T)                              
Con Edison of New York   $ 82   $ 40   $ 13   $ 10   $ 19
O&R     28     3     4     4     17
Unregulated subsidiaries     48     8     14     16     10

Total operating leases   $ 158   $ 51   $ 31   $ 30   $ 46

Purchase obligations:                              
Non-utility generator contracts—Utilities (Note I)                              
Con Edison of New York   $ 8,112   $ 530   $ 1,065   $ 1,171   $ 5,346
O&R     105     57     48        

Total non-utility generator contracts   $ 8,217   $ 587   $ 1,113   $ 1,171   $ 5,346

Natural gas supply, transportation, and storage contracts—Utilities                              
Con Edison of New York   $ 298   $ 101   $ 87   $ 61   $ 49
O&R     122     41     36     25     20

Total natural gas supply, transportation and storage contracts   $ 420   $ 142   $ 123   $ 86   $ 69

Other purchase obligations(a)                              
Con Edison of New York   $ 1,136   $ 228   $ 455   $ 453   $
O&R     80     17     32     31    

Total other purchase obligations   $ 1,216   $ 245   $ 487   $ 484   $

Unregulated subsidiary commodity and service agreements(b)   $ 661   $ 254   $ 173   $ 42   $ 192

Total   $ 17,666   $ 1,459   $ 2,428   $ 2,703   $ 11,076

(a)
Other purchase obligations for the Utilities exclude amounts included in other contractual obligations shown on the table. Amounts shown for purchase obligations were derived from the Utilities' purchasing systems as the difference between the amounts authorized and the amounts paid (or vouchered to be paid) for each obligation. For most of its other purchase obligations, the Utilities are committed to purchase less than the amount authorized, typically a 10 percent commitment. These other purchase obligations reflect capital and operations and maintenance costs entered into by the Utilities in running their day to day operations. Payments of the other purchase obligations are assumed to be made ratably over the terms of the obligations.

(b)
Represents commitments to purchase electric energy and capacity, natural gas and natural gas pipeline capacity and operation and maintenance generation service agreements entered into by Con Edison's unregulated subsidiaries.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

The Companies' commitments to make payments in addition to these contractual commitments are their other liabilities reflected in their balance sheets and Con Edison's guarantees of certain obligations of its subsidiaries. See Notes S and T to the financial statements.

Electric Power Requirements

In 2003, the Utilities purchased substantially all of the energy they sold to customers pursuant to firm contracts with NUGs and others and through the NYISO's wholesale electricity market. Con Edison expects that these resources will again be adequate to meet the requirements of its customers in 2004.

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

To reduce the volatility of electric energy costs, the Utilities have firm contracts to purchase electric energy (including the output of the nuclear generating unit divested in 2001) and have entered into derivative transactions to hedge the costs of expected purchases, which together cover a substantial portion of the electric energy expected to be sold to customers in the summer of 2004. See Notes I and P to the financial statements. O&R's New Jersey subsidiary entered into firm contracts to purchase electric energy for a substantial portion of the electric energy expected to be sold to its customers in 2004. Con Edison of New York also owns approximately 630 MW of generating stations associated primarily with its steam system, located in New York City, the electricity output of which it sells through the NYISO's wholesale electricity market.

The East River Repowering Project will add incremental electric capacity of approximately 200 MW based on a winter nominal rating or approximately 125 MW based on a summer nominal rating. In a July 1998 order, the PSC indicated that it "agree(s) generally that Con Edison of New York need not plan on constructing new generation as the competitive market develops," but considers "overly broad" and did not adopt Con Edison of New York's request for a declaration that, solely with respect to providing generating capacity, it will no longer be required to engage in long-range planning to meet potential demand and, in particular, that it will no longer have the obligation to construct new generating facilities, regardless of the market price of capacity. Con Edison of New York monitors the adequacy of the electric capacity resources and related developments in its service area, and works with other parties on long-term resource adequacy issues within the framework of the NYISO.

Con Edison's unregulated subsidiaries sell electricity in the wholesale and retail NYISO and other markets. At December 31, 2003, Con Edison Development's interests in electric generating facilities amounted to 1,668 MW. Con Edison Energy sells the electricity from these generating facilities under

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


contract or on the wholesale electricity markets. See "Financial and Commodity Market Risks—Commodity Price Risk," below.


REGULATORY MATTERS

For additional information about the electric, gas and steam agreements discussed below, see "Rate and Restructuring Agreements" in Note B to the financial statements.

Electric

In July 2002, FERC issued a Notice of Proposed Rulemaking (NOPR) to establish a Standard Market Design (SMD) for wholesale electricity markets across the country. The proposed SMD has many of the elements of the markets that have been established in the Northeast, and if adopted, could facilitate transactions among energy markets across the country. After receiving over 1,000 comments on the proposals contained in its SMD NOPR, the FERC issued its Wholesale Market Platform "White Paper" on April 28, 2003. The White Paper built on the existing rules contained in Order 2000. Key among the attributes discussed in the White Paper are flexibility on the scope and configuration to allow for both Independent System Operators (ISOs) and Regional Transmission Organizations (RTOs); the need for a regional planning process; the need for rate mechanisms that minimize cost shifts; the need to eliminate "seams" charges between ISOs and RTOs; the use of a real-time market for energy to resolve imbalances; and the need for an approach to manage congestion, which could include locational pricing with firm transmission rights, that protects against manipulation, utilizes the grid effectively and promotes the use of lower cost generation. In addition, each region within an RTO or ISO will determine how it will ensure that its region has sufficient resources to meet customers' needs. Since releasing its White Paper, the FERC has held technical conferences on various issues. However, it has not issued any specific orders for compliance. The energy bill introduced in Congress in 2003 contained a provision remanding SMD to the FERC and requiring that no new rule could be issued before October 31, 2006 or could become effective before December 31, 2006. The energy bill was not passed in 2003. The Senate leadership has stated its intent to bring the bill up for vote again in 2004.

In September 1997, the PSC approved a restructuring agreement among Con Edison of New York, the PSC staff and certain other parties (the 1997 Restructuring Agreement). Pursuant to the 1997 Restructuring Agreement, Con Edison of New York reduced electric rates on an annual basis by $129 million in 1998, $80 million in 1999, $103 million in 2000 and $209 million in 2001, divested most of its electric generating capacity, and enabled all of its electric customers to be served by competitive energy suppliers.

In November 2000, the PSC approved an October 2000 agreement (the 2000 Electric Rate Agreement) that, among other things, revised and extended the electric rate plan provisions of the 1997 Restructuring Agreement and addressed certain generation divestiture-related issues.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

The electric rate plan provisions of the 2000 Electric Rate Agreement cover the five-year period ending March 2005. Pursuant to the 2000 Electric Rate Agreement, Con Edison of New York reduced the distribution component of its electric rates by $170 million on an annual basis, effective October 2000.

The 2000 Electric Rate Agreement continues the rate provisions pursuant to which Con Edison of New York recovers prudently incurred purchased power and fuel costs from customers. See "Recoverable Energy Costs" in Note A to the financial statements.

O&R has entered into settlement agreements or similar arrangements with the PSC, NJBPU and PPUC that provide for a transition to a competitive electric market.

In October 2003, the PSC approved agreements among O&R, the staff of the PSC and other parties with respect to the rates O&R can charge to its New York customers for electric service. The electric agreement, which covers the period from July 1, 2003 through October 31, 2006, provides for no changes to electric base rates and contains provisions for the amortization and offset of regulatory assets and liabilities, the net effect of which will reduce electric operating income by a total of $11 million (pre-tax) between July 2003 and June 2006. During the second half of 2003, O&R amortized $3.7 million of the $11 million. The agreement continues to provide for recovery of energy costs from customers on a current basis and for O&R to share equally with customers earnings in excess of a 12.75 percent return on common equity during the three year period from July 2003 through June 2006. The period from July 2006 through October 2006 will not be subject to earnings sharing.

In July 2003, the NJBPU ruled on the petitions of Rockland Electric Company (RECO), the New Jersey utility subsidiary of O&R, for an increase in electric rates and recovery of deferred purchased power costs. See "Recoverable Energy Costs" and "Rate and Restructuring Agreements—Electric" in Notes A and B, respectively, to the financial statements. The NJBPU ordered a $7 million decrease in RECO's electric base rates, effective August 2003, authorized RECO's recovery of approximately $83 million of previously deferred purchased power costs and associated interest and disallowed recovery of approximately $19 million of such costs and associated interest. At December 31, 2002, the company had accrued a reserve for $13 million of the disallowance, and at June 30, 2003 reserved an additional $6 million for the disallowance.

Gas

In November 2003, Con Edison of New York filed a request with the PSC to increase charges for gas service by $108 million (9.8 percent), effective October 2004.

Con Edison of New York is currently operating under a gas rate agreement approved by the PSC in April 2002. The Agreement covers the three-year period ending September 30, 2004. The rate agreement reduced retail sales and transportation rates by $25 million, on an annual basis.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

In November 2000, the PSC approved an agreement between Con Edison of New York, the PSC staff and certain other parties that revised and extended the 1996 gas rate settlement agreement through September 2001. The 1996 agreement, with limited exceptions, continued base rates at September 1996 levels through September 2000.

In October 2003, the PSC approved an agreement among O&R, the staff of the PSC and other parties with respect to the rates O&R can charge to its New York customers for gas service. The O&R gas agreement, which covers the period from November 1, 2003 through October 31, 2006, provides for annual increases in gas base rates of $9 million (5.8 percent) effective November 2003, $9 million (4.8 percent) effective November 2004 and $5 million (2.5 percent) effective November 2005. The O&R gas agreement also continues a weather normalization clause that moderates, but does not eliminate, the effect of weather-related changes on net income. The agreement continues to provide for recovery of energy costs from customers on a current basis and for O&R to share equally with customers earnings in excess of an 11 percent return on common equity over the term of the agreement. The agreement also contains incentives under which, among other things, the company earns additional amounts based on attaining specified targets for customer migration to its retail access programs and the achievement of certain net revenue targets for interruptible sales and transportation customers.

In November 2000, the PSC also approved a gas rate agreement between O&R, PSC Staff and certain other parties covering the three-year period November 2000 through October 2003.

Steam

In November 2003, Con Edison of New York filed a request with the PSC to increase annual charges for steam service by $129 million (14.6 percent), effective October 2004.

Con Edison of New York is currently operating under a steam rate agreement that was approved by the PSC in December 2000. The agreement provided for a $16.6 million steam rate increase, which took effect October 2000 and, with limited exceptions, provided for no further changes in steam rates prior to October 2004.


FINANCIAL AND COMMODITY MARKET RISKS

The Companies are subject to various risks and uncertainties associated with financial and commodity markets. The most significant market risks include interest rate risk, commodity price risk, credit risk and investment risk.

Interest Rate Risk

The interest rate risk relates primarily to variable rate debt and to new debt financing needed to fund capital requirements, including the construction expenditures of the Utilities and maturing debt securities. Con Edison and its subsidiaries manage interest rate risk through the issuance of mostly fixed rate-debt with varying maturities and through opportunistic refinancing of debt. Con Edison estimates that, as of December 31, 2003, each 10 percent variation in interest rates applicable to the Companies'

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

variable rate debt of $816 million would result in a change in annual interest expense of $1 million. For each 10 percent change in Con Edison of New York's and O&R's variable interest rates applicable to their variable rate debt of $714 million and $59 million, respectively, annual interest expense for Con Edison of New York would change by $1 million and there would be no material impact for O&R.

In addition, Con Edison and its subsidiaries, from time to time, enter into derivative financial instruments to hedge interest rate risk on certain debt securities. See "Interest Rate Hedging" in Note P to the financial statements.

Commodity Price Risk

Con Edison's commodity price risk relates primarily to the purchase and sale of electricity, gas and related derivative instruments. The Utilities and Con Edison's unregulated subsidiaries have risk management strategies to mitigate their related exposures. See Note P to the financial statements.

Con Edison estimates that, as of December 31, 2003, each 10 percent change in market prices would result in a change in fair value of $12 million for the derivative instruments used by the Utilities to hedge purchases of electricity and gas, of which $8 million is for Con Edison of New York and $4 million for O&R. Con Edison expects that any such change in fair value would be largely offset by directionally opposite changes in the cost of the electricity and gas purchased. In accordance with provisions approved by state regulators, the Utilities generally recover from customers the costs they incur for energy purchased for their customers, including gains and losses on certain derivative instruments used to hedge energy purchased and related costs. See "Recoverable Energy Costs" in Note A to the financial statements.

Con Edison's unregulated subsidiaries use a value-at-risk (VaR) model to assess the market risk of their electricity and gas commodity fixed price purchase and sales commitments, physical forward contracts and commodity derivative instruments. VaR represents the potential change in fair value of instruments or the portfolio due to changes in market factors, for a specified time period and confidence level. The unregulated subsidiaries estimate VaR across their electricity and natural gas commodity businesses using a delta-normal variance/covariance model with a 95 percent confidence level. Since the VaR calculation involves complex methodologies and estimates and assumptions that are based on past experience, it is not necessarily indicative of future results. VaR for transactions associated with hedges on generating assets and commodity contracts, assuming a one-day holding period, for the years ended December 31, 2003, and 2002, respectively, was as follows:

95% Confidence Level, One-Day Holding Period

  2003

  2002


 
  (Millions of Dollars)

Average for the period   $ 1   $ 1
High   $ 3   $ 3
Low   $ -   $ 1

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

Credit Risk

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

Con Edison's unregulated energy subsidiaries had $71 million of credit exposure, net of collateral and reserves, at December 31, 2003, of which $63 million was with investment grade counterparties and $8 million was with the New York Mercantile Exchange or independent system operators.

Investment Risk

The Companies' investment risk relates to the investment of the assets of their pension and other postretirement benefit plans. See "Application of Critical Accounting Policies—Accounting for Pensions and Other Postretirement Benefits," above. The Companies' current investment policy for pension plan assets includes investment targets of 65 percent equities and 35 percent fixed income and other securities. At December 31, 2003, the pension plan investments consisted of 64 percent equity and 36 percent fixed income and other securities. See Note E to the financial statements.


ENERGY TRADING ACTIVITIES

Unregulated subsidiaries of Con Edison engage in energy trading activities that are accounted for in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. See Note P to the financial statements.

Prior to October 2002, these contracts were accounted for under Emerging Issues Task Force (EITF) Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." As of October 2002, energy and energy-related trading contracts that meet the definition of a derivative are accounted for under SFAS No. 133. Such contracts are marked to market with gains and losses recognized in earnings. For the years ended December 31, 2003 and 2002, Con Edison recognized in income net unrealized pre-tax losses of $3 million and $1 million, respectively, excluding the effect of a cumulative adjustment due to a change in accounting principle. Contracts that did not fall within the scope of SFAS No. 133 were included in the cumulative effect of a change in accounting principle recognized in December 2002. See Note P to the financial statements.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

The changes in fair value of energy trading net assets for the years ended December 31, 2003 and 2002 were as follows:

 
  Twelve months ended
December 31,

 
(Millions of Dollars)

  2003

  2002

 

 
Fair value of net assets outstanding - beginning of period   $ 5   $ 11  
Change in fair value during the period:              
  Unrealized gain at inception     -     11  
  Net premium paid/(received)     2     (2 )
  Cumulative effect of a change in accounting principle     -     (3 )
  Changes in fair value prior to settlement     25     6  
  Fair value realized at settlement of contracts     (28 )   (18 )

 
Total change in fair value during the period     (1 )   (6 )

 
Fair value of net assets outstanding—end of period   $ 4   $ 5  

 

As of December 31, 2003, the sources of fair value of the energy trading net assets were as follows:


(Millions of Dollars)

   
  Fair Value of Net
Assets at Period End

   
 

 
Source of Fair Value

  Maturity less
than 1 year

  Maturity
1-3
years

  Maturity
4-5
years

  Maturity in
excess of 5
years

  Total fair
value

 

 
Prices provided by external sources   $ 7   $ -   $ -   $ -   $ 7  
Prices based on models and other valuation methods     (3 )   -     -     -     (3 )

 
Total   $ 4   $ -   $ -   $ -   $ 4  

 

"Prices provided by external sources" represent the fair value of exchange-traded futures and options and the fair value of positions for which price quotations are available through or derived from brokers or other market sources.

"Prices based on models and other valuation methods" represent the fair value of positions calculated using internal models when directly and indirectly quoted external prices or prices derived from external sources are not available. Internal models incorporate the use of options pricing and estimates of the present value of cash flows based on underlying contractual terms. The models reflect management's estimates, taking into account observable market prices, estimated market prices in the absence of quoted market prices, the risk-free market discount rate, volatility factors, estimated correlations of energy commodity prices and contractual volumes. Counterparty specific credit quality, market price uncertainty and other risks are also factored into the models.


ENVIRONMENTAL MATTERS

For information concerning potential liabilities arising from laws and regulations protecting the environment and from claims relating to alleged exposure to asbestos, see Note G to the financial statements.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


IMPACT OF INFLATION

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


MATERIAL CONTINGENCIES

For information concerning potential liabilities arising from the Companies' material contingencies, see "Application of Critical Accounting Policies—Accounting for Contingencies," above.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
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RESULTS OF OPERATIONS


YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002

The Companies' results of operations (which were discussed above under "Results of Operations—Summary") in 2003 compared with 2002 were:

 
  Con Edison*

  Con Edison
of New York

  O&R

 

 
(Millions of Dollars)

  Increases
(Decreases)
Amount

  Increases
(Decreases)
Percent

  Increases
(Decreases)
Amount

  Increases
(Decreases)
Percent

  Increases
(Decreases)
Amount

  Increases
(Decreases)
Percent

 

 
Operating revenues   $ 1,325   15.6 % $ 942   13.0 % $ 92   14.5 %
Purchased power     725   22.6     502   19.1     31   14.1  
Fuel     215   74.4     126   54.3        
Gas purchased for resale     251   42.1     243   51.5     31   34.8  

 
Operating revenues less purchased power, fuel and gas purchased for resale (net revenues)     134   3.0     71   1.8     30   9.2  
Other operations and maintenance     138   10.2     45   4.0     27   18.9  
Impairment charges     159   N/A     -   -     -   -  
Depreciation and amortization     34   6.9     20   4.6     -   -  
Taxes, other than income tax     2   0.2     -   -     (2 ) (3.8 )
Income tax     (73 ) (18.3 )   18   5.1     9   36.0  

 
Operating income     (126 ) (11.9 )   (12 ) (1.3 )   (4 ) (5.6 )
Other income less deductions and related federal income tax     (26 ) (41.9 )   (19 ) (34.5 )   (3 ) Large  
Net interest charges     (8 ) (1.8 )   (16 ) (4.1 )   (7 ) 25.0  
Preferred stock dividend requirements     (1 ) (8.3 )   (1 ) (8.3 )   -   -  
Cumulative effect of changes in accounting principles     25   Large     -   -     -   -  

 
Net income for common stock   $ (118 ) (18.3 )% $ (14 ) (2.3 )% $ -   - %

 

*Represents the consolidated financial results of Con Edison and its subsidiaries.

A discussion of the results of operations by principal business segment follows. For additional business segment financial information, see Note O to the financial statements.

The results reflect the application of the Companies' accounting policies and rate plans that cover the rates the Utilities can charge their customers. In general, the Utilities recover on a current basis the fuel and purchased power costs they incur in supplying energy to their full-service customers. See "Recoverable Energy Costs" in Note A and "Regulatory Matters" in Note B to the financial statements.


CON EDISON OF NEW YORK

Electric

Con Edison of New York's electric operating revenues increased $559 million in 2003 compared with 2002, due primarily to higher fuel and purchased power costs of $503 million (which are recoverable

60


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

from customers), and a lower amount reserved for earnings in excess of a specified rate of return to be retained for customer benefit ($31 million). Changes to operating revenues also reflect variations in electric sales.

Con Edison of New York's electric sales and deliveries, excluding off-system sales, in 2003 compared with 2002 were:


MILLIONS OF KWHS

 
  Twelve Months Ended

   
   
 
Description

  December 31, 2003

  December 31, 2002

  Variation

  Percent
Variation

 

 
Residential/Religious   12,441   12,481   (40 ) (0.3 )%
Commercial/Industrial   18,033   19,111   (1,078 ) (5.6 )
Other   154   181   (27 ) (14.9 )

 
  Total Full Service Customers   30,628   31,773   (1,145 ) (3.6 )

 
Retail access customers   12,637   11,926   711   6.0  

 
  Sub-total   43,265   43,699   (434 ) (1.0 )

 
NYPA, Municipal Agency and Other Sales   10,470   10,267   203   2.0  

 
  Total Service Area   53,735   53,966   (231 ) (0.4 )%

 

Electric delivery volumes in Con Edison of New York's service area decreased 0.4 percent in 2003 compared with 2002. The decrease in delivery volumes reflects the cool weather in the second quarter of 2003 and the lower than normal number of hot days during the summer of 2003 compared with an exceptionally warm summer in 2002, partially offset by the cold winter weather in 2003 compared with the mild winter in 2002. After adjusting for variations, principally weather and billing days in each period and the August 2003 regional power outage, electric delivery volumes in Con Edison of New York's service area increased 0.6 percent in 2003 compared with 2002. Weather-adjusted sales represent an estimate of the sales that would have been made if historical average weather conditions had prevailed.

Con Edison of New York's electric purchased power costs increased $477 million in 2003 as compared with 2002, due to an increase in the average unit price of purchased power. This increase was offset in part by lower usage by the company's full service customers and higher volumes of electricity purchased from other suppliers by participants in the company's retail access programs. Electric fuel costs increased $26 million, reflecting an increase in the average unit price of fuel.

Con Edison of New York's electric operating income decreased $1 million in 2003 compared with 2002. The principal component of the decrease was an increase in other operations and maintenance expense ($41 million—due primarily to a reduced net credit for pensions and other postretirement benefits), property taxes ($17 million) and depreciation ($16 million). The increase in expenses was offset in part

61


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


by higher net revenues (operating revenues less purchased power and fuel costs—$56 million), lower state and local revenue taxes ($7 million), sales and use tax ($5 million) and payroll taxes ($3 million).

Gas

Con Edison of New York's gas operating revenues in 2003 increased $250 million compared with 2002, due primarily to the higher cost of purchased gas of $244 million (which is recoverable from customers), and higher sales volumes.

Con Edison of New York's revenues from gas sales are subject to a weather normalization clause that moderates, but does not eliminate, the effect of weather-related changes on net income.

Con Edison of New York's gas sales and deliveries, excluding off-system sales, in 2003 compared with 2002 were:


THOUSANDS OF DTHS

 
  Twelve Months Ended

   
   
 
Description

  December 31, 2003

  December 31, 2002

  Variation

  Percent
Variation

 

 
Firm Sales                  
Residential   51,944   44,163   7,781   17.6 %
General   36,840   32,682   4,158   12.7  
Firm Transportation   16,486   15,695   791   5.0  

 
  Total Firm Sales and Transportation   105,270   92,540   12,730   13.8  
Off Peak/Interruptible Sales   15,247   12,622   2,625   20.8  
Non-Firm Transportation of Gas                  
NYPA   23,360   25,467   (2,107 ) (8.3 )
Generation Plants   43,808   77,516   (33,708 ) (43.5 )

 
Total NYPA and Generation Plants   67,168   102,983   (35,815 ) (34.8 )

 
Other   17,766   22,301   (4,535 ) (20.3 )

 
  Total Sales and Transportation   205,451   230,446   (24,995 ) (10.8 )%

 

Con Edison of New York's sales and transportation volumes for firm customers increased 13.8 percent in 2003 compared with 2002. The increase reflects the impact of the cold weather in the 2003 winter period compared with the mild weather in the 2002 winter period and increased new business. After adjusting for variations, principally weather and billing days in each period and the August 2003 regional power outage, firm gas sales and transportation volumes in the company's service area increased 3.6 percent in 2003.

Non-firm transportation of customer-owned gas to NYPA and electric generating plants decreased 34.8 percent in 2003 as compared with 2002 due to higher gas prices. In 2003, because of the relative prices of gas and fuel oil, electric generating plants in the company's gas service area utilized oil rather

62


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


than gas for a significant portion of their generation. The decline in gas usage had minimal impact on earnings due to the application of a fixed demand charge for local transportation.

Con Edison of New York's purchased gas cost increased $244 million in 2003 compared with 2002, due to higher unit costs and increased sales volumes for firm sales customers.

Con Edison of New York's gas operating income decreased $10 million in 2003 compared with 2002, reflecting primarily an increase in other operations and maintenance expense ($4 million—due primarily to a reduced net credit for pensions and other postretirement benefits), depreciation ($4 million), state and local taxes on revenues ($5 million) and income tax ($4 million). The increases in expenses were offset in part by higher net revenues (operating revenues less gas purchased for resale—$7 million).

Steam

Con Edison of New York's steam operating revenues increased $133 million and steam operating income decreased $1 million in 2003 compared with 2002. The higher revenues reflect higher sales volumes due to the cold winter weather in 2003 as compared with the mild weather in 2002. The increase also includes higher fuel and purchased power costs ($124 million) in 2003 compared with 2002. The decrease in steam operating income reflects primarily higher income taxes ($10 million—due to higher taxable income and a lower level of removal costs in 2003) and operations and maintenance expense ($3 million—due to a reduced net credit for pensions and other postretirement benefits) offset in part by an increase in net revenues (operating revenues less fuel and purchased power costs) of $9 million and lower state and local taxes on steam revenues ($4 million).

Con Edison of New York's steam sales and deliveries in 2003 compared with 2002 were:


MILLIONS OF POUNDS

 
  Twelve Months Ended

   
   
 
Description

  December 31, 2003

  December 31, 2002

  Variation

  Percent
Variation

 

 
General   729   600   129   21.5 %
Apartment house   7,845   7,022   823   11.7  
Annual power   17,674   16,897   777   4.6  

 
  Total Sales   26,248   24,519   1,729   7.1 %

 

Steam sales volumes increased 7.1 percent in 2003 compared with 2002, reflecting the impact of the cold weather in the 2003 winter period compared with the mild weather in the 2002 winter period. After adjusting for variations, principally weather and billing days in each period and the August 2003 regional power outage, steam sales increased 0.9 percent.

63


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

Taxes Other Than Income Taxes

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

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

(Millions of Dollars)

  2003

  2002

  Increase/
(Decrease)

 

 
Property taxes   $ 651   $ 630   $ 21  
State and local taxes related to revenue receipts     321     327     (6 )
Payroll taxes     50     55     (5 )
Other taxes     18     28     (10 )

 
Total   $ 1,040 (a) $ 1,040 (a) $ -  

 
(a)
Including sales tax on customers' bills, total taxes other than income taxes billed to customer in 2003 and 2002 were $1,393 and $1,352 million, respectively.

Effective January 2003, New York City increased Con Edison of New York's annual property taxes by $94 million. Under the company's rate agreements, the company is deferring most of the property tax increase as a regulatory asset to be recovered from customers.

Other Income

Other income (deductions) decreased $19 million in 2003 compared with 2002, reflecting $27 million of interest income on a federal income tax refund claim recorded in 2002, partially offset by an increase in income tax expense in 2003 as a result of the recognition in 2002 of income tax benefits relating to the September 2001 sale of the company's nuclear generating unit.

Net Interest Charges

Net interest charges decreased $16 million in 2003 compared with 2002 due primarily to the interest expense associated with a net federal income tax deficiency related to a prior period audit ($19 million) recorded in 2002.

Income Taxes

Operating income taxes increased $18 million in 2003 compared with 2002, primarily as a result of less flow-through (non-deferred) depreciation for tax purposes. In addition, lower operating income taxes in 2002 reflected a tax benefit from an Internal Revenue Service audit for tax years 1995 through 1997 and a write-off of excess deferred tax reserves.


O&R

Electric

Electric operating revenues increased $54 million in 2003 compared with 2002. The increase is due primarily to higher purchased power costs in 2003 and accounting for the 2003 O&R electric rate agreement and the NJBPU ruling on the RECO rate petitions.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

O&R's electric sales and deliveries, excluding off-system sales, in 2003 compared with 2002 were:


MILLIONS OF KWHS

 
  Twelve Months Ended

   
   
 
Description

  December 31, 2003

  December 31, 2002

  Variation

  Percent
Variation

 

 
Residential/Religious   1,769   1,815   (46 ) (2.5 )%
Commercial/Industrial   2,277   2,393   (116 ) (4.8 )
Other   111   111   -   -  

 
  Total Full Service Customers   4,157   4,319   (162 ) (3.8 )

 
Retail access customers   1,455   1,235   220   17.8  

 
  Total Service Area   5,612   5,554   58   1.0  

 

Electric delivery volumes in O&R's service area increased 1.0 percent in 2003 compared with 2002 due to the growth in the number of customers, higher average customer usage, and the positive effect of the cooler-than-normal weather in the first quarter of 2003, partially offset by negative impact of weather on the last nine months of 2003. After adjusting for weather variations and the August 2003 regional power outage, electric delivery volumes in O&R's service area increased 2.5 percent in 2003.

O&R's purchased power cost increased $31 million in 2003 as compared with 2002 due to an increase in the average unit cost and the regulatory actions referenced above. This increase was offset by lower energy usage by the company's full-service customers and higher volumes of electricity purchased from other suppliers by participants in O&R's retail access program.

O&R's electric operating income decreased $6 million in 2003 as compared with 2002 due primarily to the referenced regulatory actions.

Gas

O&R's gas operating revenues increased $38 million in 2003 compared with 2002. The increase is due primarily to higher cost of gas purchased for resale in 2003, higher firm sales and transportation volumes and the impact of the 2003 gas rate agreement.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

O&R's gas sales and deliveries, excluding off-system sales, in 2003 compared with 2002 were:


THOUSANDS OF DTHS

 
  Twelve Months Ended

   
   
 
Description

  December 31, 2003

  December 31, 2002

  Variation

  Percent
Variation

 

 
Firm Sales                  
Residential   10,810   10,203   607   5.9 %
General   3,314   3,295   19   0.6  
Firm Transportation   8,498   6,368   2,130   33.4  

 
  Total Firm Sales and Transportation   22,622   19,866   2,756   13.9  
Off Peak/Interruptible Sales   6,833   7,366   (533 ) (7.2 )
Non-Firm Transportation of Gas                  
Generation Plants   2,833   13,983   (11,150 ) (79.7 )
Other   1,134   1,057   77   7.3  

 
  Total Sales and Transportation   33,422   42,272   (8,850 ) (20.9 )%

 

O&R's sales and transportation volumes for firm customers increased 13.9 percent in 2003 compared with 2002. The increase reflects the impact of the cold weather in the 2003 winter period compared with the mild weather in the 2002 winter period. Revenues from gas sales in New York are subject to a weather normalization clause that moderates, but does not eliminate, the effect of weather-related changes on net income. After adjusting for weather variations in each period and the August 2003 regional power outage, total firm sales and transportation volumes were 3.0 percent higher in 2003 compared with 2002.

Non-firm transportation of customer-owned gas to electric generating plants decreased 79.7 percent in 2003 as compared with 2002 due to higher gas prices. In 2003, because of the relative prices of gas and fuel oil, power plants in the company's gas service area utilized oil rather than gas for a significant portion of their generation. In addition, one area power plant completed a construction project to directly connect to a gas transmission provider. The decline in gas usage had minimal impact on earnings due to the application of a fixed demand charge for local transportation.

O&R's cost of gas purchased for resale increased $31 million in 2003 as compared with 2002 due to increased sales to firm customers and increased gas unit costs in 2003. The increase is offset in part by increased volumes of gas purchased from other suppliers by participants in O&R's retail access program. See "Recoverable Energy Costs" in Note A to the financial statements.

Gas operating income increased $2 million in 2003 as compared with 2002. The increase reflects an increase in net gas revenues (operating revenues less purchased gas) of $7 million, which is due primarily to increased sales and the referenced regulatory actions. The increase in net revenues was offset in part by increased gas operations and maintenance expenses of $2 million and increased federal and state income tax of $3 million.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

Taxes Other Than Income Taxes

Taxes other than income taxes decreased $2 million in 2003 compared with 2002.

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

(Millions of Dollars)

  2003

  2002

  Increase/
(Decrease)

 

 
Property taxes   $ 28   $ 27   $ 1  
State and local taxes related to revenue receipts     19     21     (2 )
Payroll taxes     4     4     -  
Other taxes     (1 )(b)   -     (1 )

 
Total   $ 50 (a) $ 52 (a) $ (2 )

 
(a)
Including sales tax on customers' bills, total taxes other than income taxes, billed to customers in 2003 and 2002 were $69 and $71 million, respectively.

(b)
Includes a sales and use tax refund of approximately $800,000.

Income Taxes

Operating income taxes increased by $9 million in 2003 compared with 2002 due primarily to the result of less flow-through (non-deferred) depreciation for tax purposes.

Other Income

O&R's other income (deductions) decreased $3 million in 2003 compared with 2002, due primarily to the reclassification to other income (deductions) of losses previously recognized in other comprehensive income related to investments in marketable securities.

Net Interest Charges

O&R's net interest charges decreased by $7 million in 2003 compared with 2002, due primarily to the company recording interest charges of $5 million in 2002 as a result of a change by the NJBPU in the carrying charges allowed on the company's deferred purchased power balance in New Jersey and to lower interest on long-term debt as a result of the redemption of a $35 million, 10-year debenture in March 2003 (see "Liquidity and Capital Resources," above).

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


UNREGULATED SUBSIDIARIES AND OTHER

Unregulated subsidiaries' operating income for 2003 was $122 million lower than 2002. Operating revenues increased $292 million in 2003 compared with 2002 due primarily to higher sales from Con Edison Development's increased generating capacity and increased retail electric sales at Con Edison Solutions.

Unregulated subsidiaries' operating expenses, excluding income taxes, increased by $502 million, reflecting principally increased fuel and purchased power costs of $260 million, impairment charges of $159 million and increased operation and maintenance expenses of $83 million. See Note H to the financial statements. The increase in operation and maintenance expenses was attributable to increased costs at Con Edison Development ($51 million), primarily to operate the new generation assets, Con Edison Communications' increased operating costs reflecting expansion of the business ($23 million), and higher depreciation for additional telecommunications facilities and generating assets placed in service ($13 million), offset in part by lower operation and maintenance costs at Con Edison Solutions ($6 million).

Operating income taxes decreased $88 million for 2003 as compared with 2002 reflecting primarily lower taxable income (including the tax-effect of the aforementioned impairment charges).

Unregulated subsidiaries' other income (deductions) increased $1 million and interest charges were lower by $1 million for 2003 as compared with 2002.

Unregulated subsidiaries' earnings reflect an increase of $25 million for 2003 as compared with 2002 resulting from the cumulative effect of changes in accounting principles adopted in each year. For 2003, the positive cumulative effect of changes in accounting principles of $3 million (after tax) at Con Edison Development related to mark-to-market gains applicable to power sales contracts at certain generating plants, partially offset by the impact of the financial statement consolidation of its Newington plant. For 2002, the cumulative effect of changes in accounting principles included charges for goodwill impairment of certain generating assets at Con Edison Development, totaling $20 million (after tax), and a charge of $2 million (after tax) at Con Edison Energy relating to the accounting for certain contracts involved in energy trading and risk management activities.

Earnings attributable to Other, representing the parent company and inter-company transactions, were $9 million lower for 2003 as compared with 2002 primarily reflecting higher interest expenses.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001

The Companies' results of operations (which were discussed above under "Results of Operations—Summary") in 2002 compared with 2001 were:

 
  Con Edison*

  Con Edison
of New York

  O&R

 

 
(Millions of Dollars)

  Increases
(Decreases)
Amount

  Increases
(Decreases)
Percent

  Increases
(Decreases)
Amount

  Increases
(Decreases)
Percent

  Increases
(Decreases)
Amount

  Increases
(Decreases)
Percent

 

 
Operating revenues   $ (887 ) (9.4 )% $ (898 ) (11.1 )% $ (101 ) (13.7 )%
Purchased power     (179 ) (5.3 )   (197 ) (7.0 )   (70 ) (24.1 )
Fuel     (105 ) (26.6 )   (119 ) (33.9 )   -   -  
Gas purchased for resale     (264 ) (30.7 )   (194 ) (29.1 )   (40 ) (31.0 )

 
Operating revenues less purchased power, fuel and gas purchased for resale (net revenues)     (339 ) (7.1 )   (388 ) (9.1 )   9   2.8  
Other operations and maintenance     (148 ) (9.9 )   (160 ) (12.6 )   2   1.4  
Depreciation and amortization     (31 ) (5.9 )   (27 ) (5.8 )   1   3.0  
Taxes, other than income tax     (25 ) (2.2 )   (27 ) (2.5 )   (2 ) (3.7 )
Income tax     (67 ) (14.4 )   (81 ) (18.6 )   (1 ) (3.8 )

 
Operating income     (68 ) (6.0 )   (93 ) (8.9 )   9   14.3  
Other income less deductions and related federal income tax     63   Large     54   Large     -   N/A  
Net interest charges     11   2.6     7   1.8     4   16.7  
Preferred stock dividend requirements     (2 ) (14.3 )   (2 ) (14.3 )   -   N/A  
Cumulative effect of change in accounting principle     22   N/A     -   -     -   N/A  

 
Net income for common stock   $ (36 ) (5.3 )% $ (44 ) (6.8 )% $ 5   12.5 %

 

*Represents the consolidated financial results of Con Edison and its subsidiaries.

A discussion of the results of operations by principal business segment follows. For additional business segment financial information, see Note O to the financial statements.

The results reflect the application of the Companies' accounting policies and rate plans that cover the rates the Utilities can charge their customers. In general, the Utilities recover on a current basis the fuel and purchased power costs they incur in supplying energy to their full-service customers. See "Recoverable Energy Costs" in Note A and "Regulatory Matters" in Note B to the financial statements.


CON EDISON OF NEW YORK

Electric

Con Edison of New York's electric operating revenues in 2002 decreased $575 million compared with 2001, reflecting primarily lower fuel and purchased power costs of $227 million (discussed below). The decrease also reflects the completion in March 2002 of amortizations of a previously deferred gain on the sale of divested plants and a previously deferred NYPA revenue increase ($43 million), a reserve established in 2002 for earnings in excess of a specified rate of return that are to be retained for customer

69


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

benefit in accordance with the 2000 Electric Rate Agreement ($40 million), a reserve established in 2002 related to the sale of the company's nuclear generating unit ($25 million), the amortization of the loss ($30 million) related to the sale of the company's nuclear generating unit and rate reductions and other amortizations in accordance with the company's rate agreements. The decrease in electric operating revenues was offset, in part, by an increase in electric sales revenues ($24 million) reflecting principally the hot summer weather.

Con Edison of New York's electric sales and deliveries, excluding off-system sales, in 2002 compared with 2001 were:


MILLIONS OF KWHS

 
  Twelve Months Ended

   
   
 
Description

  December 31, 2002

  December 31, 2001

  Variation

  Percent
Variation

 

 
Residential/Religious   12,481   12,049   432   3.6 %
Commercial/Industrial   19,111   19,839   (728 ) (3.7 )
Other   181   166   15   9.0  

 
  Total Full Service Customers   31,773   32,054   (281 ) (0.9 )

 
Retail access customers   11,926   10,520   1,406   13.4  

 
  Sub-total   43,699   42,574   1,125   2.6  

 
NYPA, Municipal Agency and Other Sales   10,267   10,476   (209 ) (2.0 )

 
  Total Service Area   53,966   53,050   916   1.7 %

 

Electricity delivery volumes in Con Edison of New York's service territory increased 1.7 percent in 2002 compared with 2001. The increase reflects the impact of the hot summer weather, offset in part by the mild winter weather in the first quarter of 2002, and the soft economy. After adjusting for variations, principally weather and billing days in each period, electricity delivery volumes in the service territory increased 0.5 percent in 2002.

The company's electric purchased power costs decreased $175 million in 2002 compared with 2001, due to a decrease in the price of purchased power and an increase in volumes of electricity purchased from other suppliers by participants in the retail access programs. This decrease was offset in part by the company's increased purchased volumes resulting from the sale of the company's nuclear generating unit in September 2001 and the hot summer weather in 2002. Fuel costs decreased $52 million as a result of decreased generation at company-owned power plants. In general, the company recovers prudently incurred fuel and purchased power costs pursuant to rate provisions approved by the PSC.

The company's electric operating income decreased $93 million in 2002 compared with 2001. The principal component of the decrease was lower net electric revenues (operating revenues less fuel and purchased power costs) of $348 million. The decrease in net electric revenues reflects the sale of the nuclear generation unit and the same factors (other than lower fuel and purchased power costs) as

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


discussed above with respect to the decrease in electric operating income. The decrease in net electric revenues was offset in part by reduced other operations and maintenance expenses ($137 million) reflecting nuclear production expenses incurred in 2001 but not in 2002, and productivity improvements, lower depreciation and amortization expense ($32 million) and lower revenue taxes ($26 million). The decrease is also offset by lower operating income tax of $62 million.

Gas

Con Edison of New York's gas operating revenues decreased $223 million, resulting primarily from the lower cost of purchased gas ($194 million) in 2002 compared with 2001. The lower cost of purchased gas reflects primarily lower unit costs. The lower revenues also reflect reduced sales volumes, resulting primarily from the mild winter weather in the first quarter of 2002, and revenue reductions implemented in accordance with the gas rate agreement approved by the PSC in April 2002. Gas operating income decreased $8 million in 2002, reflecting a $29 million decrease in net revenues (operating revenues less gas purchased for resale), and increased property tax expense ($10 million), offset in part by reduced operations and maintenance expenses ($16 million), reduced revenue taxes ($10 million) and lower income taxes ($9 million).

Con Edison of New York's gas sales and deliveries, excluding off-system sales, in 2002 compared with 2001 were:


THOUSANDS OF DTHS

 
  Twelve Months Ended

   
   
 
Description

  December 31, 2002

  December 31, 2001

  Variation

  Percent
Variation

 

 
Firm Sales                  
Residential   44,163   46,506   (2,343 ) (5.0 )%
General   32,682   35,118   (2,436 ) (6.9 )
Firm Transportation   15,695   14,280   1,415   9.9  

 
  Total Firm Sales and Transportation   92,540   95,904   (3,364 ) (3.5 )
Off Peak/Interruptible Sales   12,622   14,731   (2,109 ) (14.3 )
Non-Firm Transportation of Gas                  
NYPA   25,467   13,762   11,705   85.1  
Generation Plants   77,516   62,991   14,525   23.1  

 
  Total NYPA and Generation Plants   102,983   76,753   26,230   34.2  

 
Other   22,301   15,718   6,583   41.9  

 
  Total Sales and Transportation   230,446   203,106   27,340   13.5 %

 

Con Edison of New York's sales and transportation volumes for firm customers decreased 3.5 percent in 2002 compared with 2001. Revenues from gas sales in New York are subject to a weather normalization clause that moderates, but does not eliminate, the effect of weather-related changes on net income. After

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED


adjusting for variations, principally weather and billing days in each period, firm gas sales and transportation volumes in the company's service territory decreased 1.5 percent in the 2002.

The company's gas sales and transportation volumes vary seasonally in response to weather and peak in the winter. A weather-normalization provision that applies to the company's gas business moderates, but does not completely eliminate, the effect of weather-related changes on gas operating income.

Steam

Con Edison of New York's steam operating revenues decreased $100 million. The lower revenues reflect reduced sales volumes and lower fuel and purchased power costs primarily as a result of the loss of the World Trade Center as a customer, the mild winter weather in the first quarter of 2002 and the soft economy. The lower fuel and purchased power costs reflect primarily lower unit costs and volumes. Steam operating income increased $8 million for 2002 compared with 2001 due primarily to reduced operations and maintenance expenses of $9 million and lower income taxes of $11 million, offset in part by a decrease in net revenues (operating revenues less fuel and purchased power costs) of $11 million.

Con Edison of New York's steam sales and deliveries in 2002 compared with 2001 were:


MILLIONS OF POUNDS

 
  Twelve Months Ended

   
   
 
Description

  December 31, 2002

  December 31, 2001

  Variation

  Percent
Variation

 

 
General   600   620   (20 ) (3.2 )%
Apartment house   7,022   7,050   (28 ) (0.4 )
Annual power   16,897   17,657   (760 ) (4.3 )

 
  Total Sales   24,519   25,327   (808 ) (3.2 )%

 

Steam sales volume decreased 3.2 percent in 2002 compared with 2001, reflecting primarily the loss of the World Trade Center as a customer, the mild winter weather in the first quarter of 2002 and the soft economy. After adjusting for variations, principally weather and billing days in each period, steam sales volume decreased 1.4 percent.

Taxes Other Than Income Taxes

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

(Millions of Dollars)

  2002

  2001

  Increase/
(Decrease)

 

 
Property taxes   $ 630   $ 620   $ 10  
State and local taxes related to revenue receipts     327     365     (38 )
Payroll taxes     55     56     (1 )
Other taxes     28     26     2  

 
Total   $ 1,040 (a) $ 1,067 (a) $ (27 )

 

(a)    Including sales tax on customers' bills, total taxes other than income taxes billed to customers in 2002 and 2001 were $1,352 million and $1,414 million, respectively.

72


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

Other Income

Investment income decreased $4 million in 2002 compared with 2001, due principally to reduced interest income earned on short-term cash investments in 2002 compared with 2001. For 2001, the company had more cash on hand than in 2002, primarily as a result of the sale of its nuclear generating unit. Allowance for equity funds used during construction increased $9 million in 2002 compared with 2001 primarily reflecting the East River Repowering Project. Other income increased $42 million in 2002 compared with 2001 due primarily to $27 million of interest income on a federal income tax refund claim, a $10 million write-off in 2001 of an investment in the New York Discovery Fund, a $9 million increase in interest earned on regulatory assets (See "Application of Critical Accounting Policies—Accounting for Regulated Public Utilities—SFAS No. 71," above), offset in part by reduced income of $3 million from non-utility operations. Income tax expense decreased $4 million in 2002 compared with 2001 due primarily to the recognition of tax benefits relating to the September 2001 sale of the Company's nuclear generating unit.

Net Interest Charges

Net interest charges increased $7 million in 2002 compared with 2001. The increase reflects principally the interest expense associated with a net federal income tax deficiency related to a prior period audit ($19 million), partially offset by decreased interest expense on long-term debt of $15 million.

Income Tax

Federal income tax decreased $29 million in 2002 compared with 2001, reflecting lower income before tax and deductions related to removal costs and tax credits. In 2000, New York State implemented a tax law change that reduced or repealed certain revenue-based taxes and replaced them with a net income-based tax. State income taxes decreased $57 million in 2002 compared with 2001, reflecting lower income before tax, lowering of the tax rate and prior period adjustments. The state income tax expense is offset against the savings from the eliminated or reduced revenue taxes. Any over- or under-collection of these taxes is deferred for return to, or recovery from, customers. See Notes A and M to the financial statements.


O&R

Electric

Electric operating revenues decreased $62 million in 2002 compared with 2001. This decrease was primarily the result of lower purchased power costs and tax recoveries in 2002.

73


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

O&R's electric sales and deliveries, excluding off-system sales, in 2002 compared with 2001 were:


MILLIONS OF KWHS

 
  Twelve Months Ended

   
   
 
Description

  December 31, 2002

  December 31, 2001

  Variation

  Percent
Variation

 

 
Residential/Religious   1,815   1,773   42   2.4 %
Commercial/Industrial   2,393   2,567   (174 ) (6.8 )
Other   111   110   1   0.9  

 
  Total Full Service Customers   4,319   4,450   (131 ) (2.9 )

 
Retail access customers   1,235   799   436   54.6  

 
  Total Service Area   5,554   5,249   305   5.8 %

 

Electricity delivery volumes in 2002 increased 5.8 percent compared with 2001 due to warmer than normal summer weather, customer growth and higher average usage. After adjusting for weather variations, total electricity delivery volumes were 3.2 percent higher in 2002. Net electric revenues (operating revenues less purchased power) were $8 million higher in 2002 than in 2001.

Purchased power costs decreased $70 million in 2002 compared with 2001, reflecting decreases in the unit cost of purchased power and increased volumes of electricity purchased by customers from other suppliers.

Electric operating income increased $8 million in 2002 as compared with 2001. This increase reflects the impact of higher net electric revenues along with lower New York state and local income and revenue taxes, offset in part by higher operation and maintenance charges and depreciation costs.

Gas

Gas operating revenues decreased $39 million in 2002 as compared with 2001. This decrease was primarily the result of lower gas costs and sales to firm customers in 2002.

O&R's gas sales and deliveries, excluding off-system sales, in 2002 compared with 2001 were:


THOUSANDS OF DTHS

 
  Twelve Months Ended

   
   
 
Description

  December 31, 2002

  December 31, 2001

  Variation

  Percent
Variation

 

 
Firm Sales                  
Residential   10,203   11,724   (1,521 ) (12.8 )%
General   3,295   3,751   (456 ) (12.2 )
Firm Transportation   6,368   4,724   1,644   34.8  

 
  Total Firm Sales and Transportation   19,866   20,199   (333 ) (1.6 )
Off Peak/Interruptible Sales   7,366   7,264   102   1.4  
Non-Firm Transportation of Gas                  
Generation Plants   13,983   11,427   2,556   22.4  
Other   1,057   1,039   18   1.7  

 
  Total Sales and Transportation   42,272   39,929   2,343   5.9 %

 

74


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

O&R's sales and transportation volumes for firm customers decreased 1.6 percent in 2002 compared with 2001. Revenues from gas sales in New York are subject to a weather normalization clause that moderates, but does not eliminate, the effect of weather-related changes on net income. After adjusting for weather variations in each period, total firm sales and transportation volumes were 0.3 percent lower for 2002 compared with 2001.

Net gas revenues (operating revenues less purchased gas) were $1 million higher in 2002 due primarily to incentives earned from interruptible and off-system gas sales.

The cost of gas purchased for resale was $40 million less in 2002 than in 2001, reflecting lower sales volumes and unit costs.

Decreased gas revenues also reflect the reduced requirement for the company to buy gas for resale because of an increase in the purchase of gas by customers from other suppliers.

Gas operating income increased by $1 million in 2002 compared with 2001, due primarily to higher net revenues and lower operations and maintenance expenses, offset in part by lower late payment charge revenues and higher depreciation.

Other Operations and Maintenance

Other operations and maintenance expense increased $2 million in 2002 compared with 2001. The increase was attributable primarily to higher electric transmission and distribution expenditures, partially offset by lower customer bad debt and collections expense.

Taxes Other Than Income Taxes

Taxes other than income taxes decreased by $2 million in 2002 compared with 2001. The decrease was primarily the result of lower New York State revenue taxes of $3 million, which resulted from reduced tax rates and lower energy costs billed to customers. Partially offsetting this decrease were higher property taxes of $1 million.

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

(Millions of Dollars)

  2002

  2001

  Increase/
(Decrease)

 

 
Property taxes   $ 27   $ 26   $ 1  
State and local taxes related to revenue receipts     21     24     (3 )
Payroll taxes     4     4     -  
Other taxes     -     -     -  

 
  Total   $ 52 (a) $ 54 (a) $ (2 )

 

(a)    Including sales tax on customers' bills, total taxes other than income taxes, billed to customers in 2002 and 2001 were $71 million and $66 million, respectively.

75


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF
NEW YORK AND O&R) — CONTINUED

Net Interest Charges

Interest charges increased by $4 million in 2002 compared with 2001, primarily as a result of a change by the NJBPU in the carrying charges allowed on O&R's deferred purchased power balance in New Jersey ($5 million) and lower allowance for borrowed funds used during construction ($1 million). These expenses were offset in part by lower net financing costs of $1 million that resulted from lower average debt balances and interest rates in 2002.

Income Taxes

Income taxes decreased by $1 million in 2002 compared with 2001, reflecting primarily lower state income taxes. State income taxes decreased primarily as a result of a 0.5 percent reduction in the New York State tax rate. Excluding certain taxes in New York that are reconciled to amounts included in rates, income taxes increased by $2 million due primarily to higher operating income in 2002.


UNREGULATED SUBSIDIARIES AND OTHER

Earnings for the unregulated subsidiaries decreased $14 million in 2002 compared with 2001, reflecting a non-cash, after-tax charge in 2002 of $22 million for changes in accounting principles (see Notes L, P and T to the financial statements) and continued start-up losses in the company's wholesale telecommunications business, including a non-cash, after-tax charge in 2002 of $5 million for a write-down of an investment in Neon Communications, Inc. (NEON). The decrease in earnings was offset, in part, by higher electric retail sales volumes and gross margins, the capitalization of previously expensed project development costs on generation assets ($4 million after tax) and unrealized mark-to-market gains on derivative instruments ($7 million after tax).

76


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Con Edison

For information about Con Edison's primary market risks associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments, see "Financial and Commodity Market Risks" in the MD&A in Item 7 (which information is incorporated herein by reference).

Con Edison of New York

For information about Con Edison of New York's primary market risks associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments, see "Financial and Commodity Market Risks" in the MD&A in Item 7 (which information is incorporated herein by reference).

O&R

For information about O&R's primary market risks associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments, see "Financial and Commodity Market Risks" in the MD&A in Item 7 (which information is incorporated herein by reference).

77


ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


A. Financial Statements

 

 
    Page
Con Edison    
Report of Independent Auditors   81
Consolidated Balance Sheet at December 31, 2003 and 2002   82
Consolidated Income Statement for the years ended December 31, 2003, 2002 and 2001   84
Consolidated Statement of Comprehensive Income for the years ended December 31, 2003, 2002 and 2001   85
Consolidated Statement of Common Shareholders' Equity for the years ended December 31, 2003, 2002 and 2001   86
Consolidated Statement of Cash Flows for the years ended December 31, 2003, 2002 and 2001   87
Consolidated Statement of Capitalization at December 31, 2003 and 2002   88

Con Edison of New York

 

 
Report of Independent Auditors   90
Consolidated Balance Sheet at December 31, 2003 and 2002   91
Consolidated Income Statement for the years ended December 31, 2003, 2002 and 2001   93
Consolidated Statement of Comprehensive Income for the years ended December 31, 2003, 2002 and 2001   94
Consolidated Statement of Common Shareholder's Equity for the years ended December 31, 2003, 2002 and 2001   95
Consolidated Statement of Cash Flows for the years ended December 31, 2003, 2002 and 2001   96
Consolidated Statement of Capitalization at December 31, 2003 and 2002   97

O&R

 

 
Report of Independent Auditors   99
Consolidated Balance Sheet at December 31, 2003 and 2002   100
Consolidated Income Statement for the years ended December 31, 2003, 2002 and 2001   102
Consolidated Statement of Comprehensive Income for the years ended December 31, 2003, 2002 and 2001   103
Consolidated Statement of Common Shareholder's Equity for the years ended December 31, 2003, 2002 and 2001   104
Consolidated Statement of Cash Flows for the years ended December 31, 2003, 2002 and 2001   105
Consolidated Statement of Capitalization at December 31, 2003 and 2002   106

Notes to the Financial Statements

 

107

Financial Statement Schedules

 

 
Con Edison    
  Schedule I—Condensed financial information   158
  Schedule II—Valuation and qualifying accounts   161
Con Edison of New York    
  Schedule II—Valuation and qualifying accounts   161
O&R    
  Schedule II—Valuation and qualifying accounts   161

All other schedules are omitted because they are not applicable or the required information is shown in financial statements or notes thereto.

78


B. Supplementary Financial Information

Selected Quarterly Financial Data for the years ended December 31, 2003 and 2002 (Unaudited)

 
  2003

 
Con Edison

  First Quarter
  Second
Quarter

  Third Quarter
  Fourth
Quarter

 

 
 
  (Millions of Dollars)

 
Operating revenues   $ 2,571   $ 2,176   $ 2,801   $ 2,279  
Operating income     256     164     361     153  
Income for common stock before cumulative effect of changes in accounting principles     155     66     257     47  
Cumulative effect of changes in accounting principles     -     -     -     3  
Net income for common stock     155     66     257     50  
Basic earnings per common share before cumulative effect of changes in accounting principles   $ 0.72   $ 0.29   $ 1.17   $ 0.19  
Cumulative effect of changes in accounting principles     -     -     -     0.02  
Basic earnings per common share after cumulative effect of changes in accounting principles   $ 0.72   $ 0.29   $ 1.17   $ 0.21  
Diluted earnings per common share before cumulative effect of changes in accounting principles   $ 0.72   $ 0.29   $ 1.16   $ 0.19  
Cumulative effect of changes in accounting principles     -     -     -     0.02  
Diluted earnings per common share after cumulative effect of changes in accounting principles   $ 0.72   $ 0.29   $ 1.16   $ 0.21  

 

 

 

2002

 

 
 
  (Millions of Dollars)

 
Operating revenues   $ 2,058   $ 1,848   $ 2,539   $ 2,057  
Operating income     258     200     386     216  
Income for common stock before cumulative effect of changes in accounting principles     166     98     284     120  
Cumulative effect of changes in accounting principles     (20 )   -     -     (2 )
Net income for common stock     146     98     284     118  
Basic earnings per common share before cumulative effect of changes in accounting principles   $ 0.78   $ 0.46   $ 1.34   $ 0.56  
Cumulative effect of changes in accounting principles     (0.10 )   -     -     (0.01 )
Basic earnings per common share after cumulative effect of changes in accounting principles   $ 0.68   $ 0.46   $ 1.34   $ 0.55  
Diluted earnings per common share before cumulative effect of changes in accounting principles   $ 0.78   $ 0.46   $ 1.33   $ 0.56  
Cumulative effect of changes in accounting principles     (0.10 )   -     -     (0.01 )
Diluted earnings per common share after cumulative effect of changes in accounting principles   $ 0.68   $ 0.46   $ 1.33   $ 0.55  

In the opinion of Con Edison, these quarterly amounts include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation.

79


 
  2003

Con Edison of New York

  First Quarter
  Second
Quarter

  Third Quarter
  Fourth
Quarter


 
  (Millions of Dollars)

Operating revenues   $ 2,150   $ 1,828   $ 2,330   $ 1,858
Operating income     228     151     337     226
Net income for common stock     139     65     253     134

 

 

 

2002

 
  (Millions of Dollars)

Operating revenues   $ 1,759   $ 1,568   $ 2,180   $ 1,717
Operating income     229     186     352     187
Net income for common stock     150     97     259     99

In the opinion of Con Edison of New York, these quarterly amounts include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation.

 
  2003

O&R

  First Quarter
  Second
Quarter

  Third Quarter
  Fourth
Quarter


 
  (Millions of Dollars)

Operating revenues   $ 201   $ 156   $ 199   $ 171
Operating income     21     9     23     15
Net income for common stock     16     3     15     11

 

 

 

2002

 
  (Millions of Dollars)

Operating revenues   $ 156   $ 144   $ 179   $ 155
Operating income     18     12     24     18
Net income for common stock     12     7     19     7

In the opinion of O&R, these quarterly amounts include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation.

80


REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of Directors of Consolidated Edison, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Consolidated Edison, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
New York, NY
February 19, 2004

81


Consolidated Edison, Inc.

CONSOLIDATED BALANCE SHEET

 
  As at

 
  December 31, 2003

  December 31, 2002

 
 

 
  (Millions of Dollars)

ASSETS            
UTILITY PLANT, AT ORIGINAL COST (Note A)            
  Electric   $ 12,097   $ 11,568
  Gas     2,699     2,530
  Steam     799     768
  General     1,482     1,434

  TOTAL     17,077     16,300
  Less: Accumulated depreciation     4,069     3,847

  NET     13,008     12,453
  Construction work in progress     1,276     989

NET UTILITY PLANT     14,284     13,442

NON-UTILITY PLANT (Note A)            
  Unregulated generating assets, less accumulated depreciation of $52 and $30 in 2003 and 2002, respectively     873     222
  Non-utility property, less accumulated depreciation of $15 and $19 in 2003 and 2002, respectively     56     140
  Construction work in progress     12     348

NET PLANT     15,225     14,152

CURRENT ASSETS            
  Cash and temporary cash investments (Note A)     49     118
  Restricted cash     18     14
  Funds held for the redemption of long-term debt     -     275
  Accounts receivable - customers, less allowance for uncollectible accounts of $36 and $35 in 2003 and 2002, respectively     790     683
  Accrued unbilled revenue (Note A)     61     54
  Other receivables, less allowance for uncollectible accounts of $7 and $1 in 2003 and 2002, respectively     184     169
  Fuel, at average cost     33     23
  Gas in storage, at average cost     150     81
  Materials and supplies, at average cost     100     92
  Prepayments     98     73
  Other current assets     109     124

TOTAL CURRENT ASSETS     1,592     1,706

INVESTMENTS (Note A)     248     235

DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS            
  Goodwill (Note L)     406     406
  Intangible assets, less accumulated amortization of $16 and $10 in 2003 and 2002, respectively (Note L)     111     82
  Prepaid pension costs (Note E)     1,257     1,024
  Regulatory assets (Note B)     1,861     1,866
  Other deferred charges and noncurrent assets     266     196

TOTAL DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS     3,901     3,574

TOTAL ASSETS   $ 20,966   $ 19,667

The accompanying notes are an integral part of these financial statements

82



Consolidated Edison, Inc.


CONSOLIDATED BALANCE SHEET

 
  As at

 
  December 31, 2003

  December 31, 2002

 
 

 
  (Millions of Dollars)

CAPITALIZATION AND LIABILITIES            
CAPITALIZATION            
  Common shareholders' equity (See Statement of Shareholders' Equity)   $ 6,423   $ 5,921
  Preferred stock (See Statement of Capitalization)     213     213
  Long-term debt (See Statement of Capitalization)     6,733     6,166

TOTAL CAPITALIZATION     13,369     12,300

MINORITY INTERESTS     42     9
NONCURRENT LIABILITIES            
  Obligations under capital leases (Note K)     36     38
  Provision for injuries and damages (Note G)     194     197
  Pensions and retiree benefits     205     206
  Superfund and other environmental costs (Note G)     193     143
  Independent power producer buyout     31     32
  Other noncurrent liabilities     48     43

TOTAL NONCURRENT LIABILITIES     707     659

CURRENT LIABILITIES            
  Long-term debt due within one year     166     473
  Notes payable     159     162
  Accounts payable     905     925
  Customer deposits     228     221
  Accrued taxes     69     100
  Accrued interest     102     94
  System benefits charge     17     27
  Accrued wages     79     82
  Other current liabilities     186     191

TOTAL CURRENT LIABILITIES     1,911     2,275

DEFERRED CREDITS AND REGULATORY LIABILITIES            
  Deferred income taxes (Note M)     3,067     2,676
  Deferred investment tax credits (Note A)     105     112
  Regulatory liabilities (Note B)     1,759     1,632
  Other deferred credits     6     4

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES     4,937     4,424

TOTAL CAPITALIZATION AND LIABILITIES   $ 20,966   $ 19,667

The accompanying notes are an integral part of these financial statements

83


Consolidated Edison, Inc.

CONSOLIDATED INCOME STATEMENT

 
  For the Years Ended December 31,

 
 
  2003

  2002

  2001

 
 
 
 
 
  (Millions of Dollars/Except Share Data)

 
OPERATING REVENUES (Note A)                    
  Electric   $ 6,863   $ 6,251   $ 6,888  
  Gas     1,492     1,204     1,466  
  Steam     537     404     504  
  Non-utility     935     643     531  

 
TOTAL OPERATING REVENUES     9,827     8,502     9,389  

 
OPERATING EXPENSES                    
  Purchased power     3,926     3,201     3,380  
  Fuel     504     289     394  
  Gas purchased for resale     847     596     860  
  Other operations     1,134     962     1,067  
  Maintenance     353     387     430  
  Impairment Charges - Telecommunications and Other Unregulated Assets (Note H)     159     -     -  
  Depreciation and amortization (Note A)     529     495     526  
  Taxes, other than income taxes (Note A)     1,116     1,114     1,139  
  Income taxes (Notes A and M)     325     398     465  

 
TOTAL OPERATING EXPENSES     8,893     7,442     8,261  

 
OPERATING INCOME     934     1,060     1,128  

 
OTHER INCOME (DEDUCTIONS)                    
  Investment income (Note A)     4     2     8  
  Allowance for equity funds used during construction (Note A)     15     10     1  
  Other income     23     48     (4 )
  Other deductions     (16 )   (20 )   (28 )
  Income taxes (Notes A and M)     10     22     22  

 
TOTAL OTHER INCOME (DEDUCTIONS)     36     62     (1 )

 
INCOME BEFORE INTEREST CHARGES     970     1,122     1,127  

 
  Interest on long-term debt     401     386     397  
  Other interest     45     61     42  
  Allowance for borrowed funds used during construction (Note A)     (12 )   (5 )   (8 )

 
NET INTEREST CHARGES     434     442     431  

 
INCOME BEFORE PREFERRED STOCK DIVIDENDS     536     680     696  

 
PREFERRED STOCK DIVIDEND REQUIREMENTS OF SUBSIDIARY     11     12     14  

 
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES     525     668     682  

 
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES (NET OF INCOME TAX OF $(2) MILLION IN 2003 AND $15 MILLION IN 2002)     3     (22 )   -  

 
NET INCOME FOR COMMON STOCK   $ 528   $ 646   $ 682  

 
EARNINGS PER COMMON SHARE - BASIC                    
  Before cumulative effect of changes in accounting principles   $ 2.37   $ 3.14   $ 3.22  

 
  Cumulative effect of changes in accounting principles   $ 0.02   $ (0.11 ) $ -  

 
  After cumulative effect of changes in accounting principles   $ 2.39   $ 3.03   $ 3.22  

 
EARNINGS PER COMMON SHARE - DILUTED                    
  Before cumulative effect of changes in accounting principles   $ 2.36   $ 3.13   $ 3.21  

 
  Cumulative effect of changes in accounting principles   $ 0.02   $ (0.11 ) $ -  

 
  After cumulative effect of changes in accounting principles   $ 2.38   $ 3.02   $ 3.21  

 
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK   $ 2.24   $ 2.22   $ 2.20  

 
AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC (IN MILLIONS)     220.9     213.0     212.1  

 
AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED (IN MILLIONS)     221.8     214.0     212.9  

 

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

84


Consolidated Edison, Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 
  For the Years Ended December 31,

 
 
  2003

  2002

  2001

 
 
 

 
 
  (Millions of Dollars)

 

NET INCOME FOR COMMON STOCK

 

$

528

 

$

646

 

$

682

 
OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES                    
  Investment in marketable equity securities, net of $1, $(1) and $(1) taxes in 2003, 2002 and 2001, respectively     1     (1 )   (1 )
  Minimum pension liability adjustments, net of $0, $(3) and $(2) taxes in 2003, 2002 and 2001, respectively     -     (3 )   (2 )
  Unrealized gains/(losses) on derivatives qualified as hedges due to cumulative effect of a change in acounting principle, net of ($6) taxes in 2001     -     -     (8 )
  Unrealized gains/(losses) on derivatives qualified as hedges, net of $9, $13 and $(22) taxes in 2003, 2002 and 2001, respectively     13     18     (31 )
  Less: Reclassification adjustment for gains/(losses) included in net income, net of $12, $(2) and $(10) taxes in 2003, 2002 and 2001, respectively     17     (2 )   (15 )

 
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES     (3 )   16     (27 )

 
COMPREHENSIVE INCOME   $ 525   $ 662   $ 655  

 

The accompanying notes are an integral part of these financial statements

85


Consolidated Edison, Inc.

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY

 
   
   
   
   
   
   
  Capital
Stock
Expense

  Accumulated
Other
Comprehensive
Income/(Loss)

   
 
 
  Common Stock

  Additional Paid-In Capital

  Retained
Earnings

  Treasury Stock

   
 
 
  Shares

  Amount

  Shares

  Amount

  Total

 
 
 

 
 
  (Million of Dollars)

 
BALANCE AS OF
DECEMBER 31, 2000
  212,027,131   $ 24   $ 1,458   $ 5,041   23,460,963   $ (1,013 ) $ (36 ) $ (2 ) $ 5,472  

Net income for common stock

 

 

 

 

 

 

 

 

 

 

682

 

 

 

 

 

 

 

 

 

 

 

 

 

682

 
Common stock dividends                     (466 )                         (466 )
Issuance of common shares - employee stock plan   230,113                 (6 ) (230,113 )   11                 5  
Other comprehensive income/(loss)                                           (27 )   (27 )

 
BALANCE AS OF
DECEMBER 31, 2001
  212,257,244   $ 24   $ 1,458   $ 5,251   23,230,850   $ (1,002 ) $ (36 ) $ (29 ) $ 5,666  

 

Net income for common stock

 

 

 

 

 

 

 

 

 

 

646

 

 

 

 

 

 

 

 

 

 

 

 

 

646

 
Common stock dividends                     (473 )                         (473 )
Issuance of common shares - dividend reinvestment and employee stock plans   1,675,690           69     (4 ) (20,150 )   1                 66  
Other comprehensive income/(loss)                                           16     16  

 
BALANCE AS OF
DECEMBER 31, 2002
  213,932,934   $ 24   $ 1,527   $ 5,420   23,210,700   $ (1,001 ) $ (36 ) $ (13 ) $ 5,921  

 

Net income for common stock

 

 

 

 

 

 

 

 

 

 

528

 

 

 

 

 

 

 

 

 

 

 

 

 

528

 
Common stock dividends                     (492 )                         (492 )
Issuance of common shares - public offering   9,570,000     1     380                     (3 )         378  
Issuance of common shares - dividend reinvestment and employee stock plans   2,337,286           96     (5 )                         91  
Other comprehensive income/(loss)                                           (3 )   (3 )

 
BALANCE AS OF
DECEMBER 31, 2003
  225,840,220   $ 25   $ 2,003   $ 5,451   23,210,700   $ (1,001 ) $ (39 ) $ (16 ) $ 6,423  

 

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

86


Consolidated Edison, Inc

CONSOLIDATED STATEMENT OF CASH FLOWS

 
  For the Twelve Months
Ended December 31,

 
 
  2003

  2002

  2001

 
 
 

 
 
  (Millions of Dollars)

 
OPERATING ACTIVITIES                    
  Income before preferred stock dividends   $ 536   $ 680   $ 696  
  PRINCIPAL NON-CASH CHARGES (CREDITS) TO INCOME                    
      Depreciation and amortization     529     495     526  
      Deferred income taxes     418     315     6  
      Common equity component of allowance for funds used during construction     (15 )   (10 )   (1 )
      Prepaid pension costs (net of capitalized amounts)     (179 )   (262 )   (259 )
      Other non-cash charges     (10 )   141     60  
      Impairment charge     159     -     -  
CHANGES IN ASSETS AND LIABILITIES                    
      Accounts receivable - customers, less allowance for uncollectibles     (107 )   (96 )   297  
      Materials and supplies, including fuel and gas in storage     (87 )   25     (20 )
      Prepayments, other receivables and other current assets     (32 )   (88 )   119  
      Recoverable energy costs     46     (101 )   130  
      Accounts payable     (20 )   243     (354 )
      Pensions and retiree benefits     (1 )   19     7  
      Accrued taxes     (32 )   (45 )   81  
      Accrued interest     8     13     (5 )
      Deferred charges and regulatory assets     (24 )   (164 )   (46 )
      Deferred credits and regulatory liabilities     (30 )   167     19  
      Transmission congestion contracts     159     120     5  
      Other assets     (71 )   34     176  
      Other liabilities     72     36     150  

 
NET CASH FLOWS FROM OPERATING ACTIVITIES     1,319     1,522     1,587  

 
INVESTING ACTIVITIES                    
      Utility construction expenditures (excluding capitalized support costs of
$54, $64, and $61 in 2003, 2002 and 2001, respectively)
    (1,292 )   (1,204 )   (1,104 )
      Cost of removal less salvage     (128 )   (124 )   (101 )
      Non-utility construction expenditures     (105 )   (282 )   (154 )
      Regulated companies' non-utility construction expenditures     (1 )   (13 )   -  
      Common equity component of allowance for funds used during construction     15     10     1  
      Nuclear fuel expenditures     -     -     (6 )
      Contributions to nuclear decommissioning trust     -     -     (89 )
      Divestiture of utility plants (net of federal income tax)     -     -     671  
      Investments by unregulated subsidiaries     (12 )   (19 )   (157 )
      Demolition and remediation costs for First Avenue properties     (4 )   (2 )   (2 )

 
NET CASH FLOWS USED IN INVESTING ACTIVITIES     (1,527 )   (1,634 )   (941 )

 
FINANCING ACTIVITIES                    
      Net proceeds from short-term debt     (3 )   (182 )   40  
      Repayment/retirement of long-term debt     (856 )   (311 )   (310 )
      Additions to long-term debt     778     1,125     723  
      Issuance of common stock     431     25     -  
      Application of funds held for redemption of long-term debt     275     (275 )   (328 )
      Refunding of preferred stock     -     (37 )      
      Debt and equity issuance costs     (27 )   (17 )   (23 )
      Common stock dividends     (444 )   (433 )   (470 )
      Preferred stock dividends     (11 )   (10 )   (14 )

 
NET CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES     143     (115 )   (382 )

 
CASH AND TEMPORARY CASH INVESTMENTS:                    
NET CHANGE FOR THE PERIOD     (65 )   (227 )   264  
BALANCE AT BEGINNING OF PERIOD     132     359     95  

 
BALANCE AT END OF PERIOD     67     132     359  
LESS: RESTRICTED CASH     18     14     88  

 
BALANCE: CASH AND TEMPORARY CASH INVESTMENTS   $ 49   $ 118   $ 271  

 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                    
      Cash paid during the period for:                    
          Interest   $ 381   $ 359   $ 358  
          Income taxes   $ 90   $ 226   $ 217  

 

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

87


Consolidated Edison, Inc.

CONSOLIDATED STATEMENT OF CAPITALIZATION

 
  Shares outstanding

   
   
 
 
  December 31,
2003

  December 31,
2002

  At December 31,

 
 
  2003

  2002

 
 
 

 
 
   
   
  (Millions of Dollars)

 
TOTAL COMMON SHAREHOLDERS' EQUITY LESS ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)   225,840,220   213,932,934   $ 6,439   $ 5,934  

ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)

 

 

 

 

 

 

 

 

 

 

 
  Investment in marketable equity securities, net of $1 and $(2) taxes in 2003 and 2002, respectively             1     (2 )
  Minimum pension liability adjustment, net of $(5) and $(5) taxes in 2003 and 2002, respectively             (7 )   (7 )
  Unrealized gains/(losses) on derivatives qualified as hedges, net of $(6) and $(15) taxes in 2003 and 2002, respectively             (8 )   (21 )
  Less: Reclassification adjustment for gains/(losses) included in net income, net of $0 and $(12) taxes in 2003 and 2002, respectively             2     (17 )

 
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES             (16 )   (13 )

 
TOTAL COMMON SHAREHOLDERS' EQUITY (SEE STATEMENT OF COMMON SHAREHOLDERS' EQUITY AND NOTE C)           $ 6,423   $ 5,921  

 
PREFERRED STOCK OF SUBSIDIARY (NOTE C)                      
  $5 Cumulative Preferred, without par value, authorized 1,915,319 shares   1,915,319   1,915,319     175     175  
  Cumulative Preferred, $100 par value, authorized 6,000,000 shares                      
      4.65% Series C   153,296   153,296     16     16  
      4.65% Series D   222,330   222,330     22     22  

 
TOTAL PREFERRED STOCK             213     213  

 

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

88


Consolidated Edison, Inc.

CONSOLIDATED STATEMENT OF CAPITALIZATION

Long-term debt (Note C)

   
   
   
 
 
  Interest Rate

   
  At December 31,

 
Maturity

  Series

  2003

  2002

 


 
 
   
   
  (Millions of Dollars)

 
Debentures:              

2003

 

6-3/8%

 

1993D

 

 

-

 

 

150

 
2003   6.56   1993D     -     35  
2004   7-5/8   1992B     150     150  
2005   6-5/8   1995A     100     100  
2005   6-5/8   2000C     350     350  
2007   6.45   1997B     330     330  
2007   7-1/8   1997J     20     20  
2008   6-1/4   1998A     180     180  
2008   6.15   1998C     100     100  
2008   3-5/8   2003A     200     -  
2009   7.15   1999B     200     200  
2010   8-1/8   2000A     325     325  
2010   7-1/2   2000A     55     55  
2010   7-1/2   2000B     300     300  
2012   5-5/8   2002A     300     300  
2013   4-7/8   2002B     500     500  
2013   3.85   2003B     200     -  
2023   7-1/2   1993G     -     380  
2026   7-3/4   1996A     100     100  
2027   6-1/2   1997F     80     80  
2028   7.10   1998B     105     105  
2028   6.90   1998D     75     75  
2029   7-1/8   1994A     150     150  
2029   7.00   1999G     45     45  
2033   5-7/8   2003A     175     -  
2033   5.10   2003C     200     -  
2039   7.35   1999A     275     275  
2041   7-1/2   2001A     400     400  
2042   7-1/4   2002A     325     325  

 
Total debentures         5,240     5,030  

 
Tax-exempt debt—notes issued to New York State Energy Research and Development Authority for Facilities Revenue Bonds:              
2014   1.04%**   1994    *   55 ***   55 ***
2015   1.04**   1995    *   44     44  
2020   5-1/4   1993B     128     128  
2020   6.10   1995A     128     128  
2022   5-3/8   1993C     20     20  
2028   6.00   1993A     101     101  
2029   7-1/8   1994A     100     100  
2034   1.09**   1999A     292     292  
2036   4.70   2001A ***   226     231  
2036   1.10**   2001B     98     98  

 
Total tax-exempt debt         1,192     1,197  

 
Subordinated deferrable interest debentures:                  
2031   7-3/4%   1996A     -     275  

 
Other long-term debt         491     164  
Unamortized debt discount         (24 )   (27 )

 
Total         6,899     6,639  
Less: long-term debt due within one year         166     473  

 
Total long-term debt         6,733     6,166  

 
Total capitalization       $ 13,369   $ 12,300  

 

   * Issued for O&R pollution control financing.

 ** Rates reset weekly or by auction held every 35 days; December 31, 2003 rate shown.

*** See Note P.

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

89


REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of Trustees of Consolidated Edison Company of New York, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Consolidated Edison Company of New York, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
New York, NY
February 19, 2004

90


Consolidated Edison Company of New York, Inc.

CONSOLIDATED BALANCE SHEET

 
  As at

 
  December 31, 2003

  December 31, 2002

 
 

 
  (Millions of Dollars)

ASSETS            
UTILITY PLANT, AT ORIGINAL COST (Note A)            
  Electric   $ 11,324   $ 10,834
  Gas     2,381     2,230
  Steam     799     768
  General     1,363     1,316

  Total     15,867     15,148
  Less: Accumulated depreciation     3,696     3,481

  Net     12,171     11,667
  Construction work in progress     1,247     966

NET UTILITY PLANT     13,418     12,633

NON-UTILITY PLANT (Note A)            
  Non-utility property     25     35

NET PLANT     13,443     12,668

CURRENT ASSETS            
  Cash and temporary cash investments (Note A)     33     88
  Funds held for the redemption of long-term debt     -     275
  Accounts receivable - customers, less allowance for uncollectible accounts of $30 and $29 in 2003 and 2002, respectively     692     602
  Other receivables, less allowance for uncollectible accounts of $4 and $0 in 2003 and 2002, respectively     105     84
  Accounts receivable - from affiliated companies     28     25
  Fuel, at average cost     24     18
  Gas in storage, at average cost     115     63
  Materials and supplies, at average cost     89     83
  Prepayments     74     56
  Other current assets     58     53

TOTAL CURRENT ASSETS     1,218     1,347

INVESTMENTS     3     3

DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS            
  Prepaid pension costs (Note E)     1,257     1,024
  Regulatory assets (Note B)     1,640     1,630
  Other deferred charges and noncurrent assets     203     165

TOTAL DEFERRED CHARGES, REGULATORY ASSETS AND NONCURRENT ASSETS     3,100     2,819

TOTAL ASSETS   $ 17,764   $ 16,837

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

91



Consolidated Edison Company of New York, Inc.


CONSOLIDATED BALANCE SHEET

 
  As at

 
  December 31, 2003

  December 31, 2002

 
 

 
  (Millions of Dollars)

CAPITALIZATION AND LIABILITIES            
CAPITALIZATION            
  Common shareholder's equity (See Statement of Shareholder's Equity)   $ 5,482   $ 4,890
  Preferred stock (See Statement of Capitalization)     213     213
  Long-term debt (See Statement of Capitalization)     5,435     5,392

TOTAL CAPITALIZATION     11,130     10,495

NONCURRENT LIABILITIES            
  Obligations under capital leases (Note K)     36     38
  Provision for injuries and damages (Note G)     184     188
  Pensions and retiree benefits     107     108
  Superfund and other environmental costs (Note G)     153     108
  Independent power producer buyout     31     32
  Other noncurrent liabilities     7     9

TOTAL NONCURRENT LIABILITIES     518     483

CURRENT LIABILITIES            
  Long-term debt due within one year     150     425
  Notes payable     99     -
  Accounts payable     713     743
  Accounts payable to affiliated companies     12     20
  Customer deposits     214     208
  Accrued taxes     95     93
  Accrued interest     88     80
  System benefits charge     17     27
  Accrued wages     76     76
  Other current liabilities     133     131

TOTAL CURRENT LIABILITIES     1,597     1,803

DEFERRED CREDITS AND REGULATORY LIABILITIES            
  Deferred income taxes (Note A)     2,755     2,423
  Deferred investment tax credits (Note A)     100     106
  Regulatory liabilities (Note B)     1,664     1,527

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES     4,519     4,056

TOTAL CAPITALIZATION AND LIABILITIES   $ 17,764   $ 16,837

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

92


Consolidated Edison Company Of New York, Inc.

CONSOLIDATED INCOME STATEMENT

 
  For the Years Ended December 31,
 
 
  2003

  2002

  2001

 
 
 

 
 
  (Millions of Dollars)

 
OPERATING REVENUES (Note A)              
  Electric   $6,334   $5,775   $6,350  
  Gas   1,295   1,045   1,268  
  Steam   537   404   504  

 
TOTAL OPERATING REVENUES   8,166   7,224   8,122  

 
OPERATING EXPENSES              
    Purchased power   3,124   2,622   2,819  
    Fuel   358   232   351  
    Gas purchased for resale   715   472   666  
    Other operations   835   752   868  
    Maintenance   322   360   404  
    Depreciation and amortization (Note A)   458   438   465  
    Taxes, other than income taxes (Note A)   1,040   1,040   1,067  
    Income taxes (Notes A and M)   372   354   435  

 
TOTAL OPERATING EXPENSES   7,224   6,270   7,075  

 
OPERATING INCOME   942   954   1,047  

 
OTHER INCOME (DEDUCTIONS)              
    Investment income (Note A)   -   -   4  
    Allowance for equity funds used during construction (Note A)   15   10   1  
    Other income   27   42   -  
    Other deductions   (11 ) (9 ) (12 )
    Income taxes (Notes A and M)   5   12   8  

 
TOTAL OTHER INCOME (DEDUCTIONS)   36   55   1  

 
INCOME BEFORE INTEREST CHARGES   978   1,009   1,048  

 
    Interest on long-term debt   346   345   360  
    Other interest   42   52   32  
    Allowance for borrowed funds used during construction (Note A)   (12 ) (5 ) (7 )

 
NET INTEREST CHARGES   376   392   385  

 
INCOME BEFORE PREFERRED STOCK DIVIDENDS   602   617   663  

 
PREFERRED STOCK DIVIDEND REQUIREMENTS   11   12   14  

 
NET INCOME FOR COMMON STOCK   $   591   $   605   $   649  

 

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

93


Consolidated Edison Company of New York, Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 
  For the Years Ended December 31,
 
 
  2003

  2002

  2001

 
 
 

 
 
  (Millions of Dollars)

 
NET INCOME FOR COMMON STOCK   $ 591   $ 605   $ 649  
OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES                    
  Minimum pension liability adjustments, net of $0, $(2) and $(1) taxes in 2003, 2002 and 2001, respectively     -     (3 )   (2 )
  Unrealized gains/(losses) on derivatives qualified as hedges, net of $0, $2, and $(4) taxes in 2003, 2002 and 2001, respectively     (1 )   3     (5 )
  Less: Reclassification adjustment for gains/(losses) included in net income, net of $0, $1 and $(2) taxes in 2003, 2002 and 2001, respectively     (1 )   1     (3 )

 
TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES     -     (1 )   (4 )

 
COMPREHENSIVE INCOME   $ 591   $ 604   $ 645  

 

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

94


Consolidated Edison Company of New York, Inc.

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDER'S EQUITY

 
   
   
  Additional
Paid-In
Capital

   
  Repurchased
Con Edison
Stock

  Capital
Stock
Expense

  Accumulated
Other
Comprehensive
Income/(Loss)

   
 
 
  Common Stock

  Retained
Earnings

   
 
 
  Shares

  Amount

  Total

 
 
 

 
 
  (Millions of Dollars)

 
BALANCE AS OF
DECEMBER 31, 2000
  235,488,094   $ 589   $ 893   $ 3,996   $ (962 ) $ (36 ) $ -   $ 4,480  

Net income before preferred stock dividends

 

 

 

 

 

 

 

 

 

 

663

 

 

 

 

 

 

 

 

 

 

 

663

 
Common stock dividends                     (460 )                     (460 )
Cumulative preferred dividends                     (14 )                     (14 )
Other comprehensive income/(loss)                                       (4 )   (4 )

 
BALANCE AS OF
DECEMBER 31, 2001
  235,488,094   $ 589   $ 893   $ 4,185   $ (962 ) $ (36 ) $ (4 ) $ 4,665  

 

Net income before perferred stock dividends

 

 

 

 

 

 

 

 

 

 

618

 

 

 

 

 

 

 

 

 

 

 

618

 
Common stock dividends                     (379 )                     (379 )
Cumulative preferred dividends                     (12 )                     (12 )
Other comprehensive income/(loss)                                       (2 )   (2 )

 
BALANCE AS OF
DECEMBER 31, 2002
  235,488,094   $ 589   $ 893   $ 4,412   $ (962 ) $ (36 ) $ (6 ) $ 4,890  

 

Net income before perferred stock dividends

 

 

 

 

 

 

 

 

 

 

602

 

 

 

 

 

 

 

 

 

 

 

602

 
Common stock dividends                     (377 )                     (377 )
Cumulative preferred dividends                     (11 )                     (11 )
Capital contribution by parent               381                 (3 )         378  

 
BALANCE AS OF
DECEMBER 31, 2003
  235,488,094   $ 589   $ 1,274   $ 4,626   $ (962 ) $ (39 ) $ (6 ) $ 5,482  

 

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

95


Consolidated Edison Company of New York, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS

 
  For the Twelve Months
Ended December 31,

 
 
  2003

  2002

  2001

 
 
 

 
 
  (Millions of Dollars)

 
OPERATING ACTIVITIES                    
  Income before preferred stock dividends   $ 602   $ 617   $ 663  
  PRINCIPAL NON-CASH CHARGES (CREDITS) TO INCOME                    
      Depreciation and amortization     458     438     465  
      Deferred income taxes     374     270     (50 )
      Common equity component of allowance for funds used during construction     (15 )   (10 )   (1 )
      Prepaid pension costs (net of capitalized amounts)     (179 )   (262 )   (259 )
      Other non-cash charges     (10 )   173     151  
  CHANGES IN ASSETS AND LIABILITIES                    
      Accounts receivable - customers, less allowance for uncollectibles     (90 )   (75 )   216  
      Materials and supplies, including fuel and gas in storage     (63 )   20     (16 )
      Prepayments, other receivables and other current assets     (49 )   (33 )   133  
      Recoverable energy costs     47     (102 )   153  
      Accounts payable     (30 )   152     (280 )
      Pensions and retiree benefits     -     6     (3 )
      Accrued taxes     2     (49 )   92  
      Accrued interest     8     7     (5 )
      Deferred charges and regulatory assets     (40 )   (171 )   -  
      Deferred credits and regulatory liabilities     (22 )   181     9  
      Transmission congestion contracts     159     120     5  
      Other assets     (17 )   (16 )   (17 )
      Other liabilities     34     44     50  

 
NET CASH FLOWS FROM OPERATING ACTIVITIES     1,169     1,310     1,306  

 
INVESTING ACTIVITIES                    
      Construction expenditures (excluding capitalized support costs of
$54, $64 and $61 in 2003, 2002 and 2001, respectively)
    (1,221 )   (1,146 )   (1,045 )
      Non-utility construction expenditures     (1 )   (13 )   -  
      Cost of removal less salvage     (126 )   (122 )   (99 )
      Nuclear fuel expenditures     -     -     (6 )
      Contributions to nuclear decommissioning trust     -     -     (89 )
      Divestiture of utility plant (net of federal income taxes)     -     -     671  
      Common equity component of allowance for funds used during construction     15     10     1  
      Demolition and remediation costs for First Avenue properties     (4 )   (2 )   (2 )

 
NET CASH FLOWS USED IN INVESTING ACTIVITIES     (1,337 )   (1,273 )   (569 )

 
FINANCING ACTIVITIES                    
      Net proceeds from short-term debt     99     -     (140 )
      Retirement of long-term debt     (805 )   (300 )   (300 )
      Issuance of long-term debt     575     800     723  
      Application of funds held for redemption of long-term debt     275     (275 )   (328 )
      Refunding of preferred stock     -     (37 )   -  
      Debt and equity issuance costs     (25 )   (8 )   (23 )
      Capital contribution by parent     381     -     -  
      Dividend to parent     (376 )   (384 )   (460 )
      Preferred stock dividends     (11 )   (10 )   (14 )

 
NET CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES     113     (214 )   (542 )

 
CASH AND TEMPORARY CASH INVESTMENTS:                    
NET CHANGE FOR THE PERIOD     (55 )   (177 )   195  
BALANCE AT BEGINNING OF PERIOD     88     265     70  

 
BALANCE AT END OF PERIOD   $ 33   $ 88   $ 265