For the fiscal year ended December 31, 2004
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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

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

For the fiscal year ended DECEMBER 31, 2004

 

or

 

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

For the transition period from                              to                            

 

Commission

File Number

  

Exact name of registrant as specified in its charter and

principal office address and telephone number

 

State of

Incorporation

  

I.R.S. Employer

ID. Number

1-14514

  

CONSOLIDATED EDISON, INC.

4 Irving Place, New York, New York 10003

(212) 460-4600

  New York    13-3965100

1-1217

  

CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.

4 Irving Place, New York, New York 10003

(212) 460-4600

  New York    13-5009340

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.,

      

7.50% 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)

 

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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 x    No ¨

 

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 x

 

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

 

Consolidated Edison, Inc. (Con Edison) Yes x    No ¨

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

Orange and Rockland Utilities, Inc. (O&R) Yes ¨    No x

 

The aggregate market value of the common equity of Con Edison held by non-affiliates of Con Edison, as of June 30, 2004, was approximately $9.6 billion.

 

As of January 31, 2005, Con Edison had outstanding 242,567,337 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 16, 2005, to be filed with the Commission pursuant to Regulation 14A and Regulation 14C, respectively, not later than 120 days after December 31, 2004, are incorporated in Part III of this report.

 

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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, and together with Con Edison of New York, collectively referred to in this combined report as the “Utilities”). Con Edison and Con Edison of New York file reports required by Section 13 of the Securities Exchange Act of 1934. O&R is not required to file such reports since it has no securities registered under Section 12 of the Act and its duty under Section 15(d) of the Act to file reports was automatically suspended because at the beginning of 2005 it had fewer than 300 security holders of record for each class of its securities that had been registered under the Securities Act of 1933. O&R is filing this report voluntarily. O&R intends to discontinue filing reports during 2005.

 

The Utilities are subsidiaries of Con Edison and, as such, the information in this report about each of the Utilities also applies to Con Edison. As used in this report, the term the “Companies” refers to each of the three separate registrants: Con Edison, Con Edison of New York and O&R. However, neither of the Utilities makes any representation as to the information contained in this report relating to Con Edison or the subsidiaries of Con Edison other than itself.

 

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TABLE OF CONTENTS

 

          PAGE

Glossary of Terms

   6

Part I

         

Item 1.

   Business     
    

Con Edison

   8
    

Con Edison of New York

   10
    

O&R

   18

Item 2.

   Properties     
    

Con Edison

   21
    

Con Edison of New York

   21
    

O&R

   22

Item 3.

   Legal Proceedings     
    

Con Edison

   24
    

Con Edison of New York

   24
    

O&R

   27

Item 4.

   Submission of Matters to a Vote of Security Holders    None
    

Executive Officers of the Registrant

    
    

Con Edison

   30
    

Con Edison of New York

   30
    

O&R

   Omitted*

Part II

         

Item 5.

  

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

    
    

Con Edison

   31
    

Con Edison of New York

   31
    

O&R

   31

Item 6.

   Selected Financial Data     
    

Con Edison

   32
    

Con Edison of New York

   32
    

O&R

   Omitted*

Item 7.

  

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

    
    

Con Edison

   33
    

Con Edison of New York

   33
    

O&R

   33

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk     
    

Con Edison

   82

 

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          PAGE  
    

Con Edison of New York

   82  
    

O&R

   82  

Item 8.

   Financial Statements and Supplementary Data       
    

Con Edison

   83  
    

Con Edison of New York

   83  
    

O&R

   83  

ITEM 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   175  
    

Con Edison

   None  
    

Con Edison of New York

   None  
    

O&R

   None  

ITEM 9A

  

Controls and Procedures

   175  

ITEM 9B

  

Other Information

   176  

Part III

           

ITEM 10.

  

Directors and Executive Officers of the Registrant

   177 *

ITEM 11.

  

Executive Compensation

   177 *

ITEM 12.

  

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

   177 *

ITEM 13.

  

Certain Relationships and Related Transactions

   177 *

ITEM 14.

  

Principal Accounting Fees and Services

   177  

Part IV

           

ITEM 15.

  

Exhibits and Financial Statement Schedules

   180  
    

Signatures

   188  

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

 

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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

NYAG

   New York Attorney General

NUGs

   Non-utility generators

OCI

   Other Comprehensive Income

PCBs

   Polychlorinated biphenyls

PRP

   Potentially responsible party

PUHCA

   Public Utility Holding Company Act of 1935

SFAS

   Statement of Financial Accounting Standards

Superfund

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

VaR

   Value-at-Risk

 

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              PAGE
PART I              
ITEM 1.    BUSINESS CONTENTS OF ITEM 1     
     INCORPORATION BY REFERENCE     
     AVAILABLE INFORMATION     
     CON EDISON   Corporate Overview        8
         Operating Segments        8
         Regulation             8
         Competition          9
         Unregulated Subsidiaries            9
         Capital Requirements            9
         State Anti-takeover Law            10
         Employees             10
     CON EDISON OF NEW YORK     
         Corporate Overview          10
         Operating Segments         10
         Electric Operations           10
         Gas Operations             12
         Steam Operations        13
         Regulation         13
         Competition            14
         Capital Requirements and Financing        14
         Environmental Matters          15
         Operating Statistics           16
     O&R   General Nature and Scope of Business            18
         Operating Statistics           19

 

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

 

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information regarding issuers (including Con Edison, Con Edison of New York and O&R) that file electronically with the SEC. The address of that site is http://www.sec.gov.

 

This information the Companies file with the SEC is also available free of charge on or through the Investor Information section of their websites as soon as reasonably practicable after the reports are electronically filed with, or furnished to, the SEC. Con Edison’s internet website is at: http://www.conedison.com; 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 2004, the operating revenues of the Utilities were 89 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.

 

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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 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 three unregulated energy subsidiaries: Consolidated Edison Solutions, Inc. (Con Edison Solutions), a retail energy supply and services company that sells energy 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. These subsidiaries participate in competitive energy supply and services businesses that are subject to different risks than those found in the businesses of the Utilities. The unregulated energy subsidiaries accounted for almost 11 percent of consolidated operating revenues and 7 percent of consolidated total assets during 2004. For a discussion of the unregulated subsidiaries’ operating revenues and operating income, see “Results of Operations—Unregulated Subsidiaries and Other” in Item 7.

 

In December 2004, after a comprehensive strategic review, Con Edison entered into an agreement to sell its other unregulated subsidiary, Con Edison Communications, LLC for $37 million, subject to certain adjustments. Con Edison expects to complete the sale in 2005 following review or approval by the City of New York, the PSC and various federal, state and local regulators. The contemplated sale will not result in a significant after-tax gain or loss. See Note W to the financial statements.

 

Capital Requirements and Financing

For information about Con Edison’s capital requirements, financing and securities ratings, see “Liquidity and Capital Resources—Capital Resources and Capital Requirements” and “Financial and Commodity Market Risks” in Item 7. Securities ratings assigned by rating organizations are

 

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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.

 

State Anti-takeover Law

New York State law provides that a “domestic corporation,” such as Con Edison, may not consummate a merger, consolidation or similar transaction with the beneficial owner of a 20 percent or greater voting stock interest in the corporation, or with an affiliate of the owner, for five years after the acquisition of 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, 2004 had 12,715, 1,045 and 336 employees, respectively).

 

In June 2004, the Utilities reached collective bargaining agreements covering essentially all of their employees that are union members (about two-thirds of each of the company’s employees).

 

CON EDISON OF NEW YORK

 

Corporate Overview

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

 

Operating Segments

Con Edison of New York’s principal business segments are its regulated electric, gas and steam businesses. In 2004, electric, gas and steam operating revenues were 77 percent, 16 percent and 7 percent, respectively, of its operating revenues. For a discussion of the company’s operating revenues and operating income for each segment, see “Results of Operations” in Item 7. For additional information about the segments, see Note O to the financial statements in Item 8.

 

Electric Operations

 

Electric Sales.    Electric operating revenues were $6 billion in 2004 or 77 percent of Con Edison of New York’s operating revenues. The percentages were 78 and 80 percent, respectively, in the two preceding years. In 2004, 55 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, 45 percent was sold by other suppliers,

 

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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 essentially its cost for the electricity it sells to full-service customers, and it charges all customers in its service area for the delivery of electricity.

 

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

 

Electric Peak Load.    The electric peak load in Con Edison of New York’s service area occurs during the summer air conditioning season. The 2004 service area peak load, which occurred on June 9, was 11,327 thousand kilowatts (MW). The 2004 peak load included an estimated 6,407 MW for Con Edison of New York’s full-service customers, 3,070 MW for customers participating in its electric retail access program and 1,850 MW for NYPA’s customers and municipal electric agency customers. If adjusted to historical design weather conditions, the 2004 peak load would have been 12,775 MW. “Design weather” for the electric system is a standard to which the actual peak load is adjusted for evaluation and planning purposes. The company estimates that, under design weather conditions, the 2005 service area peak load will be 13,025 MW, including an estimated 7,370 MW for its full-service customers, 3,530 MW for its electric retail access customers and 2,125 MW for NYPA’s customers and municipal electric agency customers.

 

Electric Supply.    Most of the electricity sold by Con Edison of New York to its customers in 2004 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 2,060 MW of electric generating capacity, see Note I to the financial statements in Item 8.

 

For information about the company’s 565 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

 

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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 2004 and expects to meet them in 2005.

 

Gas Operations

Gas Sales.    Gas operating revenues in 2004 were $1 billion or 16 percent of Con Edison of New York’s operating revenues. The percentages were 16 percent and 14 percent, respectively, in the two preceding years. In 2004, 52 percent of the gas delivered by the company in its service area was sold by the company to its full-service (firm and interruptible) customers and 48 percent was sold by other suppliers, including Con Edison Solutions. For additional information about gas sales, see “Operating Statistics,” below, and “Results of Operations” in Item 7.

 

Gas Requirements and Peak Load.    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 2004/March 2005 winter heating season would amount to 82,700 thousand dekatherms (mdths) (including 68,300 mdths to its firm sales customers and 14,400 mdths to its firm transportation customers). Through January 31, 2005, the company’s peak throughput day in this heating season occurred on December 20, 2004 when it delivered 1,089 mdths of gas (including 695 mdths to its firm sales customers, 10 mdths to NYPA, 235 mdths to its transportation customers and 149 mdths for use by the company in generating electricity and steam).

 

Under its design criteria, the company projects that for the November 2005/March 2006 winter heating season, its requirements for firm gas customers will amount to 84,800 mdths (including 64,100 mdths to firm sales customers and 20,700 mdths to firm transportation customers) and that the peak day requirements for these customers will amount to 1,016 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

 

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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 $157 million in 2004. See “Liquidity and Capital Resources—Contractual Obligations” in Item 7. In addition, the Utilities purchase gas on the spot market and have interruptible gas transportation contracts. See “Recoverable Energy Costs” in Note A to the financial statements in Item 8.

 

Steam Operations

Steam Sales.    Con Edison of New York sells steam in Manhattan south of 96th Street, mostly to large office buildings, apartment houses and hospitals. In 2004, steam operating revenues were $550 million or 7 percent of the company’s operating revenues. The percentages were 6 percent in the two preceding years.

 

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 demand during the winter of 2004/2005 (through January 31, 2005) occurred on January 28, 2005 when the load reached 9.6 million pounds (mlbs) per hour. The company’s estimate for the winter of 2005/2006 peak demand of its steam customers is 10.4 mlbs per hour under design criteria, which assume severe weather.

 

On December 31, 2004, the steam system had the capability of delivering about 11.9 mlbs of steam per hour. Con Edison of New York estimates that the system will have the capability to deliver 12.6 mlbs of steam per hour in the 2005/2006 winter.

 

Steam Supply.    49 percent of the steam sold by Con Edison of New York in 2004 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 15 percent was purchased from others. See Item 2 for a discussion of Con Edison of New York’s steam facilities.

 

Regulation

The PSC regulates, among other things, Con Edison of New York’s electric, gas and steam rates, the siting of its transmission lines and the issuance of its securities. Certain activities of the company are subject to the jurisdiction of the FERC. 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

 

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exiting the business of selling electric energy and gas at retail (including an examination of utilities’ provider of last resort responsibility and consumer protections) and addressing any rate disincentives to the promotion of energy efficiency and distributed generation. The company typically is an active participant in such proceedings. The company does not expect that the pending proceedings will have a material adverse effect on its financial position, results of operation or liquidity.

 

In 2004, the PSC issued an order in a generic proceeding addressing its program with respect to the State’s goal of increasing to 25 percent (from approximately 19 percent at the end of 2004) the portion of electricity used in the State provided from renewable energy resources. New York State Energy Research and Development Authority (NYSERDA) will be responsible for procuring the new renewable energy resources, and the cost of the program (including NYSERDA’s administrative fee) will be covered by a charge imposed on the delivery customers of each of the utilities in the State. Also in 2004, new requirements for annual testing and inspections of electric related infrastructure were adopted. See “Other Regulatory Matters” in Note B to the financial statements included in Item 8 (which information is incorporated herein by reference).

 

Competition

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

 

    has sold most of its electric generating capacity;

 

    provides its customers the opportunity to buy electricity and gas from other suppliers;

 

    purchases most of the electricity and all of the gas it sells to its full-service customers (the cost of which is recovered pursuant to provisions approved by the PSC); and

 

    provides energy delivery services to customers pursuant to rate provisions approved by the PSC.

 

See “Rate 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 and Capital Requirements” and “Financial and Commodity Market Risks” in Item 7.

 

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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 $84 million in 2004 and are estimated to be $90 million in 2005.

 

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 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,
     2004

   2003

   2002

   2001

   2000

ELECTRIC ENERGY (MWH)

                        

Generated

   1,441,498    1,077,681    1,259,533    6,793,393    3,259,790

Purchased from others

   30,221,137    31,717,254    32,712,723    27,877,154    35,780,429

  
  
  
  
  

TOTAL GENERATED AND PURCHASED

   31,662,635    32,794,935    33,972,256    34,670,547    39,040,219

Less: Used by Company

   168,533    175,965    172,873    187,773    191,445

Distribution losses and other variances

   1,623,682    1,893,403    2,008,530    1,931,694    2,768,249

  
  
  
  
  

NET GENERATED AND PURCHASED

   29,870,420    30,725,567    31,790,853    32,551,080    36,080,525

Electric Energy Sold

                        

Residential

   12,672,847    12,440,663    12,481,689    12,048,743    11,637,167

Commercial and industrial

   16,966,448    18,033,468    19,110,770    19,839,340    19,930,376

Railroads and railways

   19,308    18,193    55,186    16,003    95,457

Public authorities

   209,699    135,758    125,651    150,069    257,706

  
  
  
  
  

Con Edison of New York full service customers

   29,868,302    30,628,082    31,773,296    32,054,155    31,920,706

Off-System Sales (a)

   2,118    97,485    17,557    496,925    4,159,819

  
  
  
  
  

TOTAL ELECTRIC ENERGY SOLD

   29,870,420    30,725,567    31,790,853    32,551,080    36,080,525

  
  
  
  
  

ELECTRIC ENERGY DELIVERED

                        

Con Edison of New York full service customers

   29,868,302    30,628,082    31,773,296    32,054,155    31,920,706

Delivery service for retail access customers

   14,143,045    12,636,520    11,925,752    10,520,219    9,321,630

Delivery service to NYPA customers and others

   10,034,301    9,823,018    9,504,526    9,815,259    9,631,618

Delivery service for municipal agencies

   696,041    647,388    762,660    660,220    526,816

  
  
  
  
  

TOTAL DELIVERIES IN FRANCHISE AREA

   54,741,689    53,735,008    53,966,234    53,049,853    51,400,770

  
  
  
  
  

AVERAGE ANNUAL KWHR USE PER RESIDENTIAL CUSTOMER (b)

   4,700    4,622    4,652    4,502    4,372

AVERAGE REVENUE PER KWHR SOLD (CENTS)

                        

RESIDENTIAL (b)

   18.9    19.4    17.0    18.1    18.5

COMMERCIAL AND INDUSTRIAL (b)

   16.0    16.3    14.4    15.6    15.5
(a) For 2000, included sales to Con Edison Solutions. See “Unregulated Subsidiaries,” above.
(b) Includes Municipal Agency sales.

 

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Con Edison of New York

 

OPERATING STATISTICS (CONTINUED)

 

    Year Ended December 31,  
    2004

    2003

    2002

    2001

    2000

 

GAS (DTH)

                                       

Purchased

    137,605,722       145,325,065       134,126,768       140,633,193       157,800,083  

Storage - net change

    (1,331,154 )     (5,516,703 )     5,728,684       (6,474,137 )     774,660  

Used as boiler fuel at Electric and Steam Stations

    (29,435,890 )     (27,362,620 )     (29,386,788 )     (27,725,598 )     (27,674,312 )

 


 


 


 


 


GAS PURCHASED FOR RESALE

    106,838,678       112,445,742       110,468,664       106,433,458       130,900,431  

Less:  Gas used by the company

    364,142       383,312       323,915       299,057       294,937  

Off-System Sales & NYPA

    6,062,145       4,007,592       16,120,307       12,666,668       29,563,339  

Distribution losses and other variances

    2,769,000       4,023,631       4,555,763       (2,887,761 )     7,060,117  

 


 


 


 


 


TOTAL GAS PURCHASED FOR CON
EDISON OF NEW YORK CUSTOMERS

    97,643,391       104,031,207       89,468,679       96,355,494       93,982,038  

GAS SOLD

                                       

Firm Sales

                                       

Residential

    48,569,514       51,943,706       44,162,920       46,506,365       47,602,792  

General

    35,886,544       36,840,304       32,681,926       35,118,342       30,468,676  

 


 


 


 


 


TOTAL FIRM SALES

    84,456,058       88,784,010       76,844,846       81,624,707       78,071,468  

Interruptible Sales

    13,187,333       15,247,197       12,623,833       14,730,787       15,910,570  

 


 


 


 


 


TOTAL GAS SOLD TO CON EDISON OF
NEW YORK CUSTOMERS

    97,643,391       104,031,207       89,468,679       96,355,494       93,982,038  

 


 


 


 


 


Transportation of customer-owned gas

                                       

Firm transportation

    16,795,124       16,485,309       15,695,403       14,279,816       18,215,120  

NYPA

    18,622,910       23,360,162       25,466,325       13,762,339       19,857,321  

Other

    63,306,409       61,575,954       99,815,203       78,709,049       97,155,425  

Off-System Sales (a)

    266,907       459,088       8,354,940       6,206,522       23,067,713  

 


 


 


 


 


TOTAL SALES AND TRANSPORTATION

    196,634,741       205,911,720       238,800,550       209,313,220       252,277,617  

 


 


 


 


 


AVERAGE REVENUE PER DTH SOLD

                                       

RESIDENTIAL

  $ 13.94     $ 13.02     $ 12.30     $ 14.25     $ 11.62  

GENERAL

  $ 10.75     $ 10.23     $ 8.90     $ 10.76     $ 8.44  

 


 


 


 


 


STEAM SOLD (MLBS)

    26,128,644       26,248,361       24,519,476       25,327,694       26,733,260  

 


 


 


 


 


AVERAGE REVENUE PER MLB SOLD

  $ 20.34     $ 19.47     $ 15.52     $ 18.86     $ 16.37  

CUSTOMERS - AVERAGE FOR YEAR

                                       

Electric

    3,152,023       3,137,301       3,117,542       3,100,642       3,078,648  

Gas

    1,041,454       1,053,946       1,054,312       1,051,540       1,051,555  

Steam

    1,811       1,825       1,838       1,853       1,861  
(a) The reduction in off-system sales in 2001, compared with 2000, reflects the release of excess capacity to marketers participating in the company’s retail access program. Further reductions resulted from combining the Utilities’ gas purchasing activities, which had the effect of reducing excess capacity available for off-system sales.

 

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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 areas of northern New Jersey and eastern Pennsylvania, an approximately 1,350 square mile service area. They also provide gas service in southeastern New York and adjacent areas of eastern Pennsylvania. O&R’s business is subject to regulation by the 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 2004, electric and gas operating revenues were 71 percent and 29 percent, respectively, of its operating revenues.

 

Competition

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

 

    has sold its electric generating capacity;

 

    provides its customers the opportunity to buy electricity and gas from other suppliers;

 

    purchases the electricity and gas it supplies to its full-service customers (the cost of which is recovered pursuant to provisions approved by the PSC, NJBPU or PPUC); and

 

    provides energy delivery services to customers pursuant to rate provisions approved by the PSC.

 

See “Rate 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.

 

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O&R

 

OPERATING STATISTICS

 

     Year Ended December 31,
     2004

   2003

   2002

   2001

   2000

ELECTRIC ENERGY (MWH)

                        

Purchased from others

   4,113,021    4,388,804    4,506,217    4,565,551    4,879,400

  
  
  
  
  

TOTAL PURCHASED

   4,113,021    4,388,804    4,506,217    4,565,551    4,879,400

Less: Supplied without direct charge

   7    11    9    6    20

Used by company

   14,174    15,511    13,435    14,572    19,337

Distribution losses and other variances

   216,946    215,615    173,397    101,461    410,469

  
  
  
  
  

NET GENERATED AND PURCHASED

   3,881,894    4,157,667    4,319,376    4,449,512    4,449,574

ELECTRIC ENERGY SOLD

                        

Residential

   1,729,095    1,769,421    1,815,241    1,772,552    1,881,680

Commercial and industrial

   2,045,800    2,276,973    2,393,039    2,566,651    2,463,744

Public authorities

   106,999    111,273    111,096    110,309    104,150

  
  
  
  
  

Total sales to Orange & Rockland customers

   3,881,894    4,157,667    4,319,376    4,449,512    4,449,574

  
  
  
  
  

TOTAL ELECTRIC ENERGY SOLD

   3,881,894    4,157,667    4,319,376    4,449,512    4,449,574

  
  
  
  
  

Total sales to Orange & Rockland customers

   3,881,894    4,157,667    4,319,376    4,449,512    4,449,574

Delivery service for Retail Choice customers

   1,860,661    1,454,794    1,235,048    798,814    606,794

  
  
  
  
  

TOTAL SALES IN FRANCHISE AREA

   5,742,555    5,612,461    5,554,424    5,248,326    5,056,368

  
  
  
  
  

AVERAGE ANNUAL KWH USE PER RESIDENTIAL CUSTOMER

   8,818    8,955    8,801    8,506    7,854

AVERAGE REVENUE PER KWH SOLD (CENTS)

                        

RESIDENTIAL

   12.35    12.17    11.23    12.79    12.22

COMMERCIAL AND INDUSTRIAL

   9.89    9.81    8.65    10.04    9.93

 

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O&R

 

OPERATING STATISTICS (CONTINUED)

 

     Year Ended December 31,  
     2004

    2003

   2002

    2001

   2000

 

GAS (DTH)

                                      

Purchased

     15,732,315       16,546,568      19,723,917       18,588,275      25,042,346  

Storage - net change

     (237,000 )     1,112,011      (2,139,045 )     854,482      (1,099,134 )

  


 

  


 

  


GAS PURCHASED FOR RESALE

     15,495,315       17,658,579      17,584,872       19,442,757      23,943,212  

Less: Gas used by the company

     58,823       52,377      56,939       45,979      57,828  

Distribution losses and other variances

     406,863       376,605      856,036       578,187      841,295  

  


 

  


 

  


TOTAL GAS PURCHASED FOR O&R CUSTOMERS

     15,029,629       17,229,597      16,671,897       18,818,591      23,044,089  

  


 

  


 

  


GAS SOLD

                                      

Firm Sales

                                      

Residential

     9,486,765       10,810,384      10,203,403       11,724,341      14,281,013  

General

     2,487,197       3,314,154      3,294,624       3,750,851      4,080,178  

  


 

  


 

  


TOTAL FIRM SALES

     11,973,962       14,124,538      13,498,027       15,475,192      18,361,191  

Interruptible Sales

     3,055,667       3,105,059      3,173,870       3,343,399      3,653,684  

Sales to Con Edison

     -       -      -       -      1,029,214  

  


 

  


 

  


TOTAL GAS SOLD TO O&R CUSTOMERS

     15,029,629       17,229,597      16,671,897       18,818,591      23,044,089  

Transportation of customer-owned gas

                                      

Firm transportation

     9,930,731       8,497,814      6,367,990       4,723,695      3,415,804  

Interruptible transportation

     3,940,332       3,728,018      4,192,062       3,920,901      4,222,835  

Sales for resale

     1,067,953       1,133,649      1,057,156       1,039,083      1,138,937  

Sales to divested electric generating

Stations

     659,449       2,833,322      13,983,048       11,427,428      11,640,751  

Off-System Sales

     53,692       373,686      2,883,913       2,526,829      4,984,794  

  


 

  


 

  


TOTAL SALES AND TRANSPORTATION

     30,681,786       33,796,086      45,156,066       42,456,527      48,447,210  

  


 

  


 

  


AVERAGE REVENUE PER DTH SOLD

                                      

RESIDENTIAL

   $ 11.84     $ 10.41    $ 8.29     $ 10.29    $ 8.32  

GENERAL

   $ 11.27     $ 10.00    $ 7.87     $ 9.73    $ 7.65  

CUSTOMERS - AVERAGE FOR YEAR

                                      

Electric

     290,905       288,746      285,519       282,191      278,851  

Gas

     123,505       122,565      121,437       120,108      118,707  

 

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ITEM 2. PROPERTIES

 

CON EDISON

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

 

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

 

CON EDISON OF NEW YORK

 

Electric Facilities

Generating Facilities.    Con Edison of New York’s electric generating facilities consist of plants located in New York City with an aggregate capacity of 565 MW. The company expects to have sufficient amounts of gas and fuel oil available in 2005 for use in these facilities. In addition, the company’s East River Repowering Project, which is expected to be placed in service in 2005, will add incremental electric capacity of 200 MW based on a winter nominal rating (125 MW based on a summer nominal rating).

 

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, 2004, 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 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, 2004, the company’s distribution system had a transformer capacity of 26,500 MVA, with 33,011 miles of overhead distribution lines and 91,255 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 4,283 miles of mains and 376,804 service

 

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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 3,913 MVA), 60 distribution substations (with a transformer capacity of 2,159 MVA), 94,636 in-service line transformers, 5,142 pole miles of overhead distribution lines and 2,733 miles of underground distribution lines.

 

Gas Facilities

O&R and Pike own their gas distribution systems, which include 1,810 miles of mains. In addition, O&R owns and maintains a gas transmission system, which includes 62 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.

 

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UNREGULATED SUBSIDIARIES

Con Edison Development, an unregulated subsidiary of Con Edison, owns interests in 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, 2004 amounted to $830 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)
              

    

TOTAL BASE CAPACITY

        554  
              

GENOR

   Intermediate    Central America/Guatemala    42  

CEEMI

   Intermediate    NEPOOL/Massachusetts    125  

Lakewood

   Intermediate    PJM/New Jersey    236 (b)
              

    

TOTAL INTERMEDIATE CAPACITY

        403  
              

CEEMI

   Peaking    NEPOOL/Massachusetts    156  

Ocean Peaking

   Peaking    PJM/New Jersey    330  

Rock Springs

   Peaking    PJM/Maryland    335  
              

    

TOTAL PEAKING CAPACITY

        821  
              

    

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 Development is 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).

 

DISCONTINUED OPERATIONS

Con Edison Communications’ assets, the capitalized costs of which at December 31, 2004 amounted to $47 million, are included in Con Edison’s financial statements as Non-Utility Properties Held for Sale. The assets include opto-electronic equipment and over 400 miles of fiber optic cable that have 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 Communications pays fees for the use of such conduits and rights of way.

 

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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).

 

Lease in/Lease Out Transactions

For information about Con Edison’s appeal of a proposed disallowance by the Internal Revenue Service of certain tax losses recognized in connection with the company’s lease in/lease out transactions, see Note K to the financial statements in Item 8 (which information is incorporated herein by reference).

 

CON EDISON OF NEW YORK

 

Asbestos

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

 

Superfund

The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes (Superfund) impose joint and several liability, regardless of fault, upon generators of hazardous substances for investigation, 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, develop and implement remediation programs for the 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

 

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of the MGP Sites has been completed at only five of the sites. Coal tar and/or other manufactured gas plant-related environmental contaminants have been detected at 23 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 a manufactured gas plant 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 action is necessary, to conduct corrective action to remediate the contamination. The company has investigated various sections of the property and is planning additional investigations. The company has submitted to the DEC and the New York State Department of Health a report identifying the known areas of contamination. The company estimates that its undiscounted potential liability for the cleanup of the known 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 assessment of the nature and extent of the contamination in, and recommended a 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 2005. The company estimates that its undiscounted potential liability for the cleanup of PCB contamination at the site will be approximately $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 have been, and are expected to continue to be, conducted over extended periods of time. The company does not believe that it is reasonably likely that monetary sanctions, such as penalties, will be imposed upon it by any governmental authority with respect to these sites.

 

The following table lists each of Con Edison of New York’s other Superfund sites for which the company anticipates it may have a liability. The table also shows for each such site, its location, the year in which the company was designated or alleged to be a PRP or to otherwise have responsibilities with

 

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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 approximate potential liability for investigation, remediation and monitoring and environmental damages at the site or the unpaid share of any payments it is required to make under a settlement agreement resolving its liability for the site.

 

Site    Location    Start   

Court or

Agency

   Estimated Liability(a)    % of Total(a)  

Maxey Flats Nuclear

   Morehead, KY    1986    EPA    $ 114,000    0.8 %

Curcio Scrap Metal

   Saddle Brook, NJ    1987    EPA      380,000    100 %

Metal Bank of America

   Philadelphia, PA    1987    EPA      150,000    1.0 %

Cortese Landfill

   Narrowsburg, NY    1987    EPA      745,000    6.0 %

Global Landfill

   Old Bridge, NJ    1988    EPA      115,000    0.3 %

PCB Treatment, Inc.

   Kansas City, KS & MO    1994    EPA      2,900,000    6.1 %

Borne Chemical

   Elizabeth, NJ    1997    NJSC      117,000    0.7 %
(a) Superfund liability is joint and several. Estimated liability shown is the company’s estimate of its anticipated share of the total liability determined pursuant to consent decrees, settlement agreements or otherwise and in light of financial condition of other PRPs.

 

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, 2004, 12 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.

 

Electric System Safety

For information regarding PSC proceedings regarding the safety of Con Edison of New York’s electric transmission and distribution systems, see “Other Regulatory Matters” in Note B to the financial statements included in Item 8 (which information is incorporated herein by reference).

 

Lower Manhattan Restoration Litigation

For a description of litigation against the company with respect to emergency response and restoration activities following the September 11, 2001 attack on the World Trade Center, see Note R to the financial statements included in Item 8 (which information is incorporated herein by reference).

 

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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. O&R has completed an Interim Remedial Measure at one MGP site. In addition, in 2004 the DEC has selected a remedial action plan for another O&R MGP site. 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 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.

 

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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    1.7 %

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.

 

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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 15, 2005. 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. 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. The term of each employment agreement is subject to one year extensions unless terminated on six months prior notice.

 

NAME


   AGE

  

OFFICES AND POSITIONS DURING PAST FIVE YEARS


EXECUTIVE OFFICERS OF CON EDISON AND CON EDISON OF NEW YORK

Eugene R. McGrath

   63    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

   54    9/00 to present—President of Con Edison of New York
          7/99 to 8/00—President of O&R

Joan S. Freilich

   63    3/98 to present—Executive Vice President, Chief Financial Officer and Director (Trustee) of Con Edison and Con Edison of New York

Robert N. Hoglund

   43    4/04 to present—Senior Vice President of Finance of Con Edison and Con Edison of New York
          6/04 to present—Chief Financial Officer and Controller of O&R
          4/97 to 3/04—Managing Director, Citigroup Global Markets Inc. and predecessors

Frances A. Resheske

   44    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

Charles E. McTiernan, Jr.

   60    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

   56    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

 

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NAME


   AGE

  

OFFICES AND POSITIONS DURING PAST FIVE YEARS


Hyman Schoenblum

   56   

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

Joseph P. Oates

   43    04/04 to present—Vice President and Treasurer of Con Edison and Con Edison of New York
         

01/04 to 04/04—Vice President of Con Edison of New York

          11/03 to 01/04—Vice President—Bronx and Westchester of Con Edison of New York
          07/01 to 11/03—Vice President—Energy Management of Con Edison of New York
          02/01 to 07/01—Director—Direct Report to the Senior Vice President of Central Operations of Con Edison of New York
          04/99 to 02/01—Project Manager—Corporate Planning of Con Edison of New York

EXECUTIVE OFFICERS OF CON EDISON BUT NOT CON EDISON OF NEW YORK

Stephen B. Bram

   62    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

John D. McMahon

   53   

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

   56   

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

   56   

10/93 to present—Senior Vice President—Gas

Robert A. Saya

   63   

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

   56   

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

   50   

8/98 to present—Vice President—Customer Operations

 

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PART II

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

 

CON EDISON

Con Edison’s Common Shares ($.10 par value), the only class of common equity of Con Edison, are traded on the New York Stock Exchange. As of January 31, 2005, there were 88,506 holders of record of Con Edison’s Common Shares.

 

The market price range for Con Edison’s Common Shares during 2004 and 2003, as reported in the consolidated reporting system, and the dividends paid by Con Edison in 2004 and 2003 were as follows:

 

    2004   2003
    High

  Low

  Dividends
Paid


  High

  Low

  Dividends
Paid


1st Quarter

  $ 45.01   $ 42.21   $ 0.565   $ 46.02   $ 36.55   $ 0.56

2nd Quarter

  $ 44.25   $ 37.23   $ 0.565   $ 44.26   $ 38.20   $ 0.56

3rd Quarter

  $ 42.90   $ 39.12   $ 0.565   $ 43.78   $ 38.55   $ 0.56

4th Quarter

  $ 45.59   $ 42.09   $ 0.565   $ 43.48   $ 38.80   $ 0.56

 

On January 20, 2005, Con Edison’s Board of Directors declared a quarterly dividend of 57 cents per Common Share. The first quarter 2005 dividend will be paid on March 15, 2005.

 

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 in Item 12 of this report from Con Edison’s definitive proxy statement for its Annual Meeting of Stockholders to be held on May 16, 2005.

 

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 2004 and 2003 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 2004 and 2003 are shown in its Consolidated Statement of Common Shareholder’s Equity included in Item 8 (which information is incorporated herein by reference). For

 

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additional information about the payment of dividends by O&R, and restrictions thereon, see “Dividends” in Note C to the financial statements in Item 8 (which information is incorporated herein by reference).

 

ITEM 6. SELECTED FINANCIAL DATA

 

CON EDISON

 

     For the Year Ended December 31

 
     2004

    2003

    2002

    2001

    2000

 
     (Millions of Dollars)  

Operating revenues*

   $ 9,758     $ 9,808     $ 8,498     $ 9,389     $ 9,317  

Purchased power

     3,961       3,884       3,201       3,380       3,536  

Fuel

     597       504       289       394       351  

Gas purchased for resale

     852       889       596       860       789  

Operating income

     931       1,044       1,078       1,141       1,021  

Income from continuing operations

     549       634       689       694       588  

Loss from discontinued operations

     (12 )     (109 )     (21 )     (12 )     (5 )

Income before cumulative effect of changes in accounting principles

     537       525       668       682       583  

Cumulative effect of changes in accounting principles

     -       3       (22 )     -       -  

Net income for common stock

     537       528       646       682       583  

Total assets

     22,560       20,966       19,667       17,901       17,661  

Long-term debt

     6,561       6,733       6,166       5,501       5,415  

Preferred stock subject to mandatory redemption

     -       -       -       37       37  

Common shareholders’ equity

     7,054       6,423       5,921       5,666       5,472  

  


 


 


 


 


BASIC EARNINGS PER SHARE

                                        

Continuing operations

   $ 2.33     $ 2.87     $ 3.24     $ 3.28     $ 2.77  

Discontinued operations

   $ (0.05 )   $ (0.50 )   $ (0.10 )   $ (0.06 )   $ (0.02 )

Before cumulative effect of changes in accounting principles

   $ 2.28     $ 2.37     $ 3.14     $ 3.22     $ 2.75  

Cumulative effect of changes in accounting principles

     -     $ 0.02     $ (0.11 )     -       -  

After cumulative effect of changes in accounting principles

   $ 2.28     $ 2.39     $ 3.03     $ 3.22     $ 2.75  

DILUTED EARNINGS PER SHARE

                                        

Continuing operations

   $ 2.32     $ 2.86     $ 3.23     $ 3.27     $ 2.76  

Discontinued operations

   $ (0.05 )   $ (0.50 )   $ (0.10 )   $ (0.06 )   $ (0.02 )

Before cumulative effect of changes in accounting principles

   $ 2.27     $ 2.36     $ 3.13     $ 3.21     $ 2.74  

Cumulative effect of changes in accounting principles

     -     $ 0.02     ($ 0.11 )     -       -  

After cumulative effect of changes in accounting principles

   $ 2.27     $ 2.38     $ 3.02     $ 3.21     $ 2.74  

Cash dividends per common share

   $ 2.26     $ 2.24     $ 2.22     $ 2.20     $ 2.18  

  


 


 


 


 


Average common shares outstanding (millions)

     236       221       213       212       212  

  


 


 


 


 


* Includes a $124 million pre-tax charge in 2004, in accordance with Con Edison of New York’s electric, gas and steam rate plans.

 

Con Edison of New York

 

     For the Year Ended December 31

     2004

   2003

   2002

   2001

   2000

     (Millions of Dollars)

Operating revenues*

   $ 8,006    $ 8,166    $ 7,224    $ 8,122    $ 8,001

Purchased power

     3,064      3,124      2,622      2,819      2,988

Fuel

     404      358      232      351      322

Gas purchased for resale

     709      715      472      666      491

Operating income

     825      942      954      1,047      952

Net income for common stock

     518      591      605      649      570

Total assets

     19,244      17,764      16,837      15,347      15,405

Long-term debt

     5,235      5,435      5,392      5,012      4,915

Preferred stock subject to mandatory redemption

     -      -      -      37      37

Common shareholder’s equity

     6,116      5,482      4,890      4,666      4,480

  

  

  

  

  

* Includes $124 million pre-tax in 2004, in accordance with Con Edison of New York’s electric, gas and steam rate plans.

 

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

 

This combined management’s discussion and analysis of financial condition and results of operations (MD&A) relates to the consolidated financial statements of this report of the three separate 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) and should be read in conjunction with the financial statements and the notes thereto. Con Edison of New York and O&R (the Utilities) are subsidiaries of Con Edison and, as such, information in this MD&A about each of the Utilities also applies to Con Edison.

 

As used in this report, the term the “Companies” refers to each of the three separate registrants: Con Edison, Con Edison of New York and O&R. However, neither of the Utilities 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 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 businesses.

 

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

 

    

Twelve months ended

December 31, 2004

    

At December 31,

2004

(Millions of Dollars)   

Operating

Revenues

    Net Income      Assets

Con Edison of New York

   $ 8,006     82 %   $ 518 (b)   96 %    $ 19,244    85%

O&R

     703     7 %     46     8 %      1,390    6%

  


 

 


 

  

  

Total Utilities

     8,709     89 %     564     104 %      20,634    91%

  


 

 


 

  

  

Con Edison Development

     417     4 %     (4 )   (1 )%      1,270    6%

Con Edison Energy

     28     - %     -     - %      119    1%

Con Edison Solutions

     626     7 %     3     1 %      119    1%

Other(a)

     (22 )   - %     (14 )   (2 )%      366    1%

  


 

 


 

  

  

Total continuing operations

   $ 9,758     100 %     549     102 %      22,508    100%

Discontinued operations (c)

     -     - %     (12 )   (2 )%      52    -%

  


 

 


 

  

  

Total Con Edison

   $ 9,758     100 %   $ 537     100 %    $ 22,560    100%

  


 

 


 

  

  
(a) Represents inter-company and parent company accounting.
(b) Reflects after-tax charges discussed below.
(c) Represents the discontinued operations of Con Edison Communications.

 

Con Edison’s net income for common stock in 2004 was $537 million or $2.28 a share. Net income for common stock in 2003 and 2002 was $528 million or $2.39 a share and $646 million or $3.03 a share,

 

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF

NEW YORK AND O&R) — CONTINUED

 

respectively. The 2004 results reflect after-tax charges totaling $80 million or $0.34 a share in accordance with Con Edison of New York’s electric, gas and steam rate plans (see Note B to the financial statements) and $12 million or $.05 a share (after-tax) losses from the discontinued operations of Con Edison Communications (see Note W to the financial statements). Included in 2003 net income for common stock were impairment charges for certain generating assets ($10 million after-tax or $0.05 per share), the impact of a regulatory settlement ($5 million after tax charge or $0.03 per share) and losses from discontinued operations of Con Edison Communications ($109 million after-tax charge or $0.50 per share, which includes an impairment charge of $84 million after tax or $0.38 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 were the cumulative effect of changes in accounting principles ($22 million after-tax charges or $0.11 per share) and the loss from discontinued operations of Con Edison Communications ($21 million after-tax charge or $0.10 per share).

 

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

 

See also “Risk Factors,” below.

 

Regulated Utility Subsidiaries

Con Edison of New York provides electric service to approximately 3.2 million customers and gas service to over 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 approximately 0.3 million customers in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service to over 0.1 million customers in southeastern New York and adjacent areas of eastern Pennsylvania.

 

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

 

Con Edison anticipates that the Utilities will 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.

 

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF

NEW YORK AND O&R) — CONTINUED

 

The factors affecting demand for utility service include weather and economic conditions. In December 2004 Con Edison of New York and O&R each experienced a new winter peak load for electricity. Con Edison of New York set monthly electric delivery records in 8 of the 12 months of 2004 and O&R for 10 of the 12 months of 2004. The peak electric loads for Con Edison of New York and O&R in 2004 were 11,327 MW and 1,330 MW, respectively.

 

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 2004 was 12,775 MW, 1.4 percent higher than the adjusted peak load in 2003. The company estimates that, under design weather conditions, the 2005 service area peak load will be 13,025 MW. The forecasted average annual growth rate of the electric peak load over the next five years is 1.5 percent. The company anticipates an ongoing need for substantial capital investment in order to meet this load growth with the high level of reliability that it currently provides (see “Liquidity and Capital Resources—Capital Requirements,” below).

 

The Utilities have rate plans approved by state utility regulators that cover the rates they can charge their customers. Con Edison of New York has an electric rate plan (approved in November 2000) that ends March 31, 2005, and has pending with the New York State Public Service Commission (PSC) a Joint Proposal supported by the company, PSC staff and other parties, which would establish a new rate plan for the period April 1, 2005 through March 31, 2008. The company has new gas and steam rate plans (approved in September 2004), effective October 1, 2004 through September 30, 2007 and October 1, 2004 through September 30, 2006, respectively. Among other things, the pending electric rate plan and the new gas and steam rate plans address the increased construction expenditures and related costs incurred and expected to be incurred to meet increasing customer demand and reliability needs. O&R has rate plans for it’s electric and gas services in New York that extend through October 31, 2006. Pursuant to the Utilities’ rate plans, charges to customers may not be changed during the respective terms of the rate plans other than for recovery of the costs incurred for energy supply and limited other exceptions. The rate plans generally require the Utilities to share with customers earnings in excess of specified rates of return on equity. Changes in delivery volumes are reflected in operating income (except to the extent that weather-normalization provisions apply to the gas businesses). 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

 

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the economic effects of rate regulation are reflected in financial statements. See “Application of Critical Accounting Policies,” below.

 

In June 2004, the Utilities reached collective bargaining agreements covering essentially all of their employees that are union members (about two-thirds of each of the company’s employees).

 

Unregulated Businesses

Con Edison’s unregulated energy 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 an impairment charge of $18 million ($10 million after-tax) for these businesses in the fourth quarter of 2003. See “Application of Critical Accounting Policies,” below and Note H to the financial statements. At December 31, 2004, Con Edison’s investment in its unregulated energy subsidiaries was $599 million and the unregulated subsidiaries’ assets amounted to $1.5 billion.

 

Consolidated Edison Solutions, Inc. (Con Edison Solutions) sells electricity to delivery customers of the Utilities and other utilities in the Northeast and Mid-Atlantic regions and also offers energy related services. The company sold approximately 6.9 million megawatt hours of electricity to customers over the 12-month period ended December 31, 2004 and served approximately 28,000 electric customers at that date.

 

Consolidated Edison Development, Inc. (Con Edison Development) owns and operates generating plants and participates in other infrastructure projects. At December 31, 2004, the company owned the equivalent of 1,668 MW of capacity in electric generating facilities of which 224 MW is 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 anticipates investing $14 million in its unregulated businesses over the next two years and will focus on increasing their customer base, gross margins and increasing the value of their existing assets. See “Liquidity and Capital Resources—Capital Requirements” and “Capital Resources,” below.

 

Discontinued Operations

In December 2004, after a comprehensive strategic review, Con Edison entered into an agreement to sell Consolidated Edison Communications, LLC (Con Edison Communications) to FiberNet Telecom Group, Inc. for $37 million in cash, subject to certain adjustments. Con Edison expects to complete the sale in 2005 following review or approval by the City of New York, the PSC and various federal, state and local regulators. At December 31, 2004, Con Edison Communications’ assets and liabilities

 

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amounted to $52 million and $16 million, respectively. In addition, Con Edison Communications incurred net losses of $12 million, $109 million (including an after-tax impairment charge of $84 million) and $21 million for the years ended 2004, 2003 and 2002, respectively. The contemplated sale will not result in a significant after-tax gain or loss. See Note W to the financial statements.

 

Results of Operations - Summary

Con Edison’s earnings per share in 2004 were $2.28 ($2.27 on a diluted basis). Earnings per share in 2003 and 2002 were $2.39 ($2.38 on a diluted basis) and $3.03 ($3.02 on a diluted basis).

 

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, 2004, 2003 and 2002 were as follows:

 

(Millions of Dollars)    2004     2003     2002  

Con Edison of New York

   $ 518 (c)   $ 591     $ 605  

O&R

     46       45       45  

Con Edison Development

     (4 )     (9 )(d)     (4 )(f)

Con Edison Energy

     -       1       2 (g)

Con Edison Solutions

     3       19       22  

Other(a)

     (14 )     (10 )     (3 )

  


 


 


Total continuing operations

     549       637       667  

Discontinued operations(b)

     (12 )     (109 )(e)     (21 )

  


 


 


CON EDISON

   $ 537     $ 528     $ 646  

  


 


 


(a) Represents inter-company and parent company accounting including interest expense on debt and non-operating income tax expense.
(b) Represents the discontinued operations of Con Edison Communications.
(c) Includes charges totaling $80 million after tax in accordance with Con Edison of New York’s new or pending electric, gas and steam rate plans. See Note B to the financial statements.
(d) Includes a charge for the impairment of two combustion turbines and a generation investment totaling $10 million after tax. See Note H to the financial statements. Also includes a benefit for the cumulative effect of changes in accounting principles for mark-to-market gains related to certain power sales contracts, partially offset by a $3 million net after-tax impact of financial statement consolidation of the Newington plant.
(e) Includes a charge for the impairment of Con Edison Communications assets in accordance with SFAS No. 144 totaling $84 million after-tax. See Note H to the financial statements.
(f) 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.
(g) 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.

 

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Con Edison’s earnings in 2004 were $9 million higher than in 2003, reflecting the following factors (after tax, in millions):

 

Con Edison of New York:

        

Impact of weather in 2004 on net revenues versus 2003 (estimated)

   $ (5 )

Sales growth and other revenue factors (estimated)

     35  

Increased pensions and other post-retirement benefits costs

     (18 )

Regulatory accounting

     (12 )

Higher depreciation and property tax expense

     (32 )

Higher operations and maintenance expense

     (27 )

Lower interest expense, principally long-term debt

     14  

Allowance for funds used during construction and other income

     21  

Electric, gas and steam rate plan charges

     (80 )

Settlement in 2003 regarding nuclear generating unit sold in 2001

     5  

Other, principally tax benefits

     26  
    


Total Con Edison of New York

     (73 )

O&R

     1  

Unregulated energy subsidiaries including parent company

     (23 )

Unregulated generating asset impairments

     10  

Loss on discontinued operations, including impairment recognized in 2003

     97  

Cumulative effect of changes in accounting principles

     (3 )

  


TOTAL

   $ 9  

  


 

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 growth and other revenue factors (estimated)

     34  

Lower operations and maintenance expense

     25  

Regulatory accounting

     14  

Increased pensions and other post-retirement benefits costs

     (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 energy subsidiaries including parent company

     (30 )

Unregulated generating asset impairments

     (10 )

Loss on discontinued operations, including impairment recognized in 2003

     (88 )

Cumulative effect of changes in accounting principles

     25  

Other

     (1 )

  


Total

   $ (118 )

  


 

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

 

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RISK FACTORS

Con Edison’s business is influenced by many factors that are difficult to predict, and that involve uncertainties that may materially affect our actual operating results, cash flows and financial condition. These risk factors include:

 

Our Revenues And Results of Operations Reflect Regulatory Actions—Our utility subsidiaries have rate plans approved by state utility regulators that cover the prices they can charge their customers. The prices generally may not be changed during the specified terms of the rate plans other than for the recovery of energy costs and limited other exceptions. The rate plans include earnings adjustments for meeting or failing to meet certain standards. Certain of the plans require action by regulators at their expiration dates, which may include approval of new plans with different provisions. Regulators may also take actions affecting the company outside of the framework of the approved rate plans. See “Application of Critical Accounting Polices” and “Regulatory Matters,” below.

 

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

 

We Purchase The Energy We Sell To CustomersWe purchase substantially all of the energy we sell to our customers. A disruption or delay in our energy supply arrangements could adversely affect our ability to meet our customers’ energy needs and our results of operations. We have policies to manage the economic risks related to energy supply, including related hedging transactions and the risk of a counterparty’s non-performance. Our utility subsidiaries generally recover their prudently incurred fuel, purchased power and gas costs, including the cost of hedging transactions, in accordance with rate provisions approved by state utility regulators. Our unregulated energy subsidiaries enter into energy market transactions to manage their commodity-related price and volumetric risks. See “Financial and Commodity Market Risks—Commodity Price Risk,” below.

 

We Have A Substantial Ongoing Utility Construction ProgramWe estimate that our utility subsidiaries’ construction expenditures will exceed $1.5 billion in each of the next three years. The ongoing construction program includes large energy transmission and distribution system projects. The failure to complete these projects in a timely manner could adversely affect our ability to meet our customers’ growing energy needs with the high level of reliability that we currently provide. The Utilities expect to use internally-generated funds and external financing to fund the construction expenditures. Changes

 

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in capital market conditions or in our credit ratings could adversely affect our ability to raise money. Our commercial paper and unsecured debt are rated by Moody’s Investors Services, Inc., Standard & Poor’s Ratings Services and Fitch, Inc. These ratings impact our cost of funds. Our current ratings are shown in “Liquidity and Capital Resources—Capital Resources,” below.

 

Our Unregulated Energy Subsidiaries Are In Evolving Businesses—Our unregulated energy subsidiaries are active in evolving markets that are affected by the actions of governmental agencies, other organizations (such as independent system operators) and other competitive companies. Compared to the utility subsidiaries, the profitability of their products and services is not as predictable.

 

Our Financial Statements Reflect the Application of Critical Accounting Policies—The application of our critical accounting policies reflects complex judgments and estimates. These policies, which are described in “Application of Critical Accounting Policies,” below, include industry specific accounting applicable to regulated public utilities and accounting for pensions and other post-retirement benefits, contingencies, long-lived assets, derivative instruments, goodwill and leases. New generally accepted accounting policies or changes to current accounting policies or interpretations of such policies that affect our financial statements may be adopted by the relevant accounting authorities.

 

We Are Engaged In A Material Legal Proceeding With Northeast Utilities—In 2001, we sued Northeast Utilities to recover damages from their breach of our merger agreement with them and to seek the court’s declaration that we had no further obligations under the merger agreement. Northeast Utilities alleges we breached the merger agreement and is pursuing a counter-claim against us for damages in excess of $1.2 billion. There are also claims by purported classes of Northeast Utilities shareholders seeking damages from us that we believe to be substantially duplicative of those sought by Northeast Utilities. See Note Q to the financial statements.

 

We Are Exposed To Material Liabilities Relating To Hazardous Substances—Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or produced in the course of operations of our utility subsidiaries and are present on properties or in facilities and equipment currently or previously owned by them. See “Environmental Matters,” below.

 

We Are Subject To Extensive Government Regulation—Our operations are subject to extensive federal and state regulation and require numerous permits, approvals and certificates from various federal, state and local governmental agencies. We may be subject to new laws or regulations or the revision or reinterpretation of existing laws or regulations.

 

We Are Exposed to Risks That Are Beyond Our Control—Our results of operations can be affected by changes in the weather, which directly influences the demand for electricity, gas and steam and can affect the price of energy commodities. The cost of repairing damage to our operating subsidiaries’ facilities and

 

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the potential disruption of their operations due to storms, natural disasters, wars, terrorist acts and other catastrophic events could be substantial. The occurrence or risk of occurrence of future terrorist attacks or related acts of war could also adversely affect the New York or United States economy. A lower level of economic activity for these or other reasons could result in a decline in energy consumption, which could adversely affect our revenues and earnings and limit our future growth prospects.

 

FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements intended to qualify for the safe-harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements of future expectation and not facts. Words such as “expects,” “estimates,” “anticipates,” “intends,” “believes,” “plans,” “will” and similar expressions identify forward-looking statements. Forward-looking statements are based on information available at the time the statements are made, and accordingly speak only as of that time. Actual results or developments might differ materially from those included in the forward-looking statements because of various factors such as those discussed under “Risk Factors,” above.

 

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

 

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 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.

 

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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.

 

In the event that regulatory assets of the Utilities were no longer probable of recovery (as required by SFAS No. 71), these regulatory assets would be charged to earnings. At December 31, 2004, the regulatory assets for Con Edison, Con Edison of New York and O&R were $2.3 billion, $2.0 billion and $252 million, respectively.

 

Accounting for Pensions and Other Postretirement Benefits

The Utilities provide pensions and other postretirement benefits to substantially all of their employees and retirees. Con Edison’s 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 2004, 2003 and 2002.

 

Primarily because of the amortization of previous years’ net investment gains, Con Edison of New York’s pension expense for 2004, 2003 and 2002 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 2005 is an increase, compared with 2004, in the pension and other postretirement benefits cost of $146 million and $9 million for Con Edison of New York and O&R, respectively. This increase reflects the amortization of prior period actuarial losses associated with declines in the market value of assets in recent years and a change in the discount rate assumption from 6.3% in 2004 to 5.9% in 2005.

 

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Amortization of market gains and losses experienced in previous years is expected to reduce Con Edison of New York’s and O&R’s pension and other postretirement benefit costs by an additional $34 million and $1 million in 2006, respectively. A 5.0 percentage point variation in the actual annual return in 2005 as compared with the expected annual asset return of 8.8 percent would change pension and other postretirement benefit costs for Con Edison of New York and O&R by approximately $14 million and $1 million, respectively, in 2006.

 

In accordance with SFAS No. 71 and consistent with the gas and steam rate plans approved by the PSC in September 2004, effective October 1, 2004, Con Edison of New York is deferring as a regulatory asset or liability, as the case may be, any difference between expenses recognized under SFAS No. 87 and SFAS No. 106 allocable to gas and steam operations and the amounts reflected in gas and steam rates for such expenses. The company’s pending electric rate plan includes a similar provision to reconcile pension and other postretirement benefit expense allocable to electric operations.

 

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, SFAS No. 106 and the amounts reflected in rates for such expenses.

 

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, 2004, showed that the fair value of the plan’s assets exceeded the plan’s accumulated benefit obligation (ABO) by $672 million 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 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 2004 under funding regulations and tax laws. O&R made a discretionary contribution of $22 million to the plan in 2004. In 2005, O&R and Con Edison’s unregulated subsidiaries expect to make discretionary contributions of $28 million and $1 million, respectively. The Companies’ policy is to fund their pension and postretirement benefit accounting costs to the extent 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

 

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more future events occur or fail to occur. Known material contingencies, which are described in the notes to the financial statements, include a PSC proceeding relating to the safety of the Con Edison of New York’s utility systems (Note B); 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 (Note G); a collection agent’s failure to forward to Con Edison of New York payments it had received (Note J); Con Edison Development’s lease in/lease out transactions (Note K); legal proceedings relating to Con Edison’s 1999 merger agreement with Northeast Utilities (Note Q); and legal proceedings relating to emergency response and restoration following the September 11, 2001 attack on the World Trade Center (Note R). 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.

 

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

 

Accounting for Long-Lived Assets

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

 

Con Edison’s unregulated businesses tested 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 ($94 million after tax) for the assets of its unregulated telecommunications and generation businesses. See Notes H and W.

 

In 2004, Con Edison’s unregulated businesses again tested their assets for impairment, and no impairments were identified. With respect to the telecommunications assets, the agreement to sell

 

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Con Edison Communications (see Note W to the financial statements) for $37 million was used to establish fair value. With respect to the forecasted cash flows associated with Con Edison Development’s generation facilities, a 10 percent decrease in the estimated undiscounted cash flows for these facilities would not have resulted in an impairment charge.

 

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.

 

Where the Companies are required to make mark-to-market estimates pursuant to SFAS No. 133, the estimates of gains and losses at a particular period end do not reflect the end results of particular transactions, and will most likely not reflect the actual gain or loss at the conclusion of a transaction. Estimated gains or losses are for the most part based on prices supplied by external sources such as the fair value of exchange traded futures and options and the fair value of positions for which price quotations are available through or derived from brokers or other market sources. Estimated gains and losses based on models or other valuation methods comprise less than .01 percent of each of the Companies’ total revenues.

 

Accounting for Goodwill

Effective January 1, 2002, Con Edison adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” This Statement modified the accounting and reporting of goodwill and intangible assets. In accordance with SFAS No. 142, Con Edison no longer amortizes goodwill, but is required to annually test goodwill for impairment. See Note L to the financial statements.

 

Goodwill is tested for impairment using a two-step approach. The first step of the goodwill impairment test compares the estimated fair value of a reporting unit with its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired. If the carrying value exceeds the estimated fair value of the reporting unit, the second step is performed to measure the amount of impairment loss, if any. The second step requires a calculation of the implied fair value of goodwill.

 

In connection with the adoption of SFAS No. 142, Con Edison recorded a loss of $34 million ($20 million after tax) as of January 1, 2002, relating to certain generation assets owned by an unregulated subsidiary.

 

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The remaining unamortized goodwill of $406 million at December 31, 2004, was most recently tested for impairment during the first quarter of 2004. This test did not require any second-step assessment and did not result in any impairment. The company’s most significant assumptions surrounding the goodwill impairment test relate to the estimates of reporting unit fair values. The Company estimated fair values primarily based upon discounted cash flows. A decrease in the forecasted cash flows of 10 percent would not have resulted in the carrying value of any reporting units exceeding their estimated fair values.

 

Accounting for Leases

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

 

In accordance with SFAS No. 13, Con Edison accounted for the two LILO transactions as leveraged leases. Accordingly, the company’s investment in these leases, net of deferred taxes, is carried as a single amount in Con Edison’s consolidated balance sheet and income is recognized pursuant to a method that incorporates a level rate of return for those years when net investment in the lease is positive, based upon the after-tax cash flows projected at the inception of the leveraged leases.

 

In a recent meeting, the FASB tentatively decided that a change in the timing alone of the tax benefits that are realized by a lessor in a leveraged lease should result in a recalculation of the leveraged lease with any change in the recalculated net investment recognized as a gain or loss currently.

 

Con Edison believes that its position on the LILOs is correct and is currently appealing the auditors’ proposal within the Internal Revenue Service. If Con Edison is unsuccessful in defending its position, the company may be required to recalculate the leveraged leases, which could result in a charge to earnings, the amount of which could have a material adverse effect on Con Edison’s results of operations.

 

LIQUIDITY AND CAPITAL RESOURCES

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

 

The principal factors affecting Con Edison’s liquidity are its investments in the Utilities, the dividends it pays to its shareholders and the dividends it receives from the Utilities. In addition, in the 2004 and 2003 periods, Con Edison issued 16.7 million and 11.9 million shares of common stock for $578 and $436 million, respectively, of which $512 million and $378 million were invested in Con Edison of New York. Con Edison also issued $200 million of five-year debt in 2003 and $325 million of 40-year debt (most of which it invested in its unregulated subsidiaries) in 2002.

 

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NEW YORK AND O&R) — CONTINUED

 

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 2004 and 2003 received net capital contributions from Con Edison of $512 million and $378 million respectively and in 2004, 2003 and 2002 issued $95 million, $45 million and $225 million, respectively, of additional debt net of redemptions. In 2003, O&R redeemed $35 million of debt at maturity with commercial paper.

 

Con Edison of New York’s expenditures have included approximately $447 million related to the attack on the World Trade Center and the subsequent restoration of lower Manhattan energy services and facilities; to date the company has received reimbursement of $76 million of such costs from insurance carriers and $63 million from the federal government and is pursuing further reimbursement of such costs. See Note R to the financial statements.

 

The Companies’ current liabilities exceeded their current assets at December 31, 2004 and 2003. The Companies generally maintain minimal cash balances and use short-term borrowing to meet their working capital needs and other cash requirements. The Companies repay their short-term borrowings using cash flow from long-term financings and operating activities. The Utilities’ cost of capital, including working capital, is reflected in the rates they charge to their customers.

 

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

 

Changes in the Companies’ cash and temporary cash investments resulting from operating, investing and financing activities for the years ended December 31, 2004, 2003 and 2002 are summarized as follows:

 

CON EDISON

 

(Millions of Dollars)    2004     2003    

Variance

2004 vs. 2003

    2002    

Variance

2003 vs. 2002

 

Operating activities

   $ 1,320     $ 1,321     $ (1 )   $ 1,581     $ (260 )

Investing activities

     (1,540 )     (1,546 )     6       (1,634 )     88  

Financing activities

     197       156       41       (100 )     256  

  


 


 


 


 


Net change for the period

     (23 )     (69 )     46       (153 )     84  

  


 


 


 


 


Balance at beginning of period

     49       118       (69 )     271       (153 )

  


 


 


 


 


Balance at end of period (including restricted cash)

   $ 26     $ 49     $ (23 )   $ 118     $ (69 )

  


 


 


 


 


 

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CON EDISON OF NEW YORK

 

(Millions of Dollars)    2004     2003    

Variance

2004 vs. 2003

    2002    

Variance

2003 vs. 2002

 

Operating activities

   $ 1,201     $ 1,169       32     $ 1,310     $ (141 )

Investing activities

     (1,412 )     (1,337 )     (75 )     (1,273 )     (64 )

Financing activities

     188       113       75       (214 )     327  

  


 


 


 


 


Net change for the period

     (23 )     (55 )     32       (177 )     122  

  


 


 


 


 


Balance at beginning of period

     33       88       (55 )     265       (177 )

  


 


 


 


 


Balance at end of period (including restricted cash)

   $ 10     $ 33     $ (23 )   $ 88     $ (55 )

  


 


 


 


 


 

O&R

 

(Millions of Dollars)    2004     2003    

Variance

2004 vs. 2003

    2002    

Variance

2003 vs. 2002

 

Operating activities

   $ 81     $ 127     $ (46 )   $ 104     $ 23  

Investing activities

     (81 )     (71 )     (10 )     (60 )     (11 )

Financing activities

     3       (49 )     52       (44 )     (5 )

  


 


 


 


 


Net change for the period

     3       7       (4 )     -       7  

  


 


 


 


 


Balance at beginning of period

     9       2       7       2       -  

  


 


 


 


 


Balance at end of period (including restricted cash)

   $ 12     $ 9     $ 3     $ 2     $ 7  

  


 


 


 


 


 

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, Con Edison’s impairment charges in 2003 and charges in 2004 under Con Edison of New York’s new or pending electric, gas and steam rate plans. For Con Edison of New York, principal non-cash credits included prepaid pension costs. Pension credits resulted 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.

 

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Net cash flows from operating activities in 2004 for Con Edison and Con Edison of New York were $1 million lower and $32 million higher than 2003, respectively. The change at Con Edison of New York reflects lower accounts receivable balances at December 31, 2004 as compared with year-end 2003 partially offset by an increase in materials and supplies.

 

Net cash flows from operating activities in 2003 for Con Edison and Con Edison of New York were $260 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.

 

Net cash flows from operating activities in 2004 for O&R were $46 million lower than in 2003 due primarily to lower deferred income tax expense partially offset by lower account receivable balances at December 31, 2004 as compared with year-end 2003.

 

Net cash flows from operating activities in 2003 for O&R were $23 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).

 

Cash Flows Used in Investing Activities

Net cash flows used in investing activities for Con Edison were $6 million lower in 2004 than in 2003, and $88 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 $75 million and $10 million higher in 2004 than in 2003, and $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.

 

Cash Flows from Financing Activities

Net cash flows from financing activities for Con Edison and Con Edison of New York increased $41 million and $75 million in 2004 compared with 2003, and increased $256 million and $327 million, respectively, in 2003 compared with 2002. O&R net cash flows from financing activities increased $52 million in 2004 compared with 2003, and decreased $5 million in 2003 compared with 2002.

 

Con Edison’s cash flows from financing activities for the years ended December 31, 2004 and 2003, reflect the issuance through public offerings of 14 million and 9.6 million Con Edison common shares resulting in proceeds of $512 million and $378 million, respectively, which were invested by Con Edison in Con Edison of New York. Cash flows from financing activities in 2003 also reflect the

 

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NEW YORK AND O&R) — CONTINUED

 

issuance of $200 million of Con Edison’s 3.625 percent 5-year 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 debentures (the proceeds of which were used to repay commercial paper). Cash flows from financing activities for 2004, 2003 and 2002 also reflect the issuance of Con Edison common shares through its dividend reinvestment and employee stock plans (2004: 2.7 million shares for $66 million, 2003: 2.3 million shares for $58 million; 2002: 1.7 million shares for $30 million). In addition, as a result of the stock plan issuances, cash used to pay common stock dividends was reduced by $39 million in 2004 and $40 million in 2003 and 2002, respectively.

 

Net cash flows from financing activities during the years ending December 31, 2004, 2003 and 2002 also reflect the following Con Edison of New York transactions:

 

2004

 

    Issued $344 million of variable rate, tax exempt Facilities Revenue Bonds, with various maturity dates between 28 and 35 years, the proceeds of which were used to redeem in advance of maturity fixed rate tax exempt Facilities Revenue Bonds, 5.25% due 2020, 5.375% due 2022, 6.0% due 2028 and 7.125% due 2029;

 

    Issued $200 million 4.7% 10-year debentures and $200 million 5.7% 30-year debentures, the proceeds of which were used to redeem in advance of maturity $150 million 7.125% debentures due 2029 and for general corporate purposes;

 

    Redeemed at maturity $150 million 7.625% 12-year debentures;

 

    Issued $275 million 4.7% 5-year debentures, the proceeds of which were used in July to redeem in advance of maturity $275 million 7.35% 40-year debentures;

 

2003

 

    Redeemed in advance of maturity $275 million 7.75% 35-year Subordinated Deferrable Interest Debentures due 2031 using cash held for that purpose at December 31, 2002;

 

    Redeemed at maturity $150 million 6.375% 10-year debentures and issued $175 million 5.875% 30-year debentures;

 

    Redeemed $380 million 7.5% 30-year debentures due 2023 using the net proceeds from the issuance of $200 million 3.85% 10-year debentures and $200 million 5.10 percent 30-year debentures;

 

2002

 

    Redeemed at maturity $150 million 6.625% 9-year debentures;

 

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NEW YORK AND O&R) — CONTINUED

 

    Redeemed at maturity $150 million variable-rate 5-year debentures and issued $300 million 5.625% 10-year debentures;

 

    Redeemed at maturity $37 million 6.125% Cumulative Preferred Stock, $100 par value;

 

    Issued $500 million 4.875% 10-year debentures.

 

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.

 

O&R’s cash flows from financing activities for the years ended December 31, 2004 and 2003 reflect the issuance of $46 million of 5.22% Transition Bonds associated with securitization of previously deferred purchased power costs of O&R’s New Jersey subsidiary, and the redemption at maturity of $35 million 6.56% 10-year debentures in 2003, partially offset by a reduction in commercial paper outstanding in 2004. Net cash flows from financing activities for the years ended December 31, 2003 and 2002 reflect the redemption at maturity of the debentures, partially offset by an increase in commercial paper.

 

Cash flows from financing activities of the Companies also reflect commercial paper issuance (included on the consolidated balance sheets as “Notes payable”). The commercial paper amounts outstanding at December 31, 2004, 2003 and 2002 and the average daily balance for 2004, 2003 and 2002 for Con Edison, Con Edison of New York and O&R were as follows:

 

     2004     2003     2002  

(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     $ 166     $ 156     $ 326     $ 151     $ 256  

Con Edison of New York

   $ 100     $ 126     $ 99     $ 179     $ -     $ 157  

O&R

   $ -     $ 9     $ 15     $ 33     $ 1     $ 1  

Weighted average yield

     2.2 %     1.2 %     1.0 %     1.2 %     1.2 %     1.7 %

  


 


 


 


 


 


 

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 ratings and certain financial ratios, see “Capital Resources,” below.

 

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NEW YORK AND O&R) — CONTINUED

 

Changes in Assets and Liabilities

The following table shows changes in assets and liabilities at December 31, 2004, compared with December 31, 2003, 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
2004 vs. 2003
Variance
  

Con Edison of New York
2004 vs. 2003

Variance

   O&R
2004 vs. 2003
Variance

Other current assets

   $ 145    $ 27    $ 10

Prepaid pension costs

     185      185      -

Regulatory assets

     401      370      31

Deferred income taxes—liability

     554      491      15

Regulatory liabilities—transmission congestion contracts

     107      107      -

Regulatory liabilities—Electric, gas and steam rate deferrals

     124      124      -

  

  

  

 

Other current assets for Con Edison increased at December 31, 2004 as compared with year-end 2003 due primarily to federal and state income tax receivables recorded in 2004 and mark-to-market gains.

 

Prepaid pension costs for Con Edison and Con Edison of New York increased at December 31, 2004 as compared with year-end 2003 due to the recognition of the current period’s pension credits.

 

Regulatory assets increased for Con Edison, Con Edison of New York and O&R at December 31, 2004 as compared with year-end 2003. The increases for Con Edison and Con Edison of New York were due primarily to the deferral of future income tax, electric interference costs and costs incurred in the restoration of service and facilities following the World Trade Center attack. The O&R increase was due primarily to the deferral of Transition Bond Charges (see “Rate and Restructuring Agreements” in Note B to the financial statements), partially offset by a reduction in recoverable energy costs.

 

Deferred income taxes and investment tax credits increased for Con Edison and Con Edison of New York due primarily to higher plant related deductions for tax purposes.

 

Transmission congestion contract (TCC) deferred revenues increased at December 31, 2004 as compared with year-end 2003 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 (see “NYISO” in Note A to the financial statements). These proceeds are being retained for customer benefit.

 

Electric, gas and steam rate deferrals increased at December 31, 2004 as compared with year-end 2003 reflecting the agreement with the PSC and other parties to resolve certain issues raised in the electric, gas and steam rate proceedings, related to the treatment of prior period pension credits (see “Rate and Restructuring Agreements” in Note B to the financial statements).

 

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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 and the issuance of Con Edison common shares through its dividend reinvestment and employee stock plans. Con Edison’s ability to make payments on its external borrowings and dividends on its common shares is also dependent on its receipt of dividends from its subsidiaries or proceeds from the sale of its securities or its interests in its subsidiaries.

 

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

 

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

 

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

 

In January 2005, Con Edison of New York filed a petition with the PSC for authorization to issue up to $4.4 billion of debt securities prior to December 31, 2009. The new authorization would supersede the company’s December 2001 PSC financing authorization pursuant to which currently up to $830 million of debt securities could be issued prior to 2006. O&R is authorized by the PSC to issue up to $150 million of debt securities prior to 2006. In addition, the PSC has authorized the refunding of the Utilities’ outstanding debt securities and preferred stock, should the Utilities determine that it is economic to do so.

 

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 has received two installments totaling $63 million as of December 31, 2004. The Company has submitted an additional application for funds and will submit further applications when appropriate. See Note R to the financial statements.

 

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For each of the Companies, the ratio of earnings to fixed charges (Securities and Exchange Commission basis) for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 was:

 

     Earnings to Fixed Charges Ratio
     2004

   2003

   2002

   2001

   2000

Con Edison

   2.6    2.7    3.1    3.3    3.0

Con Edison of New York

   3.1    3.4    3.4    3.7    3.2

O&R

   4.0    4.4    3.3    3.5    3.4

  
  
  
  
  

 

For each of the Companies, the common equity ratio at December 31, 2004, 2003 and 2002 was:

 

     Common Equity Ratio
     2004

   2003

   2002

Con Edison

   51.0    48.0    48.1

Con Edison of New York

   52.9    49.3    46.6

O&R

   52.9    55.1    53.6

  
  
  

 

The commercial paper of the Companies is rated P-1, A-1 and F1, respectively, by Moody’s Investors 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.

 

Capital Requirements

The following table contains the Companies’ capital requirements for the years 2002 through 2004 and estimated amounts for 2005 through 2007.

 

     Actual

  Estimate

(Millions of Dollars)    2002    2003    2004   2005    2006    2007

Regulated utility construction expenditures

                                        

Con Edison of New York

   $ 1,082    $ 1,167    $ 1,235   $ 1,492    $ 1,541    $ 1,580

O&R

     58      71      79     82      86      84

  

  

  

 

  

  

Total regulated construction expenditures

   $ 1,140    $ 1,238    $ 1,314   $ 1,574    $ 1,627    $ 1,664

Unregulated subsidiaries construction expenditures

     282      105      38     6      8      8

  

  

  

 

  

  

Sub-total

   $ 1,422    $ 1,343    $ 1,352   $ 1,580    $ 1,635    $ 1,672

  

  

  

 

  

  

Retirement of long-term securities at maturity*

                                        

Con Edison of New York

     337      805      923     450           330

O&R

          35          2      2      23

Unregulated energy subsidiaries

     11      16      16     17      20      21

  

  

  

 

  

  

Total retirement of long-term securities at maturity

     348      856      939     469      22      374

  

  

  

 

  

  

Total

   $ 1,770    $ 2,199    $ 2,291   $ 2,049    $ 1,657    $ 2,046

  

  

  

 

  

  

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

 

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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 energy subsidiaries’ construction expenditures declined in 2004 and are expected to continue to decline, consistent with there being no major construction or acquisition identified for those businesses at this time. At December 31, 2004 and 2003, Con Edison’s investment balance in these subsidiaries, on an unconsolidated basis, was $599 million and $703 million, respectively. The 2004 amount does not include Con Edison Communications.

 

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Contractual Obligations

The following tables summarize the Companies’ material obligations at December 31, 2004, to make payments pursuant to contracts. Long-term debt, capital lease obligations and other long-term liabilities are included on their balance sheets. Operating leases, non-utility generator (NUG) contracts and other purchase power agreements (PPAs) (for which undiscounted future annual payments are shown) are disclosed in the notes to the financial statements.

 

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

Long-term debt, including interest (Note C)

                                  

Con Edison of New York

   $ 10,210    $ 767    $ 904    $ 1,269    $ 7,270

O&R

     620      21      62      38      499

Unregulated energy subsidiaries and parent

     2,455      88      179      364      1,824

  

  

  

  

  

Total Long-term debt, including interest

   $ 13,285    $ 876    $ 1,145    $ 1,671    $ 9,593

  

  

  

  

  

Capital lease obligations (Note K)

                                  

Con Edison of New York

   $ 57    $ 7    $ 14    $ 16    $ 20

  

  

  

  

  

Total Capital lease obligations

   $ 57    $ 7    $ 14    $ 16    $ 20

  

  

  

  

  

Operating leases (Notes K and T)

                                  

Con Edison of New York

   $ 76    $ 41    $ 11    $ 10    $ 14

O&R

     25      2      4      4      15

Unregulated energy subsidiaries

     13      2      4      3      4

  

  

  

  

  

Total operating leases

   $ 114    $ 45    $ 19    $ 17    $ 33

  

  

  

  

  

Purchase obligations:

                                  

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

                                  

Con Edison of New York

                                  

Energy(a)

   $ 13,618    $ 910    $ 1,560    $ 1,026    $ 10,122

Capacity

     6,430      452      996      1,027      3,955

  

  

  

  

  

Total Con Edison of New York

   $ 20,048    $ 1,362    $ 2,556    $ 2,053    $ 14,077

  

  

  

  

  

O&R

                                  

Energy(a)

   $ 86    $ 52    $ 34    $    $

Capacity

     30      18      9      3     

  

  

  

  

  

Total O&R

   $ 116    $ 70    $ 43    $ 3    $

  

  

  

  

  

Total non-utility generator contracts and purchase power agreements—Utilities (b)

   $ 20,164    $ 1,432    $ 2,599    $ 2,056    $ 14,077

  

  

  

  

  

Natural gas supply, transportation, and storage contracts—Utilities(c)

                                  

Con Edison of New York

                                  

Natural gas supply

   $ 1,218    $ 536    $ 548    $ 134    $

Transportation and storage

     609      135      215      158      101

  

  

  

  

  

Total Con Edison of New York

   $ 1,827    $ 671    $ 763    $ 292    $ 101

  

  

  

  

  

O&R

                                  

Natural gas supply

   $ 260    $ 115    $ 109    $ 36    $ -

Transportation and storage

     140      33      51      37      19

  

  

  

  

  

Total O&R

   $ 400    $ 148    $ 160    $ 73    $ 19

  

  

  

  

  

Total natural gas supply, transportation and storage contracts

   $ 2,227    $ 819    $ 923    $ 365    $ 120

  

  

  

  

  

Other purchase obligations(d)

                                  

Con Edison of New York

   $ 1,767    $ 1,126    $ 502    $ 89    $ 50

O&R

     149      68      53      22      6

  

  

  

  

  

Total other purchase obligations

   $ 1,916    $ 1,194    $ 555    $ 111    $ 56

  

  

  

  

  

Unregulated energy subsidiary commodity and service agreements(e)

   $ 965    $ 366    $ 336    $ 48    $ 215

  

  

  

  

  

Total

   $ 38,728    $ 4,739    $ 5,591    $ 4,284    $ 24,114

  

  

  

  

  

 

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

 

(b) Con Edison of New York’s contractual obligations under its non-utility generator contracts and other purchase power agreements include the cost of energy and capacity that the company is obligated to purchase under the contracts described in Notes I, N and T to the financial statements.

 

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

 

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

 

(e) Amounts represent commitments to purchase minimum quantities of electric energy and capacity, natural gas, natural gas pipeline capacity and generating plant services entered into by Con Edison’s unregulated subsidiaries. Amounts do not include commitments of Con Edison Communications.

 

The Companies’ commitments to make payments in addition to these contractual commitments include their other liabilities reflected in their balance sheets, any funding obligations for their pension and other postretirement benefit plans, and Con Edison’s guarantees of certain obligations of its subsidiaries. See Notes E, F, S and T to the financial statements.

 

Electric Power Requirements

In 2004, 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 2005.

 

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 and enter into derivative transactions to hedge the costs of a portion of their expected purchases, which together cover a substantial portion of the electric energy expected to be sold to customers in the summer of 2005. See Notes I and P to the financial statements. O&R’s New Jersey subsidiary entered into firm contracts to purchase electric energy for substantially all of the electric energy expected to be sold to its customers in 2005.

 

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Con Edison of New York also owns generating stations in New York City associated primarily with its steam system, with electric capacity of approximately 565 MW. In addition, the company’s East River Repowering Project, which is expected to be placed in service in 2005, will add incremental electric capacity of 200 MW based on a winter nominal rating (125 MW based on a summer nominal rating). The company sells the electric output of its generating stations through the NYISO’s wholesale electricity market.

 

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.

 

Mirant Corporation is the owner of the Lovett generating station located in O&R’s service territory. Mirant, which is undergoing bankruptcy proceedings, has indicated in their recent Plan of Reorganization that under certain circumstances it would shut down the Lovett units in 2007 and 2008. If the units were shut down and in the absence of replacement generation added in the area, O&R’s transmission system could require modification in order to meet existing transmission reliability criteria.

 

Con Edison’s unregulated energy subsidiaries sell electricity in the wholesale and retail NYISO and other markets. At December 31, 2004, 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 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 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, divested most of its electric generating capacity, and enabled all of its electric customers to be served by competitive energy

 

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suppliers. O&R operates under regulatory frameworks authorized by the PSC, NJBPU and PPUC that provide for a transition to a competitive electric market.

 

In November 2000, the PSC approved an electric rate agreement for Con Edison of New York covering the five-year period ending March 2005, which, among other things, revised and extended the electric rate plan provisions of the 1997 Restructuring Agreement and addressed certain generation divestiture-related issues.

 

In December 2004, Con Edison of New York entered into a Joint Proposal with the staff of the PSC and other parties with respect to its electric rates. The new electric rate plan, which is subject to PSC approval, covers the three-year period April 2005 through March 2008, and provides for expected increases in delivery service rates of $104.6 million, effective April 1, 2005, and $220.4 million effective April 1, 2007. The rate increase is net of $100 million (pre-tax) the company agreed to apply for customer benefit relating primarily to the treatment of prior period pension credits. In addition, the company will retain the first $60 million of auction proceeds from the sale of transmission rights on the company’s transmission system (transmission congestion contracts) in each of the three years. The rate increases are lower than they otherwise would have been as a result of the amortization of certain regulatory assets and liabilities, the net effect of which will be to increase electric revenues by $128 million, $173 million and $249 million in each of the 12-month periods ended March 31, 2006, 2007 and 2008, respectively.

 

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 electric service. The 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.

 

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. 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. In July 2004, the NJBPU approved RECO’s Phase II petition of O&R’s New Jersey utility subsidiary, RECO, to increase base rates annually by $2.7 million (2.0% increase), effective August 1, 2004.

 

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Gas

In September 2004, the PSC approved a Joint Proposal by Con Edison of New York, the staff of the PSC and other parties with respect to the rates the company can charge its customers for gas and steam services. The approved gas rate plan covers the three-year period from October 2004 through September 2007, and provides for an increase in gas delivery rates of $46.8 million, effective October 1, 2004, with deferral accounting to be used to allocate the income statement effect of the increase over the term of the agreement. The rate increase is net of $17.5 million (pre-tax) the company agreed to apply for customer benefit relating primarily to the treatment of prior period pension credits, for which the company recognized a charge upon approval of the plan in September 2004. In addition to this rate increase, the company will retain the first $35 million of net revenues from non-firm customer transactions for each year of the rate plan and share with customers such revenues in excess of $35 million.

 

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 delivery service. The 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 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.

 

Steam

The Joint Proposal approved by the PSC in September 2004 for Con Edison of New York gas and steam rates includes a steam rate plan covering the two-year period from October 2004 through September 2006. The plan provides for increases in steam base rates of $49.6 million, effective October 1, 2004, and $27.4 million, effective October 1, 2005. The increases are net of a total of $6.2 million (pre-tax) the company agreed to apply for customer benefit relating primarily to the treatment of prior period pension credits, for which the company recognized a charge upon approval of the plan in September 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

 

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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, 2004, each 10 percent variation in interest rates applicable to the Companies’ variable rate debt of $1 billion would result in a change in annual interest expense of $2 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 $1 billion and $44 million, respectively, annual interest expense for Con Edison of New York would change by $2 million and there would be no material impact for O&R.

 

In addition, from time to time, Con Edison and its subsidiaries 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 energy 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, 2004, each 10 percent change in market prices would result in a change in fair value of $70 million for the derivative instruments used by the Utilities to hedge purchases of electricity and gas, of which $54 million is for Con Edison of New York and $16 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 energy 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. These 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

 

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on generating assets and commodity contracts, assuming a one-day holding period, for the years ended December 31, 2004, and 2003, respectively, was as follows:

 

95% Confidence Level, One-Day Holding Period    2004    2003
     (Millions of Dollars)

Average for the period

   $ 1    $ 1

High

   $ 3    $ 3

Low

   $ 1    $ -

  

  

 

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 $80 million of credit exposure, net of collateral and reserves, at December 31, 2004, of which $59 million was with investment grade counterparties and $21 million was with the New York Mercantile Exchange or independent system operators.

 

Investment Risk

The Companies’ investment risk relates to the investment of plan assets for their pension and other postretirement benefit plans. See “Application of Critical Accounting Policies—Accounting for Pensions and Other Postretirement Benefits,” above. The Companies’ current investment policy for pension plan assets includes investment targets of 65 percent equities and 35 percent fixed income and other securities. At December 31, 2004, the pension plan investments consisted of 67 percent equity and 33 percent fixed income and other securities. See Note E to the financial statements.

 

ENVIRONMENTAL MATTERS

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

 

IMPACT OF INFLATION

The Companies are affected by the decline in the purchasing power of the dollar caused by inflation. Regulation permits the Utilities to recover through depreciation only the historical cost of their plant

 

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assets even though in an inflationary economy the cost to replace the assets upon their retirement will substantially exceed historical costs. The impact is, however, partially offset by the repayment of the Companies’ long-term debt in dollars of lesser value than the dollars originally borrowed. Also, to the extent the Companies’ prices change by more or less than inflation, the real price of the Companies’ services will increase or decline. Over the past 20 years, for example, the real price of electric delivery 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.”

 

RESULTS OF OPERATIONS

Results of operations reflect, among other things, the Companies’ accounting policies (see “Application of Critical Accounting Policies,” above), rate plans that cover the rates the Utilities can charge their customers (see “Regulatory Matters,” above) and demand for utility service. Demand for utility service is affected by weather, economic conditions and other factors.

 

The Companies’ results of operations for the 12 months ended December 31, 2004 were negatively affected by the lower than normal number of hot days during the summer months, which offset the benefit of the unusually warm spring. For Con Edison and Con Edison of New York, the results also reflect charges totaling $124 million ($80 million after tax) related to the new and pending electric, gas and steam rate plans (see Note B to the financial statements), higher operations and maintenance expenses, and a reduction in net credits for pensions and other postretirement benefits. In addition, higher depreciation and property taxes in 2004 reflect large continuing investments in energy delivery infrastructure. For Con Edison, results of operations for 2003 and 2002 have been restated to reflect accounting for the discontinued operations of Con Edison Communications. For additional information about major factors affecting earnings, see “Results of Operations—Summary,” above.

 

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

 

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A discussion of the results of operations by principal business segment for the years ended December 31, 2004, 2003 and 2002 follows. For additional business segment financial information, see Note O to the financial statements.

 

YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003

The Companies’ results of operations (which were discussed above under “Results of Operations— Summary”) in 2004 compared with 2003 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

   $ (50 )   (0.5 )%   $ (160 )   (2.0 )%   $ (24 )   (3.3 )%

Purchased power

     77     2.0       (60 )   (1.9 )     (4 )   (1.6 )

Fuel

     93     18.5       46     12.8       -     -  

Gas purchased for resale

     (37 )   (4.2 )     (6 )   (0.8 )     -     -  

  


 

 


 

 


 

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

     (183 )   (4.0 )     (140 )   (3.5 )     (20 )   (5.6 )

Other operations and maintenance

     56     3.9       77     6.7       3     1.8  

Impairment charges

     (18 )   (100.0 )     -     -       -     -  

Depreciation and amortization

     35     6.8       19     4.1       (1 )   (2.9 )

Taxes, other than income tax

     (36 )   (3.2 )     (27 )   (2.6 )     (2 )   (4.0 )

Income tax

     (107 )   (26.8 )     (92 )   (24.7 )     (17 )   (50.0 )

  


 

 


 

 


 

Operating income

     (113 )   (10.8 )     (117 )   (12.4 )     (3 )   (4.4 )

Other income less deductions and related federal income tax

     38     Large       17     47.2       3     Large  

Net interest charges

     10     2.3       (27 )   (7.2 )     (1 )   (4.8 )

  


 

 


 

 


 

Income from continuing operations

     (85 )   (13.4 )     -     -       -     -  

Discontinued operations

     97     89.0       -     -       -     -  

Cumulative effect of changes in accounting principles

     (3 )   (100.0 )     -     -       -     -  

  


 

 


 

 


 

Net income for common stock

   $ 9     1.7 %   $ (73 )   (12.4 )%   $ 1     2.2 %

  


 

 


 

 


 

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

 

CON EDISON OF NEW YORK

 

Electric

Con Edison of New York’s electric operating revenues were $181 million lower in 2004 than in 2003, due primarily to the non-cash charge ($100 million) under the pending electric rate plan (see Note B

 

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to the financial statements) and decreased purchased power costs of $80 million. The decrease is partially offset by the increase in recoverable fuel costs ($46 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 2004 compared with 2003 were:

 

MILLIONS OF KWHS

 

     Twelve Months Ended   

Variation


   

Percent

Variation


 
Description    December 31,
2004
   December 31,
2003
    

Residential/Religious

   12,673    12,441    232     1.9 %

Commercial/Industrial

   16,966    18,033    (1,067 )   (5.9 )

Other

   229    154    75     48.7  

  
  
  

 

TOTAL FULL SERVICE CUSTOMERS

   29,868    30,628    (760 )   (2.5 )

Retail access customers

   14,143    12,637    1,506     11.9  

  
  
  

 

SUB-TOTAL

   44,011    43,265    746     1.7  

NYPA, Municipal Agency and Other Sales

   10,730    10,470    260     2.5  

  
  
  

 

TOTAL SERVICE AREA

   54,741    53,735    1,006     1.9 %

  
  
  

 

 

Electric delivery volumes in Con Edison of New York’s service area increased 1.9 percent in 2004 compared with 2003, reflecting principally increased new business. 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 1.4 percent in 2004 compared with 2003. 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 fuel costs increased $46 million in 2004 as compared with 2003, primarily because the company’s generation plants were dispatched more frequently than in the same period last year. Electric purchased power costs decreased $80 million, reflecting a decrease in purchased volumes, partially offset by higher unit costs.

 

Con Edison of New York’s electric operating income decreased $106 million in 2004 compared with 2003. The principal components of the decrease were lower net revenues ($147 million), and increases in other operations and maintenance expense ($49 million—due primarily to a reduced net credit for pensions and other postretirement benefits), property taxes ($21 million) and depreciation ($16 million). The increase in expenses were offset in part by lower income tax ($80 million), state and local revenue taxes ($32 million), sales and use tax ($8 million).

 

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Gas

Con Edison of New York’s gas operating revenues in 2004 increased $8 million compared with 2003, reflecting primarily higher firm and non-firm revenues due principally to the new gas rate plan ($23 million) and the reconciliation of gas distribution losses to levels reflected in rates, which resulted in a net benefit of $12 million. This increase was partially offset by non-cash charge ($18 million) under the new gas rate plan (see Note B to the financial statements).

 

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 2004 compared with 2003 were:

 

THOUSANDS OF DTHS

 

     Twelve Months Ended         

Percent

Variation


 
Description    December 31,
2004
   December 31,
2003
   Variation    

FIRM SALES

                      

Residential

   48,569    51,944    (3,375 )   (6.5 )%

General

   35,887    36,840    (953 )   (2.6 )

FIRM TRANSPORTATION

   16,795    16,486    309     1.9  

  
  
  

 

TOTAL FIRM SALES AND TRANSPORTATION

   101,251    105,270    (4,019 )   (3.8 )

Off Peak/Interruptible Sales

   13,187    15,247    (2,060 )   (13.5 )

NON-FIRM TRANSPORTATION OF GAS

                      

NYPA

   18,623    23,360    (4,737 )   (20.3 )

Generation Plants

   44,772    43,808    964     2.2  

  
  
  

 

TOTAL NYPA AND GENERATION PLANTS

   63,395    67,168    (3,773 )   (5.6 )

Other

   18,534    17,766    768     4.3  

  
  
  

 

TOTAL SALES AND TRANSPORTATION

   196,367    205,451    (9,084 )   (4.4 )%

  
  
  

 

 

Con Edison of New York’s sales and transportation volumes for firm customers decreased 3.8 percent in 2004 compared with 2003 reflecting the impact of milder winter and warmer spring weather, partially offset by 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 0.6 percent in 2004.

 

Non-firm transportation of customer-owned gas to NYPA and electric generating plants decreased 5.6 percent in 2004 as compared with 2003 due to higher gas prices. In 2004, because of the relative prices of gas and fuel oil, electric generating plants in the company’s gas service area utilized oil rather 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.

 

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Con Edison of New York’s purchased gas cost decreased $6 million in 2004 compared with 2003, due to lower delivery volumes, partially offset by higher unit costs.

 

Con Edison of New York’s gas operating income increased $3 million in 2004 compared with 2003, reflecting primarily higher net revenues ($14 million) and lower sales and use tax ($1 million). This increase was partially offset by increases in other operations and maintenance expense ($8 million—due primarily to a reduced net credit for pensions and other postretirement benefits), depreciation ($3 million) and income tax ($3 million).

 

Steam

Con Edison of New York’s steam operating revenues increased $13 million and steam operating income decreased $13 million in 2004 compared with 2003. The increase includes higher purchased power costs ($20 million) in 2004 reflecting an increase in purchased volumes and higher unit costs compared with 2003, partially offset by the non-cash charge ($6 million) under the new steam rate plan (see Note B to the financial statements). The decrease in steam operating income reflects increased operations and maintenance expense ($19 million, principally related to the cost of insulating steam manhole covers) and lower net revenues of $7 million. This decrease was partially offset by lower income taxes ($15 million) due to lower income.

 

Con Edison of New York’s steam sales and deliveries in 2004 compared with 2003 were:

 

MILLIONS OF POUNDS

 

     Twelve Months Ended         

Percent

Variation

 
Description    December 31,
2004
   December 31,
2003
   Variation    

General

   685    729    (44 )   (6.0 )%

Apartment house

   7,602    7,845    (243 )   (3.1 )

Annual power

   17,842    17,674    168     1.0  

  
  
  

 

TOTAL SALES

   26,129    26,248    (119 )   (0.5 )%

  
  
  

 

 

Steam sales volumes decreased 0.5 percent in 2004 compared with 2003, reflecting the impact of the milder December weather in the 2004 period. After adjusting for variations, principally weather and billing days in each period and the August 2003 regional power outage, steam sales decreased 0.4 percent in 2004.

 

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.

 

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF

NEW YORK AND O&R) — CONTINUED

 

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

 

(Millions of Dollars)    2004     2003    

Increase/

(Decrease)

 

Property taxes

   $ 681     $ 651     $ 30  

State and local taxes related to revenue receipts

     283       321       (38 )

Payroll taxes

     53       50       3  

Other taxes

     (4 )     18       (22 )

  


 


 


Total

   $ 1,013 (a)   $ 1,040 (a)   $ (27 )

  


 


 


(a) Including sales tax on customers’ bills, total taxes other than income taxes billed to customer in 2004 and 2003 were $1,357 and $1,393 million, respectively.

 

Income Taxes

Operating income taxes decreased $92 million in 2004 compared with 2003, due principally to lower income in the 2004 period.

 

Other Income (Deductions)

Other income (deductions) increased $17 million in 2004 compared with 2003, due primarily to increased allowance for equity funds used during construction and interest income associated with use tax and federal income tax.

 

Net Interest Charges

Net interest charges decreased $27 million in 2004 compared with 2003, due principally to lower interest expense on long-term debt as a result of refinancing long-term debt at lower interest rates, offset, in part, by additional debt issuances during the year.

 

O&R

 

Electric

Electric operating revenues decreased $31 million in 2004 compared with 2003. The decrease is due primarily to accounting in 2003 for the New York rate agreement and the NJBPU ruling on the RECO rate petitions (see “Rate and Restructuring Agreements” in Note B to the financial statements), as well as the deferral in 2004 of state income tax benefits for ratepayers, and lower purchased power costs.

 

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Table of Contents

MANAGEMENTS 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 2004 compared with 2003 were:

 

MILLIONS OF KWHS

 

     Twelve Months Ended             
Description    December 31,
2004
   December 31,
2003
   Variation    

Percent

Variation

 

Residential/Religious

   1,729    1,769    (40 )   (2.3 )%

Commercial/Industrial

   2,046    2,277    (231 )   (10.1 )

Other

   107    111    (4 )   (3.6 )

  
  
  

 

TOTAL FULL SERVICE CUSTOMERS

   3,882    4,157    (275 )   (6.6 )

Retail access customers

   1,861    1,455    406     27.9  

  
  
  

 

TOTAL SERVICE AREA

   5,743    5,612    131     2.3 %

  
  
  

 

 

Electric delivery volumes in O&R’s service area increased 2.3 percent in 2004 compared with 2003 due to the growth in the number of customers and higher average customer usage. After adjusting for weather variations in each period and the August 2003 regional power outage, electric delivery volumes in O&R’s service area increased 2.3 percent in 2004.

 

O&R’s purchased power cost decreased $4 million in 2004 as compared with 2003 due to a decrease in the average unit cost, lower energy usage by the company’s full-service customers and the regulatory actions referenced above.

 

O&R’s electric operating income decreased $3 million in 2004 as compared with 2003 due primarily to the referenced regulatory actions offset in part by lower depreciation expense and lower revenue and income taxes.

 

Gas

O&R’s gas operating revenues increased $7 million in 2004 compared with 2003. The increase is due primarily to the impact of the 2003 gas rate agreement and higher firm transportation volumes.

 

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Table of Contents

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS (COMBINED FOR CON EDISON, CON EDISON OF

NEW YORK AND O&R) — CONTINUED

 

Gas sales and deliveries, excluding off-system sales, in 2004 compared with 2003 were:

 

THOUSANDS OF DTHS