For the Fiscal Year Ended December 31, 2005
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

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

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

 

OR

 

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

 

For the transition period from                          to                         

 

Commission
File Number
     Exact name of registrant as specified in its charter and
principal office address and telephone number
   State of
Incorporation
     I.R.S.
Employer
ID. Number

1-14514

     Consolidated Edison, Inc.    New York      13-3965100
      

4 Irving Place, New York, New York 10003

(212) 460-4600

           

1-1217

     Consolidated Edison Company of New York, Inc.    New York      13-5009340
      

4 Irving Place, New York, New York 10003

(212) 460-4600

           

 

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

 

Title of each class    Name of each exchange
on which registered

Consolidated Edison, Inc.,

    

Common Shares ($.10 par value)

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

   New York Stock Exchange
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)

    

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

 

Con Edison, Inc (Con Edison)

   Yes    x        No    ¨  

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

   Yes    x        No    ¨  

 

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

 

Con Edison

   Yes    ¨        No    x  

Con Edison of New York

   Yes    ¨        No    x  


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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Con Edison

   Yes    x        No    ¨  

Con Edison of New York

   Yes    x        No    ¨  

 

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  ¨

 

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

 

Con Edison

                                    

Large accelerated filer

     x      Accelerated filer      ¨      Non-accelerated filer      ¨  

Con Edison of New York

                                    

Large accelerated filer

     ¨      Accelerated filer      ¨      Non-accelerated filer      x  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2) of the Exchange Act).

 

Con Edison

   Yes      ¨      No      x  

Con Edison of New York

   Yes      ¨      No      x  

 

The aggregate market value of the common equity of Con Edison held by non-affiliates of Con Edison, as of June 30, 2005, was approximately $11.4 billion.

 

As of January 31, 2006, Con Edison had outstanding 245,436,666 Common Shares ($.10 par value).

 

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

 

Documents Incorporated By Reference

Portions of Con Edison’s definitive proxy statement and Con Edison of New York’s definitive information statement, for their respective Annual Meetings of Stockholders to be held on May 15, 2006, to be filed with the Commission pursuant to Regulation 14A and Regulation 14C, respectively, not later than 120 days after December 31, 2005, are incorporated in Part III of this report.

 

Filing Format

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

 



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Table of Contents

          PAGE

Glossary of Terms

   4

PART I

         

ITEM 1.

  

Business

   6
    

Con Edison

   7
    

Con Edison of New York

   8

ITEM 1A.

  

Risk Factors

   16
    

Con Edison

   16
    

Con Edison of New York

   16

ITEM 1B.

  

Unresolved Staff Comments

   16
    

Con Edison

   None
    

Con Edison of New York

   None

ITEM 2.

  

Properties

   16
    

Con Edison

   16
    

Con Edison of New York

   16
    

O&R

   16

ITEM 3.

  

Legal Proceedings

   17
    

Con Edison

   17
    

Con Edison of New York

   17

ITEM 4.

  

Submission of Matters to a Vote of Security Holders

   None
    

Executive Officers of the Registrant

   21
    

Con Edison

   21
    

Con Edison of New York

   21

PART II

         

ITEM 5.

  

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

   23
    

Con Edison

   23
    

Con Edison of New York

   23

ITEM 6.

  

Selected Financial Data

   24
    

Con Edison

   24
    

Con Edison of New York

   24

ITEM 7.

  

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

   25
    

Con Edison

   25
    

Con Edison of New York

   25

ITEM 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   53
    

Con Edison

   53
    

Con Edison of New York

   53

ITEM 8.

  

Financial Statements and Supplementary Data

   54
    

Con Edison

   56
    

Con Edison of New York

   56

ITEM 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    
    

Con Edison

   None
    

Con Edison of New York

   None

ITEM 9A.

  

Controls and Procedures

   114

ITEM 9B.

  

Other Information

   114

Part III

         

ITEM 10.

  

Directors and Executive Officers of the Registrant

   115

ITEM 11.

  

Executive Compensation

   115

ITEM 12.

  

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

   115

ITEM 13.

  

Certain Relationships and Related Transactions

   115

ITEM 14.

  

Principal Accounting Fees and Services

   115

Part IV

         

ITEM 15.

  

Exhibits and Financial Statement Schedules

   117
    

Signatures

   124

 

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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 and Con Edison of New York

The Utilities

   Con Edison of New York and O&R

Regulatory and State Agencies

    

DEC

   New York State Department of Environmental Conservation

ECAR

   East Central Area Reliability Council

EPA

   Environmental Protection Agency

FERC

   Federal Energy Regulatory Commission

IRS

   Internal Revenue Service

ISO-NE

   ISO New England

NJBPU

   New Jersey Board of Public Utilities

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

COSO

   Committee of Sponsoring Organizations Treadway Commission

DIG

   Derivatives Implementation Group

District Court

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

dths

   Dekatherms

EITF

   Emerging Issues Task Force

EMF

   Electric and magnetic fields

ERRP

   East River Repowering Project

FASB

   Financial Accounting Standards Board

FIN

   FASB Interpretation No.

Fitch

   Fitch Ratings

FSP

   FASB Staff Position

GHG

   Greenhouse gases

kV

   Kilovolts

kWh

   Kilowatt-hour

LILO

   Lease In/Lease Out

LTIP

   Long Term Incentive Plan

MD&A

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

 

4


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Other

    

mdths

  

Thousand dekatherms

MGP Sites

  

Manufactured gas plant sites

mmlbs

   Million pounds

Moody’s

   Moody’s Investors Service

MVA

   Megavolt amperes

MW

   Megawatts or thousand kilowatts

MWH

   Megawatt hour

NYAG

   New York Attorney General

NUGs

   Non-utility generators

OCI

   Other Comprehensive Income

PCBs

   Polychlorinated biphenyls

PPA

   Power purchase agreement

PRP

   Potentially responsible party

RCN

   RCN Corporation

S&P

   Standard & Poor’s Rating Services

SFAS

   Statement of Financial Accounting Standards

SO2

   Sulfur dioxide

SSCM

   Simplified service cost method

Superfund

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

VaR

   Value-at-Risk

VIE

   Variable interest entity

 

5


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PART I

ITEM 1. BUSINESS

 

CONTENTS OF ITEM 1    PAGE

Incorporation By Reference

   7

Available Information

   7

Con Edison

  

Corporate Overview

   7
    

Operating Segments

   7
    

Con Edison of New York

   7
    

O&R

   7
    

Competitive Energy Businesses

   7
    

Regulation

   8
    

Competition

   8
    

Capital Requirements and Financing

   8
    

State Anti-takeover Law

   8
    

Employees

   8

Con Edison

of New York

  

Corporate Overview

  

8

    

Operating Segments

   8
    

Electric Operations

   8
    

Gas Operations

   9
    

Steam Operations

   10
    

Regulation

   10
    

Competition

   10
    

Capital Requirements and Financing

   11
    

Environmental Matters

   11

Operating

Statistics

  

Con Edison of New York

  

12

    

O&R

   14

 

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Incorporation by Reference

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

 

Available Information

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

 

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

 

The Investor Information section of Con Edison’s website also includes the company’s code of ethics (and 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.” As used in this report, the term the “Companies” refers to Con Edison and Con Edison of New York.” Con Edison has no significant business operations other than those of the Utilities and Con Edison’s competitive businesses. See “Corporate Overview” in Item 7.

 

Operating Segments

Con Edison's principal business segments are Con Edison of New York’s regulated electric, gas and steam utility segments, O&R’s regulated electric and gas utility segments and Con Edison’s competitive energy companies. 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.

 

Con Edison of New York

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

 

O&R

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

 

O&R and its utility subsidiaries provide electric service in southeastern New York and in adjacent areas of northern New Jersey and eastern Pennsylvania, an approximately 1,350 square mile service area. They also provide gas service in southeastern New York and adjacent areas of eastern Pennsylvania. O&R's business is subject to regulation by the New York State Public Service Commission (PSC), the New Jersey Board of Public Utilities (NJBPU), the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). Changes in regulation or legislation applicable to O&R could have a material adverse effect on the company's financial position, results of operations or liquidity. O&R's principal business segments are its regulated electric and gas utility businesses. In 2005, electric and gas operating revenues were 72 percent and 28 percent, respectively, of its operating revenues. See “O&R Operating Statistics” below.

 

Competitive Energy Businesses

Con Edison has three competitive energy businesses: 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; and Consolidated Edison Development, Inc. (Con Edison Development), a company that owns and operates generating plants and energy and other infrastructure projects. See “Competitive Energy Businesses” in Item 2 and in “Results of Operations” in Item 7.

 

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Generating capacity owned and retail sales were as follows:

 

    2005   2004   2003   2002   2001

Generating capacity (MW)

  1,668   1,668   1,668   1,003   408

Retail electric volumes sold (MWH)

  9,970,252   6,943,299   6,002,126   4,723,588   3,406,964

 

Regulation

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

 

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

 

Competition

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

 

Capital Requirements and Financing

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

 

State Anti-takeover Law

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

 

Employees

Con Edison has no employees other than those of Con Edison of New York, O&R and Con Edison’s competitive businesses (which at December 31, 2005 had 13,191, 1,026 and 320 employees, respectively).

 

Con Edison of New York

Corporate Overview

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

 

Operating Segments

Con Edison of New York’s principal business segments are its regulated electric, gas and steam businesses. In 2005, electric, gas and steam operating revenues were 75 percent, 18 percent and 7 percent, respectively, of its operating revenues. For a discussion of the company’s operating revenues and operating income for each segment, see “Results of Operations” in Item 7. For additional information about the segments, see Note O to the financial statements in Item 8.

 

Electric Operations

Electric Sales.    Electric operating revenues were $7 billion in 2005 or 75 percent of Con Edison of New York’s operating revenues. The percentages were 77 and 78 percent, respectively, in the two preceding years. In 2005, 51 percent of the electricity delivered by Con Edison of New York in its service area was sold by the company to its full-service customers, 29 percent was sold by other suppliers, including Con Edison Solutions, a competitive energy business of Con Edison, to Con Edison of New York’s customers under its electric retail access program and the balance was delivered to the state and municipal customers of the New York Power Authority (NYPA) and the economic development customers of municipal electric agencies. The company charges its cost for the electricity it sells to full-service customers, and it charges all customers in its service area for the delivery of electricity.

 

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

 

Electric Peak Demand.    The electric peak demand in Con Edison of New York’s service area occurs during the summer air conditioning season. The 2005 service area peak demand, which occurred on July 27, 2005, was 13,059 thousand kilowatts (MW). The 2005 peak demand included an estimated 7,067 MW for Con Edison of New York’s full-service customers, 3,858 MW for customers participating in its electric retail access program and 2,134 MW for NYPA’s customers and municipal electric agency customers. On July 27, 2005, the New York Independent System Operator (NYISO) invoked demand reduction programs. Without these reduction programs, the actual 2005 peak

 

8      


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demand would have been higher. “Design weather” for the electric system is a standard to which the actual peak demand is adjusted for evaluation and planning purposes. Since the majority of demand reduction programs are invoked only in specific circumstances, design conditions do not include these programs’ potential impact. The company estimates that, under design weather conditions, the 2006 service area peak demand will be 13,400 MW, including an estimated 6,875 MW for its full-service customers, 4,355 MW for its electric retail access customers and 2,170 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 2005 was purchased under firm power contracts or through the wholesale electricity market administered by the 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, purchased through the NYISO’s wholesale electricity or generated from its electric generating facilities.

 

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 J to the financial statements in Item 8.

 

For information about the company’s 692 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 a requirement that is set annually by the New York State Reliability Council, the NYISO requires that entities supplying electricity to customers in New York State have generating capacity (either owned or contracted for) in an amount that is at least 18 percent above the expected peak demand 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 a substantial percentage of their New York City customer peak demands. Con Edison of New York met the requirements applicable to it in 2005 and expects to meet them in 2006.

 

The NYISO initiated a Comprehensive Reliability Planning Process in 2005. Its first 10-year assessment indicates potential reliability needs over the period. Such needs will be annually evaluated by the NYISO. The NYISO’s planning process currently requires that such reliability needs must be addressed by transmission owners should they not be met by other mechanisms. In the event that the Utilities are required to address the identified reliability needs, associated project costs are eligible for recovery through the NYISO tariff.

 

Gas Operations

Gas Sales.    Gas operating revenues in 2005 were $1.6 billion or 18 percent of Con Edison of New York’s operating revenues. The percentages were 16 percent in the two preceding years. In 2005, 48 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 52 percent was sold by other suppliers. For additional information about gas sales, see “Con Edison of New York Operating Statistics,” below, and “Results of Operations” in Item 7.

 

Gas Requirements and Peak Demand.    Firm demand for gas in Con Edison of New York’s service area peaks during the winter heating season. The “design criteria” for the company’s gas system assume severe weather conditions, which have not occurred since the 1933-34 winter. Under these criteria, the company estimated that its requirements to deliver gas to firm customers during the November 2005/March 2006 winter heating season would amount to 86,600 mdths (including 73,900 mdths to its firm sales customers and 12,700 mdths to its firm transportation customers). Through January 31, 2006, the company’s peak throughput day in this heating season occurred on January 16, 2006, when it delivered 988 mdths of gas (including 600 mdths to its firm and interruptible sales customers, 39 mdths to NYPA, 229 mdths to its transportation customers and 120 mdths for use by the company in generating electricity and steam).

 

Under its design criteria, the company projects that for the November 2006/March 2007 winter heating season, its requirements for firm gas customers will amount to 87,900 mdths (including 74,300 mdths to firm sales customers and 13,600 mdths to firm transportation customers) and that the peak day requirements for these customers will amount to 1,031 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 PSC. See Note S to the financial statements in Item 8.

 

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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 2010. The Utilities have contracts with interstate pipeline companies for the purchase of firm transportation and storage services. Charges under these contracts are approved by the FERC. The contracts are for various terms extending to 2013. The Utilities are required to pay certain charges under the supply, transportation and storage contracts whether or not the contracted capacity is actually used. These fixed charges amounted to approximately $164 million in 2005. 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 2005, steam operating revenues were $649 million or 7 percent of the company's operating revenues. The percentages were 7 percent and 6 percent, respectively, in the two preceding years.

 

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

 

Steam Peak Demand and Capacity.    Demand for steam in Con Edison of New York’s service area peaks during the winter heating season. The one-hour peak demand during the winter of 2005/2006 (through January 31, 2006) occurred on December 14, 2005 when the demand reached 8.4 million pounds (mmlbs) per hour. The company’s estimate for the winter of 2006/2007 peak demand of its steam customers is 10.6 mmlbs per hour under design criteria, which assume severe weather.

 

On December 31, 2005, the steam system had the capability of delivering about 12.5 mmlbs of steam per hour and Con Edison of New York estimates that the system will have the capability to deliver this capacity in the 2006/2007 winter.

 

Steam Supply.    Fifty-one percent of the steam sold by Con Edison of New York in 2005 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 13 percent was purchased from others. See Item 2 for a discussion of Con Edison of New York’s steam facilities.

 

Regulation

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

 

The PSC from time to time conducts “generic” proceedings to consider issues relating to all electric and gas utilities operating in New York State. Pending proceedings include those relating to utilities exiting the business of selling electric energy and gas at retail (including an examination of utilities’ provider of last resort responsibility and consumer protections) 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.

 

Competition

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

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

 

See “Rate 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 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. A new company would also be subject to extensive ongoing regulation by the PSC.

 

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Capital Requirements and Financing

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

 

Environmental Matters

Hazardous substances, such as asbestos, polychlorinated 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 $90 million in 2005 and are estimated to be $84 million in 2006.

 

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.

 

Operating Statistics

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

 

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Con Edison of New York

Operating Statistics

 

     Year Ended December 31,
     2005      2004      2003      2002      2001

ELECTRIC ENERGY (MWH)

                                

Generated

   2,261,680      1,441,498      1,077,681      1,259,533      6,793,393

Purchased from others

   29,055,402      30,221,137      31,717,254      32,712,723      27,877,154

Total Generated and Purchased

   31,317,082      31,662,635      32,794,935      33,972,256      34,670,547

Less: Used by company

   178,406      168,533      175,965      172,873      187,773

  Distribution losses and other variances

   1,794,724      1,623,682      1,893,403      2,008,530      1,931,694

Net Generated and Purchased

   29,343,952      29,870,420      30,725,567      31,790,853      32,551,080

Electric Energy Sold

                                

Residential

   13,689,870      12,672,847      12,440,663      12,481,689      12,048,743

Commercial and industrial

   15,402,396      16,966,448      18,033,468      19,110,770      19,839,340

Railroads and railways

   16,847      19,308      18,193      55,186      16,003

Public authorities

   234,839      209,699      135,758      125,651      150,069

Con Edison of New York full service customers

   29,343,952      29,868,302      30,628,082      31,773,296      32,054,155

Off-System Sales

   -      2,118      97,485      17,557      496,925

Total Electric Energy Sold

   29,343,952      29,870,420      30,725,567      31,790,853      32,551,080

Electric Energy Delivered

                                

Con Edison of New York full service customers

   29,343,952      29,868,302      30,628,082      31,773,296      32,054,155

Delivery service for retail access customers

   16,847,745      14,143,045      12,636,520      11,925,752      10,520,219

Delivery service to NYPA customers and others

   10,423,616      10,034,301      9,823,018      9,504,526      9,815,259

Delivery service for municipal agencies

   720,757      696,041      647,388      762,660      660,220

Total Deliveries in Franchise Area

   57,336,070      54,741,689      53,735,008      53,966,234      53,049,853

Average Annual KWH Use per Residential Customer (a)

   5,052      4,700      4,622      4,652      4,502

Average Revenue per KWH Sold (Cents)

                                

Residential (a)

   21.1      18.9      19.4      17.0      18.1

Commercial and Industrial (a)

   18.6      16.0      16.3      14.4      15.6

 

(a) Includes Municipal Agency sales.

 

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Con Edison of New York

Operating Statistics – Continued

 

     Year Ended December 31,  
     2005      2004      2003      2002      2001  

GAS (DTH)

                                            

Purchased

     147,855,203        137,605,722        145,325,065        134,126,768        140,633,193  

Storage—net change

     (5,041,321 )      (1,331,154 )      (5,516,703 )      5,728,684        (6,474,137 )

Used as boiler fuel at Electric and Steam Stations

     (35,820,239 )      (29,435,890 )      (27,362,620 )      (29,386,788 )      (27,725,598 )

Gas Purchased for Resale

     106,993,643        106,838,678        112,445,742        110,468,664        106,433,458  

Less: Gas used by the company

     366,780        364,142        383,312        323,915        299,057  

  Off-System Sales & NYPA

     6,449,725        6,062,145        4,007,592        16,120,307        12,666,668  

  Distribution losses and other variances

     2,074,000        2,769,000        4,023,631        4,555,763        (2,887,761 )

Total Gas Purchased for Con Edison of New York Customers

     98,103,138        97,643,391        104,031,207        89,468,679        96,355,494  

Gas Sold

                                            

Firm Sales

                                            

Residential

     48,175,004        48,569,514        51,943,706        44,162,920        46,506,365  

General

     36,800,299        35,886,544        36,840,304        32,681,926        35,118,342  

Total Firm Sales

     84,975,303        84,456,058        88,784,010        76,844,846        81,624,707  

Interruptible Sales

     13,127,835        13,187,333        15,247,197        12,623,833        14,730,787  

Total Gas Sold to Con Edison of New York Customers

     98,103,138        97,643,391        104,031,207        89,468,679        96,355,494  

Transportation of customer-owned gas

                                            

Firm transportation

     19,087,650        16,795,124        16,485,309        15,695,403        14,279,816  

NYPA

     22,305,249        18,622,910        23,360,162        25,466,325        13,762,339  

Other

     66,667,025        63,306,409        61,575,954        99,815,203        78,709,049  

Off-System Sales

     127,696        266,907        459,088        8,354,940        6,206,522  

Total Sales and Transportation

     206,290,758        196,634,741        205,911,720        238,800,550        209,313,220  

Average Revenue per DTH Sold

                                            

Residential

   $ 16.94      $ 13.94      $ 13.02      $ 12.30      $ 14.25  

General

   $ 13.41      $ 10.75      $ 10.23      $ 8.90      $ 10.76  

Steam Sold (MLBS)

     26,876,883        26,128,644        26,248,361        24,519,476        25,327,694  

Average Revenue per MLB Sold

   $ 22.77      $ 20.34      $ 19.47      $ 15.52      $ 18.86  

Customers – Average for Year

                                            

Electric

     3,176,355        3,152,023        3,137,301        3,117,542        3,100,642  

Gas

     1,054,981        1,053,698        1,053,946        1,054,312        1,051,540  

Steam

     1,796        1,811        1,825        1,838        1,853  

 

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O&R

Operating Statistics

 

     Year Ended December 31,
     2005     2004      2003      2002      2001

ELECTRIC ENERGY (MWH)

                               

Total Purchased

   4,348,953     4,113,111      4,388,804      4,506,217      4,565,551

Less: Supplied without direct charge

   -     7      11      9      6

Used by company

   15,068     14,174      15,511      13,435      14,572

Distribution losses and other variances

   38,585 (a)   217,036      215,615      173,397      101,461

Net Purchased

   4,295,300     3,881,894      4,157,667      4,319,376      4,449,512

Electric Energy Sold

                               

Residential

   1,904,884     1,729,095      1,769,421      1,815,241      1,772,552

Commercial and industrial

   2,276,161     2,045,800      2,276,973      2,393,039      2,566,651

Public authorities

   114,255     106,999      111,273      111,096      110,309

Total Electric Energy Sold

   4,295,300     3,881,894      4,157,667      4,319,376      4,449,512

Total deliveries to Orange & Rockland customers

   4,295,300     3,881,894      4,157,667      4,319,376      4,449,512

Delivery service for Retail Choice customers

   1,835,948     1,860,661      1,454,794      1,235,048      798,814

Total Deliveries in Franchise Area

   6,131,248     5,742,555      5,612,461      5,554,424      5,248,326

Average Annual KWH Use per Residential Customer

   9,657     8,818      8,955      8,801      8,506

Average Revenue per KWH Sold (Cents)

                               

Residential

   13.34     12.35      12.17      11.23      12.79

Commercial and Industrial

   10.90     9.89      9.81      8.65      10.04

 

(a) Includes one-time unbilled revenue adjustment of 89,331 MWH recorded in March 2005.

 

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O&R

Operating Statistics – Continued

 

     Year Ended December 31,
     2005    2004    2003    2002     2001

GAS (DTH)

                                   

Purchased

     15,208,262      15,732,315      16,546,568      19,723,917       18,588,275

Storage – net change

     121,547      373,271      1,112,011      (2,139,045 )     854,482

Gas Purchased for Resale

     15,329,809      16,105,586      17,658,579      17,584,872       19,442,757

Less: Gas used by the company

     48,410      58,823      52,377      56,939       45,979

  Distribution losses and other variances

     727,243      1,017,134      376,605      856,036       578,187

Total Gas Purchased for O&R Customers

     14,554,156      15,029,629      17,229,597      16,671,897       18,818,591

Gas Sold

                                   

Firm Sales

                                   

Residential

     9,306,592      9,486,765      10,810,384      10,203,403       11,724,341

General

     2,269,207      2,487,197      3,314,154      3,294,624       3,750,851

Total Firm Sales

     11,575,799      11,973,962      14,124,538      13,498,027       15,475,192

Interruptible Sales

     2,978,357      3,055,667      3,105,059      3,173,870       3,343,399

Total Gas Sold to O&R Customers

     14,554,156      15,029,629      17,229,597      16,671,897       18,818,591

Transportation of customer-owned gas

                                   

Firm transportation

     9,840,507      9,930,731      8,497,814      6,367,990       4,723,695

Interruptible transportation

     3,480,376      3,940,332      3,728,018      4,192,062       3,920,901

Sales for resale

     1,072,111      1,067,953      1,133,649      1,057,156       1,039,083

Sales to electric generating stations

     1,433,891      659,449      2,833,322      13,983,048       11,427,428

Off-System Sales

     172,458      53,692      373,686      2,883,913       2,526,829

Total Sales and Transportation

     30,553,499      30,681,786      33,796,086      45,156,066       42,456,527

Average Revenue per DTH Sold

                                   

Residential

   $ 14.07    $ 11.84    $ 10.41    $ 8.29     $ 10.29

General

   $ 13.37    $ 11.27    $ 10.00    $ 7.87     $ 9.73

Customers – Average for Year

                                   

Electric

     293,245      290,905      288,746      285,519       282,191

Gas

     124,591      123,505      122,565      121,437       120,108

 

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ITEM 1A. RISK FACTORS

Con Edison

For information about the risk factors of Con Edison, see “Risk Factors” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 (which information is incorporated herein by reference).

 

Con Edison of New York

For information about the risk factors of Con Edison of New York, see “Risk Factors” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 (which information is incorporated herein by reference).

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

Con Edison

None.

 

Con Edison of New York

None.

 

ITEM 2. PROPERTIES

Con Edison

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

 

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

 

Con Edison of New York

Electric Facilities

Generating Facilities.    Con Edison of New York’s electric generating facilities consist of plants located in New York City with an aggregate capacity of 692 MW. The company expects to have sufficient amounts of gas and fuel oil available in 2006 for use in these facilities. This includes the company’s East River Repowering Project, which commenced commercial operations in April 2005 and added electric capacity of 292 MW based on a summer rating. Also in 2005, the company retired its Waterside generating station, reducing its electric capacity by 167 MW.

 

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, 2005, 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 16,000 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, 2005, the company’s distribution system had a transformer capacity of 26,656 MVA, with 36,047 miles of overhead distribution lines and 93,612 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 4,297 miles of mains and 378,693 service lines. The company owns a natural gas liquefaction facility and storage tank at its Astoria property in Queens, New York. The plant can store approximately 1,000 mdths of which a maximum of about 250 mdths can be withdrawn per day. The company has about 1,230 mdths of additional natural gas storage capacity at a field in upstate New York, owned and operated by Honeoye Storage Corporation, a corporation 28.8 percent owned by Con Edison of New York.

 

Steam Facilities

Con Edison of New York generates steam 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.

 

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 3,568 MVA), 61 distribution substations (with a transformer capacity of 2,435 MVA), 95,780 in-service line transformers, 3,632 pole miles of overhead distribution lines and 1,485 miles of underground distribution lines. O&R’s transmission system is part of the NYISO system except that portions of RECO’s system are located with the transmission area controlled by the Pennsylvania-Jersey-Maryland Independent System Operator.

 

Gas Facilities

O&R and Pike own their gas distribution systems, which include 1,820 miles of mains. In addition, O&R owns and maintains a gas transmission system, which includes 66 miles of mains.

 

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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.

 

Competitive Energy Businesses

Con Edison Development, an unregulated subsidiary of Con Edison, owns and leases 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, 2005 amounted to $806 million (net of accumulated depreciation), are as follows:

 

Name   

Power Plant Type

Base/Peak/Intermediate

   Power Pool/Location   

Aggregate Capacity

(in MW)

 

Newington(a)

  

Base

  

ISO-NE/New Hampshire

   525  

ADA

  

Base

  

ECAR/Michigan

   29 (b)

Total Base Capacity

             554  

GENOR

  

Intermediate

  

Central America/Guatemala

   42  

CEEMI

  

Intermediate

  

ISO-NE/Massachusetts

   125  

Lakewood

  

Intermediate

  

PJM/New Jersey

   236 (c)

Total Intermediate Capacity

        403  

CEEMI

  

Peaking

  

ISO-NE/Massachusetts

   156  

Ocean Peaking

  

Peaking

  

PJM/New Jersey

   330  

Rock Springs

  

Peaking

  

PJM/Maryland

   335  

Total Peaking Capacity

             821  

Total Capacity

             1,778 (d)

 

(a) Leased pursuant to a consolidated lease transaction. See Note Q to the financial statements in Item 8.
(b) Subject to a power purchase agreement expiring in 2026.
(c) Subject to a power purchase agreement expiring in 2014.
(d) 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, 2005 amounted to $52 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’s underground conduits and other rights of way. Con Edison Communications pays fees for the use of the conduits and rights of way.

 

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 H 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 and other Superfund sites discussed below. There may be additional sites as to which assertions will be made that the company has

 

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liability. For a further discussion of claims and possible claims against the company under Superfund, including with respect to its manufactured gas sites, estimated liability accrued for Superfund claims and recovery from customers of site investigation and remediation costs, see Note G to the financial statements in Item 8 (which information is incorporated herein by reference).

 

Manufactured Gas Sites.    Con Edison of New York and its predecessors formerly manufactured gas and maintained storage holders for manufactured gas at sites in New York City and Westchester County (MGP Sites). Many of these sites are now owned by parties other than Con Edison of New York and have been redeveloped by them for other uses, including schools, residential and commercial developments and hospitals. The New York State Department of Environmental Conservation (DEC) is requiring the company to investigate, and if necessary, develop and implement remediation programs for the sites, which include 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. Through the end of 2005, investigations of all or portions of 30 of the MGP Sites have been started and have been completed at ten of the sites. Coal tar and/or other manufactured gas plant-related environmental contaminants have been detected at 24 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 $21 million.

 

Arthur Kill Site.    Following a September 1998 transformer fire at Con Edison of New York's former Arthur Kill Generating Station, it was determined that oil containing high levels of PCBs was released to the environment during the incident. The company has completed DEC-approved cleanup programs for the station's facilities and various soil and pavement areas of the site affected by the PCB release. Pursuant to a July 1999 DEC consent order, the company completed a DEC-approved assessment of the nature and extent of the contamination in, 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 entered into during 2005. The company estimates that its undiscounted potential liability for the cleanup of PCB contamination at the site will be approximately $3.4 million. See “Con Edison of New York – Environmental Matters” in Item 1.

 

Flushing Service Center Site.    The owner of a former Con Edison of New York service center facility in Flushing, New York, has informed the company that PCB contamination has been detected on a substantial portion of the property, which the owner plans to investigate, remediate, and redevelop for residential and commercial use pursuant to the New York Brownfield Cleanup Program administered by the DEC. In late 2005, the property owner claimed that the costs of investigation and remediation will be approximately $34 million and has demanded that the company pay these costs.

 

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.

 

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The following table lists each of Con Edison of New York’s other Superfund sites for which the company anticipates it may have a liability. The table also shows for each such site, its location, the year in which the company was designated or alleged to be a PRP or to otherwise have responsibilities with respect to the site (shown in table under “Start”), the name of the court or agency in which proceedings with respect to the site are pending, and the company’s current estimate of its 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        280,000      100%

Metal Bank of America

     Philadelphia, PA      1987      EPA        113,000      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        2,000,000      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.

 

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 I to the financial statements (which information is incorporated herein by reference).

 

O&R

Asbestos

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

 

Superfund

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

 

Manufactured Gas Sites.    O&R and its predecessors formerly owned and operated manufactured gas plants at seven sites (O&R MGP Sites) in Orange County and Rockland County, New York. 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 completed remedial investigations at five of its seven MGP Sites and will complete investigation of the remaining two sites in 2006. O&R has completed the remediation at one of its sites and has received DEC’s decision regarding the remedial work to be done at another site. Since the latter site is Company- owned and has no off-site impacts, remediation of this site has been deferred, with DEC’s concurrence, until approximately 2010. O&R is currently implementing remediation at its Nyack MGP site.

 

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 has requested an additional groundwater investigation and an on-site vapor intrusion study.

 

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      $ 25,000      4.6 %

Borne Chemical

     Elizabeth, NJ    1997      EPA        94,000      1.7 %

Orange County Landfill

     Goshen, NY    2000      NYAG        250,000      (b)  

Ramapo Landfill

     Ramapo, NY    2000      NYAG        99,014      (c)  

Clarkstown Landfill

     Clarkstown, NY    2003      NYAG        60,000      (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.
(c) Settled.

 

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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 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, other than Mr. McGrath, is until the next election of directors (trustees) of their company and until his or her successor is chosen and qualifies. Effective February 28, 2006, Mr. McGrath will retire, and be succeeded by Mr. Burke, as Chairman of the Boards of Con Edison and Con Edison of New York. Officers are subject to removal at any time by the board of directors (trustees) of their company. Messrs. Burke and McMahon and Ms. Freilich have employment agreements with Con Edison, which provide for them to serve in their present positions through February 28, 2007, December 31, 2008, August 31, 2007 and December 1, 2006, respectively. The employment agreements for Messrs., Burke and McMahon provide for automatic one-year extensions of their term, unless notice to the contrary is received six months prior to the end of the term.

 

Name    Age    Offices and Positions During Past Five Years

Executive Officers of Con Edison and Con Edison of New York

Eugene R. McGrath

   64   

9/05 to present – Chairman of the Board and Director of Con Edison and Trustee of Con Edison of New York

10/97 to 8/05 – Chairman, President, Chief Executive Officer and Director of Con Edison

3/98 to 8/05 – Chairman, Chief Executive Officer and Trustee of Con Edison of New York

Kevin Burke

   55   

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

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

Joan S. Freilich

   64   

9/05 to present – Vice Chairman of Con Edison and Con Edison of New York

3/98 to 8/05 – Executive Vice President, Chief Financial Officer and Director of Con Edison and Trustee of Con Edison of New York

Louis L. Rana

   57   

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

2/03 to 8/05 – 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

Robert N. Hoglund

   44   

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

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

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

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

Frances A. Resheske

   45   

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.

   61   

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

   57   

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

Hyman Schoenblum

   57   

12/00 to present – Vice President – Corporate Planning of Con Edison of New York

Joseph P. Oates

   44   

4/04 to present – Vice President and Treasurer of Con Edison and Con Edison of New York

1/04 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

7/01 to 11/03 – Vice President – Energy Management of Con Edison of New York

2/01 to 07/01 – Director – Direct Report to the Senior Vice President of Central Operations of Con Edison of New York

4/99 to 02/01 – Project Manager – Corporate Planning of Con Edison of New York

 

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Name    Age    Offices and Positions During Past Five Years

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

Stephen B. Bram

   63   

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

John D. McMahon

   54   

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)

Marilyn Caselli

   51   

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

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

Mary Jane McCartney

   57   

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

John F. Miksad

   46   

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

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

1/00 to 1/03 – Chief Engineer – Distribution Engineering

Robert A. Saya

   64   

9/01 to present – Senior Vice President – Central Operations

4/00 to 8/01 – Vice President – System and Transmission Operations

Luther Tai

   57   

9/01 to present – Senior Vice President – Central Services

9/00 to 8/01 – Senior Vice President – Central 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, 2006, there were 80,997 holders of record of Con Edison’s Common Shares.

 

The market price range for Con Edison’s Common Shares during 2005 and 2004, as reported in the consolidated reporting system, and the dividends paid by Con Edison in 2005 and 2004 were as follows:

 

    2005   2004
    High   Low   Dividends
Paid
  High   Low   Dividends
Paid

1st Quarter

  $44.71   $41.10   $0.57   $45.01   $42.21   $0.565

2nd Quarter

  $47.23   $41.50   $0.57   $44.25   $37.23   $0.565

3rd Quarter

  $49.29   $45.60   $0.57   $42.90   $39.12   $0.565

4th Quarter

  $49.10   $43.70   $0.57   $45.59   $42.09   $0.565

 

On January 26, 2006, Con Edison’s Board of Directors declared a quarterly dividend of 57 1/2 cents per Common Share. The first quarter 2006 dividend will be paid on March 15, 2006.

 

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).

 

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 2005 and 2004 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).

 

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ITEM 6. SELECTED FINANCIAL DATA

Con Edison

 

     For the Year Ended December 31,  
(Millions of Dollars)    2005      2004      2003      2002      2001  

Operating revenues

   $ 11,690      $ 9,758 *    $ 9,808      $ 8,498      $ 9,389  

Purchased power

     4,743        3,960        3,884        3,201        3,380  

Fuel

     816        597        504        289        394  

Gas purchased for resale

     1,155        852        889        596        860  

Operating income

     1,158        931        1,044        1,078        1,141  

Income from continuing operations

     732        549        634        689        694  

Loss from discontinued operations

     (13 )      (12 )      (109 )      (21 )      (12 )

Income before cumulative effect of changes in accounting principles

     719        537        525        668        682  

Cumulative effect of changes in accounting principles

     -        -        3        (22 )      -  

Net income

     719        537        528        646        682  

Total assets

     24,850        22,560        20,966        19,667        17,901  

Long-term debt

     7,398        6,561        6,733        6,166        5,501  

Preferred stock of subsidiary subject to mandatory redemption

     -        -        -        -        37  

Common shareholders’ equity

     7,310        7,054        6,423        5,921        5,666  

Basic earnings per share

                                            

Continuing operations

   $ 3.00      $ 2.33      $ 2.87      $ 3.24      $ 3.28  

Discontinued operations

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

Before cumulative effect of changes in accounting principles

   $ 2.95      $ 2.28      $ 2.37      $ 3.14      $ 3.22  

Cumulative effect of changes in accounting principles

     -        -      $ 0.02      $ (0.11 )      -  

Net Income

   $ 2.95      $ 2.28      $ 2.39      $ 3.03      $ 3.22  

Diluted earnings per share

                                            

Continuing operations

   $ 2.99      $ 2.32      $ 2.86      $ 3.23      $ 3.27  

Discontinued operations

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

Before cumulative effect of changes in accounting principles

   $ 2.94      $ 2.27      $ 2.36      $ 3.13      $ 3.21  

Cumulative effect of changes in accounting principles

     -        -      $ 0.02      $ (0.11 )      -  

Net income

   $ 2.94      $ 2.27      $ 2.38      $ 3.02      $ 3.21  

Cash dividends per common share

   $ 2.28      $ 2.26      $ 2.24      $ 2.22      $ 2.20  

Average common shares outstanding (millions)

     244        236        221        213        212  

 

* Reflects 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,
(Millions of Dollars)    2005    2004      2003    2002    2001
      

Operating revenues

   $ 9,272    $ 8,006 *    $ 8,166    $ 7,224    $ 8,122

Purchased power

     3,367      3,064        3,124      2,622      2,819

Fuel

     526      404        358      232      351

Gas purchased for resale

     965      709        715      472      666

Operating income

     1,041      825        942      954      1,047

Net income for common stock

     694      518        591      605      649

Total assets

     21,146      19,244        17,764      16,837      15,347

Long-term debt

     6,055      5,235        5,435      5,392      5,012

Preferred stock subject to mandatory redemption

     -      -        -      -      37

Common shareholder’s equity

     6,437      6,116        5,482      4,890      4,666

 

* Reflects $124 million pre-tax charge 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 AND CON EDISON OF NEW YORK)

 

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

 

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

 

Corporate Overview

Con Edison’s principal business operations are those of its utility companies, Con Edison of New York and Orange and Rockland Utilities, Inc. (O&R), together known as the “Utilities.” Con Edison also has competitive businesses that compete primarily in energy-related businesses (see “Competitive Energy Businesses,” below).

 

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

    Twelve months ended
December 31, 2005
  At
December 31,
2005
(Millions of Dollars)   Operating
Revenues
  Net Income   Assets

Con Edison of New York

  $ 9,272     79%   $ 694     97 %       $ 21,146   85%

O&R

    824     7%     49     7 %         1,588   6%
Total Utilities     10,096     86%     743     104 %         22,734   91%

Con Edison Development

    512     4%     (6 )   (1)%         1,240   5%

Con Edison Energy

    52     1%     2     - %         208   1%

Con Edison Solutions

    1,040     9%     5     1 %         139   1%

Other (a)

    (10 )   -%     (12 )   (2)%         469   2%

Total continuing operations

    11,690     100%     732     102 %         24,790   100%

Discontinued operations (b)

    -     -%     (13 )   (2)%         60   -%
Total Con Edison   $ 11,690     100%   $ 719     100 %       $ 24,850   100%

 

(a) Represents inter-company and parent company accounting.
(b) Represents the discontinued operations of Con Edison Communications.

 

Con Edison’s net income for common stock in 2005 was $719 million or $2.95 a share. Net income for common stock in 2004 and 2003 was $537 million or $2.28 a share and $528 million or $2.39 a share, respectively. The 2005 results reflect increased energy sales and deliveries, the electric rate plan that took effect in April 2005 and the gas and steam rate plans that took effect in October 2004. See “Results of Operations – Summary,” below.

 

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

 

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

 

Regulated Utilities

Con Edison of New York provides electric service to approximately 3.2 million customers and gas service to approximately 1.1 million customers in New York City and Westchester County. The company also provides steam service in parts of Manhattan. O&R, along with its regulated utility businesses, provides electric service to approximately 0.3 million customers in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service to over 0.1 million customers in southeastern New York and adjacent areas of eastern Pennsylvania.

 

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

 

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

 

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 demand adjusted to summer design weather conditions, as well as forecast growth in peak usage.

 

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

 

The Utilities had estimated prior to the summer of 2005 that, under design weather conditions, the 2005 peak electric demand in their respective service areas would be 13,025 MW for Con Edison of New York and 1,500 MW for O&R. On July 27, 2005, the electric demands served by the Utilities reached new record peaks, 13,059 MW for Con Edison of New York, and 1,539 MW for O&R. The higher-than-forecasted demands were primarily due to increased customer demand and actual temperatures that were slightly higher than those used in developing the forecast. Also, on July 27, 2005, the NYISO invoked demand reduction programs. Without these reduction programs, the experienced peak demands would have been higher.

 

The average annual growth rate of the peak electric demand over the next five years at design conditions is estimated to be approximately 1.5 percent for Con Edison of New York and 2.7 percent for O&R. Since demand reduction programs are invoked only in specific circumstances, design conditions do not include their potential impact. The Companies anticipate an ongoing need for substantial capital investment in order to meet this growth in peak usage with the high level of reliability that the Utilities currently provide (see “Liquidity and Capital Resources – Capital Requirements,” below).

 

The Utilities have rate plans approved by state utility regulators that cover the rates they can charge their customers. Con Edison of New York’s electric, gas and steam rate plans are effective through March 31, 2008, September 30, 2007 and September 30, 2006, respectively. The company has filed a request for a new steam rate plan to be effective October 1, 2006. O&R has rate plans for its electric and gas services in New York that extend through October 31, 2006. O&R has filed a request for a new gas rate plan to be effective November 1, 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, for specified increases provided in the rate plans and for 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 and subject to provisions in the rate plans for sharing above-target earnings with customers). See “Regulatory Matters” below and “Recoverable Energy Costs” and “Rate and Restructuring Agreements” in Notes A and B, respectively, to the financial statements.

 

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

 

Competitive Energy Businesses

Con Edison’s competitive energy businesses 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 certain generating assets in 2003. See “Application of Critical Accounting Policies,” below. At December 31, 2005, Con Edison’s investment in its competitive energy businesses was $543 million and their assets amounted to $1.6 billion.

 

Consolidated Edison Solutions, Inc. (Con Edison Solutions) sells electricity to delivery customers of the Utilities and other utilities primarily in the Northeast and Mid-Atlantic regions and also offers energy related services. The company sold approximately 10 million megawatt hours of electricity to customers in 2005.

 

Consolidated Edison Development, Inc. (Con Edison Development) owns and operates generating plants and participates in other infrastructure projects. At December 31, 2005, the company owned the equivalent of 1,668 MW of capacity in electric generating facilities of which 203 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.

 

Over the next two years the competitive energy businesses will focus on increasing their customer base, gross margins and the value of their existing assets. See “Liquidity and Capital Resources – Capital Requirements” and “Capital Resources,” below.

 

Discontinued Operations

In December 2005, Con Edison signed an agreement to sell Con Edison Communications, LLC (Con Edison Communications) to RCN Corporation. See Note U to the financial statements.

 

Results of Operations – Summary

Con Edison’s earnings per share in 2005 were $2.95 ($2.94 on a diluted basis). In 2004, earnings per share were $2.28 ($2.27 on a diluted basis). Earnings per share in 2003 were $2.39 ($2.38 on a diluted basis).

 

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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

 

Net income for the years ended December 31, 2005, 2004 and 2003 was as follows:

 

(Millions of Dollars)   2005     2004      2003  

Con Edison of New York

  $ 694     $ 518 (a)    $ 591  

O&R

    49       46        45  

Con Edison Development

    (6 )     (4 )      (9 )(b)

Con Edison Energy

    2       -        1  

Con Edison Solutions

    5       3        19  

Other (c)

    (12 )     (14 )      (10 )

Total continuing operations

    732       549        637  

Discontinued operations (d)

    (13 )(e)     (12 )      (109 )(e)

Con Edison

  $ 719     $ 537      $ 528  

 

(a) Net income for Con Edison of New York in 2004 includes charges totaling $80 million after tax in accordance with Con Edison of New York’s electric, gas and steam rate plans. See Note B to the financial statements.
(b) Net income for Con Edison Development includes a charge for the impairment of two combustion turbines and a generation investment totaling $10 million after tax. It 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.
(c) Other consists of inter-company and parent company accounting including interest expense on debt and the related income tax expense.
(d) Discontinued operations represent Con Edison Communications operations. See Note U to the financial statements.
(e) Net income from discontinued operations includes charges for the impairment of Con Edison Communications assets in accordance with SFAS No. 144 of $5 million and $84 million after tax in 2005 and 2003, respectively.

 

Con Edison’s net income in 2005 was $182 million higher than in 2004, reflecting the following factors (after tax, in millions):

 

Con Edison of New York:

        

Impact of weather in 2005 on net revenues versus 2004 (estimated)

   $ 40  

Sales growth (estimated)

     37  

Electric rate plan (estimated)

     170  

Gas rate plan (estimated)

     33  

Steam rate plan (estimated)

     47  

Increased pension and other post-retirement benefits costs

     (45 )

Higher depreciation and property tax expense

     (88 )

Higher operations and maintenance expense

     (61 )

Allowance for funds used during construction

     (26 )

2004 non-cash rate plan charges

     80  

Other

     (11 )

Total Con Edison of New York

     176  

O&R

     3  

Competitive energy businesses including parent company

     4  

Loss on discontinued operations, including impairment recognized in 2005

     (1 )

Total

   $ 182  

 

Con Edison’s net income in 2004 was $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 pension 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  

Competitive energy businesses including parent company

     (23 )

Competitive generating asset impairments

     10  

Loss on discontinued operations, including impairment recognized in 2003

     97  

Cumulative effect of changes in accounting principles

     (3 )

Total

   $ 9  

 

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

 

Risk Factors

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

 

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

 

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

 

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

 

Energy Market Prices Have Increased Significantly – The impact of higher energy market prices on the Companies is mitigated by their energy management policies and rate provisions pursuant to which the Utilities recover energy supply costs. However, higher energy market prices are resulting in significant increases in energy costs billed to customers that could result in decreased energy usage. If this were to occur, the Companies would have decreased energy delivery revenues. The higher prices of electricity, fuel oil and gas could also affect the value of Con Edison’s competitive energy businesses’ generating facilities.

 

The Utilities Have A Substantial Ongoing Utility Construction Program – The Utilities estimate that their construction expenditures will exceed $5.3 billion over 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 the Utilities’ ability to meet their customers’ growing energy needs with the high level of reliability that they currently provide. The Utilities expect to use internally-generated funds, equity contributions from Con Edison and external borrowing to fund the construction expenditures. Changes in capital market conditions or in the Companies’ credit ratings could adversely affect their ability and their cost to borrow funds. The Companies’ commercial paper and unsecured debt are rated by Moody’s Investors Services, Inc. (Moody’s), Standard & Poor’s Ratings Services (S&P) and Fitch Ratings (Fitch). The current ratings are shown in “Liquidity and Capital Resources—Capital Resources,” below.

 

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

 

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

 

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

 

Con Edison Is Engaged In A Material Legal Proceeding With Northeast Utilities – In 2001, Con Edison sued Northeast Utilities to recover damages from its breach of the merger agreement with them and to seek the court’s declaration that Con Edison had no further obligations under the merger agreement. Northeast Utilities alleges Con Edison breached the merger

 

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agreement and has been pursuing a counter-claim against Con Edison for damages in excess of $1.2 billion. There are also claims by purported classes of Northeast Utilities shareholders seeking damages from Con Edison that the company believes to be substantially duplicative of those sought by Northeast Utilities. See Note H to the financial statements.

 

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

 

The Companies Are Subject To Extensive Government Regulation And Taxation – The Companies’ operations require numerous permits, approvals and certificates from various federal, state and local governmental agencies. The Companies’ federal income tax returns reflect certain tax positions with which the Internal Revenue Service, which has completed its audits of the tax returns through 1996, does not or may not agree. See Notes K and M to the financial statements. The Companies may be subject to new laws or regulations or the revision or reinterpretation of existing laws or regulations which could have a material adverse effect on the Companies.

 

The Companies Face Weather And Other Risks That Are Beyond Their Control – The Companies’ 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 the Companies’ facilities and 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 the Companies’ revenues and earnings and limit the Companies’ 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.

 

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

 

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

 

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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, 2005, the regulatory assets for Con Edison and Con Edison of New York were $2.2 billion and $2.0 billion, respectively.

 

Accounting for Pensions and Other Postretirement Benefits

The Utilities provide pensions and other postretirement benefits to substantially all of their employees and retirees. Con Edison’s competitive businesses 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, discount rates, health care cost trends and future compensation. 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 2005, 2004 and 2003.

 

Primarily because of the amortization of previous years’ net investment gains, Con Edison of New York’s pension expense for 2005, 2004 and 2003 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 State 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 and Con Edison of New York’s current estimates for 2006 are increases, compared with 2005, in their pension and other postretirement benefits cost of $74 million and $67 million, respectively. The increases reflect the amortization of prior period actuarial losses associated with declines in the market value of assets in recent years, a change in the discount rate assumption from 5.9 percent in 2005 to 5.7 percent in 2006 and a decrease in the expected return on plan assets from 8.8 percent in 2005 to 8.5 percent in 2006. Generally, to the extent pension and other postretirement benefit costs vary from the amounts reflected in rates for such costs, the difference will be deferred in accordance with current rate agreements. See Note B to the financial statements.

 

Amortization of market gains and losses experienced in previous years is expected to increase Con Edison’s and Con Edison of New York’s pension and other postretirement benefit costs by an additional $12 million in 2007. A 5.0 percentage point variation in the actual annual return in 2006, as compared with the expected annual asset return of 8.5 percent would change pension and other postretirement benefit costs for Con Edison and Con Edison of New York by approximately $15 million in 2007.

 

The discount rate is determined using a model to match the durations of highly rated (Aa and Aaa, by Moody’s) corporate bonds with the projected stream of benefit payments. Due to declines in bond yields and interest rates, the company reduced the discount rate used to calculate 2005 pension and other postretirement benefit costs to 5.9% compared to 6.3% and 6.75% in 2004 and 2003, respectively.

 

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

 

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The following table illustrates the effect on 2005 pension and other postretirement costs of changing the critical actuarial assumptions discussed above, while holding all other actuarial assumptions constant:

 

Actuarial
Assumption
   Change in
Assumption
    Pension   

Other

Postretirement

Benefits

   Total
     (Millions of Dollars)

Increase in accounting cost:

Discount rate

                          

Con Edison

   (0.25 %)   $ 28    $ 3    $ 31

Con Edison of New York

   (0.25 %)   $ 26    $ 2    $ 28

Expected return on plan assets

                          

Con Edison

   (0.25 %)   $ 18    $ 2    $ 20

Con Edison of New York

   (0.25 %)   $ 18    $ 2    $ 20

Health care trend rate

                          

Con Edison

   1.00 %     N/A    $ 3    $ 3

Con Edison of New York

   1.00 %     N/A    $ 1    $ 1

Increase in projected benefit obligation:

Discount rate

                          

Con Edison

   (0.25 %)   $ 268    $ 39    $ 307

Con Edison of New York

   (0.25 %)   $ 250    $ 34    $ 284

Health care trend rate

                          

Con Edison

   1.00 %     N/A    $ 36    $ 36

Con Edison of New York

   1.00 %     N/A    $ 17    $ 17

 

Pension benefits are provided through a pension plan maintained by Con Edison to which Con Edison of New York, O&R and the competitive businesses make contributions for their participating employees. Pension accounting by the Utilities includes an allocation of plan assets. An actuarial valuation of Con Edison’s and Con Edison of New York’s plan funded status as of December 31, 2005, showed that the fair value of the plan’s assets exceeded the plan’s accumulated benefit obligation (ABO) by $214 million and $418, respectively, 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 Companies 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 2005 under funding regulations and tax laws. However, Con Edison of New York, O&R and Con Edison’s competitive businesses made discretionary contributions of $2 million, $31 million and $1 million, respectively, to the plan in 2005. In 2006, Con Edison of New York, O&R and Con Edison’s competitive businesses expect to make discretionary contributions of $34 million, $35 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 more future events occur or fail to occur. Known material contingencies, which are described in the notes to the financial statements, include the Utilities’ responsibility for hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar that have been used or generated in the course of operations (Note G); certain tax matters (Notes K and M); legal proceedings relating to Con Edison’s 1999 merger agreement with Northeast Utilities (Note H); and other contingencies (Note I). 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 these contingencies would not impact earnings.

 

Accounting for Long-Lived Assets

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

 

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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 competitive businesses test their assets for impairment whenever events indicate that their carrying amount might not be recoverable. 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 all possible outcomes must be weighted. 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 result in an impairment charge. 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 competitive telecommunications and generation businesses. No impairments were identified by the 2004 tests. As a result of the 2005 tests, Con Edison recognized impairment charges of $9 million ($5 million after tax) with respect to its telecommunications assets. In order to establish the fair value of the assets, the agreement to sell Con Edison Communications to RCN for $32 million was used. See Note U to the financial statements.

 

Accounting for Goodwill

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” Con Edison is required to annually test goodwill for impairment. See Note 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.

 

The goodwill of $406 million at December 31, 2005, was most recently tested for impairment during the first quarter of 2005. 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 based primarily on 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 Derivative Instruments

The Companies apply SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and other related accounting pronouncements to their derivative financial instruments. The Companies use derivative financial instruments to hedge market price fluctuations in related underlying transactions for the physical purchase and sale of electricity and gas and interest rate risk on certain debt securities. The Utilities are permitted by their respective regulators to reflect in rates all reasonably incurred gains and losses on these instruments. See “Financial and Commodity Market Risks,” below and Note 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. Substantially all of the estimated gains or losses are based on prices supplied by external sources such as the fair value of exchange traded futures and options and the fair value of positions for which price quotations are available through or derived from brokers or other market sources.

 

Accounting for Leases

The Companies apply SFAS No. 13, “Accounting for Leases” and other related pronouncements to their leasing transactions. See Note K to the financial statements for information about Con Edison Development’s “Lease In/Lease Out” or LILO transactions, a disallowance of tax losses by the Internal Revenue Service and a possible future charge to earnings. In accordance with SFAS No. 13, Con Edison accounted for the two LILO transactions as leveraged leases. Accordingly, the company’s investment in these leases, net of non-recourse debt, is carried as a single amount in Con Edison’s consolidated balance sheet and income is recognized pursuant to a method that incorporates a level rate of return for those years when net investment in the lease is positive, based upon the after-tax cash flows projected at the inception of the leveraged leases.

 

Liquidity and Capital Resources

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

 

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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 2004 and 2003, 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, most of the proceeds of which were invested in its competitive businesses.

 

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

 

Con Edison of New York’s expenditures have included approximately $513 million related to the 2001 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 $93 million from the federal government and is pursuing further reimbursement of such costs. See Note I to the financial statements.

 

The Companies’ current liabilities exceeded their current assets at December 31, 2005, 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 funds from long-term financings and operating activities. The Utilities’ cost of capital, including working capital, is reflected in the rates they charge to their customers.

 

Each of the Companies believes that it will be able to meet its reasonably likely short-term and long-term cash requirements. See “Risk Factors,” 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, 2005, 2004 and 2003 are summarized as follows:

 

Con Edison

(Millions of Dollars)   2005     2004    

Variance

2005
vs. 2004

    2003    

Variance

2004
vs. 2003

 

Operating activities

  $ 793     $ 1,311     $ (518 )   $ 1,309     $ 2  

Investing activities

    (1,277 )     (1,531 )     254       (1,534 )     3  

Financing activities

    539       197       342       156       41  

Net change for the period

    55       (23 )     78       (69 )     46  

Balance at beginning of period

    26       49       (23 )     118       (69 )

Balance at end of period

  $ 81     $ 26     $ 55     $ 49     $ (23 )

 

Con Edison of New York

(Millions of Dollars)   2005     2004    

Variance

2005
vs. 2004

    2003    

Variance

2004
vs. 2003

 

Operating activities

  $ 818     $ 1,201     $ (383 )   $ 1,169     $ 32  

Investing activities

    (1,167 )     (1,412 )     245       (1,337 )     (75 )

Financing activities

    400       188       212       113       75  

Net change for the period

    51       (23 )     74       (55 )     32  

Balance at beginning of period

    10       33       (23 )     88       (55 )

Balance at end of period

  $ 61     $ 10     $ 51     $ 33     $ (23 )

 

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 their rate plans. 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 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, Con Edison’s impairment charges in 2005 and 2003, and in 2004 charges in accordance with Con Edison of New York’s rate plans. For Con Edison of New York, principal non-cash credits included prepaid pension costs and in 2005, amortizations of certain net regulatory liabilities, including the tax

 

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effects, in accordance with its current electric rate plan. See “Application of Critical Accounting Policies – Accounting for Pensions and Other Postretirement Benefits” and Notes E and F to the financial statements.

 

Net cash flows from operating activities in 2005 for Con Edison and Con Edison of New York were $518 million and $383 million lower, respectively, than in 2004. The decrease reflects primarily prepayment of New York City property taxes and an increase in customer accounts receivable, offset in part by increases in accounts payable. The increase in prepayments reflects a New York City program under which Con Edison of New York achieved a 1.5 percent reduction in its City property taxes for the fiscal year ending June 30, 2006 by prepaying the taxes on June 30, 2005 instead of paying them in semi-annual installments on their due dates (July 1, 2005 and January 1, 2006). The increases in customer accounts receivable and accounts payable reflect primarily higher energy market prices and higher sales and delivery volumes. See “Changes in Assets and Liabilities,” below.

 

Net cash flows from operating activities in 2004 for Con Edison and Con Edison of New York were $2 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.

 

Cash Flows Used in Investing Activities

Net cash flows used in investing activities for Con Edison and Con Edison of New York were $254 million and $245 million lower, respectively, in 2005 than in the 2004, reflecting primarily $534 million of net proceeds from the completion in May 2005 of the sale of Con Edison of New York properties located on First Avenue in Manhattan, collectively referred to as the “First Avenue Properties” (see “Other Regulatory Matters” in Note B to the financial statements), partially offset by increased utility construction expenditures.

 

Net cash flows used in investing activities for Con Edison were $3 million lower in 2004 than in 2003, due primarily to lower construction expenditures by its competitive businesses, partially offset by increased construction expenditures by the Utilities. Cash flows used in investing activities were $75 million higher in 2004 than in 2003 for Con Edison of New York 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 $342 million and $212 million in 2005 compared with 2004, and increased $41 million and $75 million, respectively, in 2004 compared with 2003.

 

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 issuance of $200 million of Con Edison’s 3.625 percent 5-year debentures, most of which was invested in the competitive businesses. Cash flows from financing activities for 2005, 2004 and 2003 also reflect the issuance of Con Edison common shares through its dividend reinvestment and employee stock plans (2005: 2.8 million shares for $78 million, 2004: 2.7 million shares for $66 million; 2003: 2.3 million shares for $58 million). In addition, as a result of the stock plan issuances, cash used to pay common stock dividends was reduced by $38 million in 2005, $39 million in 2004 and $40 million in 2003.

 

Net cash flows from financing activities during the years ending December 31, 2005, 2004 and 2003 also reflect the following Con Edison of New York transactions:

 

2005

Issued $350 million 5.3% 30-year debentures, $125 million 5.25% 30-year debentures and $350 million 5.375% 10-year debentures, the proceeds of which were used for general corporate purposes;
Redeemed at maturity $100 million 6.625% 10-year debentures and $350 million 6.625% 5-year debentures; and
Issued note for $126 million of variable-rate, tax-exempt Facilities Revenue Bonds due 2039, the proceeds of which were used together with other funds to redeem in advance of maturity $128 million 6.10% fixed-rate tax-exempt Facilities Revenue Bonds due 2020.

 

2004

Issued notes for $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; and

 

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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; and
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% 30-year debentures.

 

Con Edison’s net cash flows from financing activities also include O&R’s financings. In 2005, O&R issued $40 million 5.3% 10-year debentures. In 2004, $46 million of 5.22% Transition Bonds associated with securitization of previously deferred purchased power costs of O&R’s New Jersey subsidiary were issued. In 2003, O&R redeemed at maturity $35 million of 6.56% 10-year debentures.

 

Cash flows from financing activities of the Companies also reflect commercial paper issuance (included on the consolidated balance sheets as “Notes payable”). The commercial paper amounts outstanding at December 31, 2005, 2004 and 2003 and the average daily balances for 2005, 2004 and 2003 for Con Edison and Con Edison of New York were as follows:

 

(Millions of
Dollars,
except
Weighted
Average Yield)
  2005     2004     2003  
  Out-
standing
at
Dec. 31
    Daily
average
    Out-
standing
at
Dec. 31
    Daily
average
    Out-
standing
at
Dec. 31
    Daily
average
 

Con Edison

  $ 755     $ 210     $ 156     $ 166     $ 156     $ 326  

Con Edison of New York

  $ 520     $ 118     $ 100     $ 126     $ 99     $ 179  

Weighted average yield

    4.3 %     3.3 %     2.2 %     1.2 %     1.0 %     1.2 %

 

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.

 

Changes in Assets and Liabilities

The following table shows changes in assets and liabilities at December 31, 2005, compared with December 31, 2004, that have impacted the Companies’ consolidated statements of cash flows. The changes in these balances are used to reconcile income to cash flow from operations.

 

(Millions of Dollars)    Con Edison
2005 vs. 2004
Variance
   Con Edison of
New York
2005 vs. 2004
Variance

Assets

             

Fair value of derivative assets

   $ 265    $ 157

Prepayments

     341      344

Accounts receivable-net

     284      214

Other receivables-net

     152      113

Liabilities

             

Deferred derivative gains

     201      162

Accounts payable

     316      277

Other current liabilities

     158      172

Fair value of derivative liabilities

     109      -

 

In the context of increasing energy market prices, the Companies’ policies for managing their energy purchases resulted in an increase in the fair value of derivative assets (included in the consolidated balance sheets as a current asset) at December 31, 2005 as compared with year-end 2004. For the Utilities, the mark-to-market gains had no effect on net income as the gains were deferred as regulatory liabilities (deferred derivative gains). In accordance with provisions approved by state regulators, the Utilities generally recover from customers their energy supply costs, net of gains and losses on derivative instruments used to hedge energy purchases. The mark-to-market accounting for Con Edison’s competitive energy businesses’ forward sales of electricity from their generating plants resulted in an increase in the fair value of derivative liabilities. The competitive energy businesses record mark-to-market gains and losses on derivative instruments in earnings in the reporting period in which such changes occur.

 

The increase in the Companies’ prepayments at December 31, 2005 as compared with year-end 2004 reflects primarily the prepayment of New York City property taxes as discussed above in “Cash Flows from Operating Activities.”

 

Accounts receivable net of allowance for uncollectibles increased at December 31, 2005 as compared with year-end 2004 due primarily to the impact of higher energy market prices on full-service customers’ bills.

 

The increase in the Companies’ other receivables reflects Con Edison of New York’s purchase of accounts receivable from authorized electricity and gas providers in its service territory (also known as energy service companies) pursuant to a program established in accordance with Con Edison of New

 

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York’s rate plans. The increase also reflects a property tax refund claim relating to the East River Repowering Project.

 

Accounts payable increased at December 31, 2005 as compared with year-end 2004 due primarily to the impact of higher energy market prices.

 

Other current liabilities increased at December 31, 2005 as compared with year-end 2004 due primarily to increases in the collateral of $57 million received by the Companies in energy market transactions. See “Financial and Commodity Market Risks – Credit Risk,” below. In addition, the increase reflects Con Edison of New York’s purchase of accounts receivable from authorized electricity and gas providers in its service territory in accordance with its rate plans.

 

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 in 2006 of between $250 million and $450 million of Con Edison common shares in addition to stock issuances under 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, contributions of equity capital from Con Edison and external borrowings.

 

In May 2005, the PSC authorized Con Edison of New York to issue up to $4.4 billion of debt securities prior to December 31, 2009. In January 2006, the PSC authorized O&R to issue up to $325 million of debt securities prior to December 31, 2009. 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 competitive businesses have financed their operations and capital requirements primarily with capital contributions and borrowings from Con Edison, internally-generated funds and external borrowings. See Note Q to the financial statements.

 

For each of the Companies, the ratio of earnings to fixed charges (Securities and Exchange Commission basis) for the years ended December 31, 2005, 2004, 2003, 2002, and 2001 was:

 

Earnings to Fixed
Charges Ratio
   2005    2004    2003    2002    2001

Con Edison

   3.1    2.6    3.1    3.1    3.4

Con Edison of New York

   3.7    3.1    3.4    3.4    3.7

 

For each of the Companies, the common equity ratio at December 31, 2005, 2004 and 2003 was:

 

Common Equity Ratio    2005    2004    2003

Con Edison

   49.0    51.0    48.0

Con Edison of New York

   50.7    52.9    49.3

 

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

 

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Capital Requirements

The following table contains the Companies’ capital requirements for the years 2003 through 2005 and estimated amounts for 2006 through 2008.

 

     Actual    Estimate*
(Millions of Dollars)    2003    2004    2005    2006    2007    2008

Regulated utility construction expenditures

                                         

Con Edison of New York

   $ 1,167    $ 1,235    $ 1,541    $ 1,725    $ 1,722    $ 1,550

O&R

     71      79      87      102      110      114

Total regulated construction expenditures

     1,238      1,314      1,628      1,827      1,832      1,664

Competitive businesses construction expenditures

     105      38      19      6      6      6

Sub-total

     1,343      1,352      1,647      1,833      1,838      1,670

Retirement of long-term securities at maturity**

                                         

Con Edison – parent company

     -      -      -      -      -      200

Con Edison of New York

     805      923      578      -      330      280

O&R

     35      -      2      2      22      3

Competitive energy businesses

     16      16      17      20      22      24

Total retirement of long-term securities at maturity

     856      939      597      22      374      507

Total

   $ 2,199    $ 2,291    $ 2,244    $ 1,855    $ 2,212    $ 2,177

 

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

 

Con Edison of New York’s utility construction expenditures in 2003 and 2004 reflect programs to meet growth in the demand for electricity and reliability needs, gas infrastructure expenditures, the East River Repowering Project and expenditures for permanent electric, gas and steam system restoration following the 2001 World Trade Center attack (see Note I to the financial statements). The increases in 2005 reflect a higher level of expenditures for electric substations and ongoing improvements and reinforcements of the electric distribution system.

 

The competitive energy businesses’ construction expenditures declined in 2004 and 2005, and are expected to decline in 2006. At December 31, 2005 and 2004, Con Edison’s investment balance in these businesses, on an unconsolidated basis, was $543 million and $599 million, respectively.

 

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Contractual Obligations

The following table summarizes the Companies’ material obligations at December 31, 2005, to make payments pursuant to contracts. Long-term debt, capital lease obligations and other long-term liabilities are included on their balance sheets. Operating leases, non-utility generator (NUG) contracts and other purchased power agreements (PPAs) (for which undiscounted future annual payments are shown) are described in the notes to the financial statements.

 

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

Long-term debt (Note C)

                                  

Con Edison of New York

   $ 6,076    $ -    $ 610    $ 1,100    $ 4,366

O&R

     388      2      25      61      300

Competitive energy businesses and parent

     974      20      246      31      677

Interest on long-term debt

     6,926      430      809      685      5,002

Total Long-term debt, including interest

     14,364      452      1,690      1,877      10,345

Capital lease obligations (Note K)

                                  

Con Edison of New York

     49      7      15      15      12

Operating leases (Notes K and Q)

                                  

Con Edison of New York

     359      36      74      77      172

O&R

     21      2      4      3      12

Competitive energy businesses

     12      2      4      3      3

Total operating leases

     392      40      82      83      187

Purchase obligations

                                  

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

                                  

Con Edison of New York

                                  

Energy (a)

     15,609      1,327      2,325      1,488      10,469

Capacity

     5,899      476      1,003      1,013      3,407

Total Con Edison of New York

     21,508      1,803      3,328      2,501      13,876

O&R

                                  

Energy (a)

     150      76      74      -      -

Capacity

     16      8      8      -      -

Total O&R

     166      84      82      -      -

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

     21,674      1,887      3,410      2,501      13,876

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

                                  

Con Edison of New York

                                  

Natural gas supply

     1,588      788      668      132      -

Transportation and storage

     536      148      200      130      58

Total Con Edison of New York

     2,124      936      868      262      58

O&R

                                  

Natural gas supply

     327      157      135      35      -

Transportation and storage

     123      36      47      29      11

Total O&R

     450      193      182      64      11

Total natural gas supply, transportation and storage contracts

     2,574      1,129      1,050      326      69

Other purchase obligations (c)

                                  

Con Edison of New York

     1,839      1,213      457      131      38

O&R

     179      105      57      13      4

Total other purchase obligations

     2,018      1,318      514      144      42

Competitive energy businesses commodity and service agreements (d)

     898      453      209      48      188

Total

   $ 41,969    $ 5,286    $ 6,970    $ 4,994    $ 24,719

 

(a) Included in these amounts is the cost of minimum quantities of energy that the company is obligated to purchase at both fixed and variable prices.
(b) Included in these amounts is the cost of minimum quantities of natural gas supply, transportation and storage that the Utilities are obligated to purchase at both fixed and variable prices.
(c) Amounts shown for other purchase obligations, which reflect capital and operations and maintenance costs incurred by the Utilities in running their day-to-day operations, were derived from the Utilities’ purchasing systems as the difference between the amounts authorized and the amounts paid (or vouchered to be paid) for each obligation. For many of these obligations, the Utilities are committed to purchase less than the amount authorized. Payments for the other purchase obligations are generally assumed to be made ratably over the term of the obligations. The Utilities believe that unreasonable effort and expense would be involved to modify their purchasing systems to enable them to report their other purchase obligations in a different manner.
(d) Amounts represent commitments to purchase minimum quantities of electric energy and capacity, natural gas, natural gas pipeline capacity and generating plant services entered into by Con Edison's competitive energy businesses. Amounts do not include commitments of Con Edison Communications.

 

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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, their collective bargaining agreements and Con Edison’s guarantees of certain obligations of its businesses. See Notes E, F, Q and “Guarantees” in Note I to the financial statements.

 

Electric Power Requirements

In 2005, the Utilities purchased substantially all of the energy they sold to customers pursuant to firm contracts and through the NYISO’s wholesale electricity market. Con Edison expects that these resources will again be adequate to meet the requirements of its customers in 2006.

 

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

 

To reduce the volatility of electric energy costs, the Utilities have firm contracts to purchase electric energy and enter into derivative transactions to hedge the costs of a portion of their expected purchases under these contracts and through the NYISO’s wholesale electricity market, which together cover a substantial portion of the electric energy expected to be sold to customers in 2006. See Notes J 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 2006.

 

Con Edison of New York also owns generating stations in New York City associated primarily with its steam system. As of December 31, 2005, the generating stations had a combined electric capacity of approximately 692 MW. In April 2005, the company’s East River Repowering Project was placed in service, adding 292 MW (on a summer nominal rating) of in-City electric capacity. Also in 2005, the company retired its Waterside generating station, reducing its electric capacity by 167 MW. The company sells the electric output of its generating stations through the NYISO’s wholesale electricity market. O&R does not own any electric generating capacity.

 

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

 

For information about transmission issues arising from the proposed closure of the Lovett generating station located in O&R’s service territory see “Generating Assets Sold to Mirant” in Note I to the financial statements.

 

Con Edison’s competitive energy businesses sell electricity to wholesale and retail customers in the NYISO and other markets. In addition, at December 31, 2005, Con Edison Development owns equity interests in electric generating facilities equivalent to 1,668 MW of net generating capacity, substantially all of which is located within the PJM Interconnection or the New England Power Pool. Con Edison Energy sells the electricity from these generating facilities on the wholesale electricity markets or under contract. See “Financial and Commodity Market Risks – Commodity Price Risk,” below.

 

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Regulatory Matters

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

 

Effective

Period

   Rate
Increases
   Amortization
To Income of
Net Regulatory
(Assets) and
Liabilities
   Other Significant
Revenue Sources
   Return on
Equity Sharing
Threshold
   

Earnings Sharing Terms

(Shareholders /Customers)

     (Millions of Dollars, except percentages)

Con Edison Of New York – Electric

April 2005 -

March 2008

   Yr. 1 - $104.6
Yr. 2 - None
Yr. 3 - $220.4
   Yr. 1 - $128
Yr. 2 - $173

Yr. 3 - $249
   $60 of annual
transmission
congestion
contracts revenues
   11.40%     11.4% - 13% - 50/50
> 13% - 25/75*

Con Edison of New York – Gas

                    

October 2004 -

September 2007

   Yr. 1 - $46.8
Yr. 2 - None
Yr. 3 - None
   $41
over 3 yrs.
   $35 of annual non-
firm revenues
   11.75%     50/50

Con Edison of New York – Steam

                    

October 2004 -

September 2006

   Yr. 1 - $49.6
Yr. 2 - $27.4
   $(3)
over 2 yrs.
   East River
Repowering Project

carrying costs
   11.75%     50/50

O&R – Electric (NY)

                         

July 2003 -

October 2006

   None    $(11)
over 3 yrs.
   -    12.75% **   50/50

O&R – Gas

                         

November 2003 -

October 2006

   Yr. 1 - $9.3
Yr. 2 - $9.3
Yr. 3 - $5.0
   $2
over 3 yrs.
   -    11.00%     50/50

 

* Subject to limitation for cost reconciliations described in Note B to the financial statements.
** Ends June 30, 2006.

 

Also see Note B to the financial statements for a description of the pending Con Edison of New York steam rate filing and the pending O&R gas rate filing.

 

The Companies are actively participating in regulatory proceedings at the federal level that are underway to implement the Energy Policy Act of 2005. The Act provides for the establishment of an Electric Reliability Organization to implement mandatory reliability standards, implementation of transmission pricing incentives, numerous studies regarding economic dispatch and transmission system needs, changes to market manipulation standards for electricity and natural gas and other changes that could impact the Companies’ businesses in the future.

 

Financial and Commodity Market Risks

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

 

Interest Rate Risk

The interest rate risk relates primarily to variable rate debt and to new debt financing needed to fund capital requirements, including the construction expenditures of the Utilities and maturing debt securities. Con Edison and its businesses manage interest rate risk through the issuance of mostly fixed rate-debt with varying maturities and through opportunistic refinancing of debt. The Companies estimate that each 10 percent variation in interest rates applicable to Con Edison’s and Con Edison of New York’s variable rate debt and commercial paper would result in a change in annual interest expense of $5 million and $4 million, respectively.

 

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

 

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Commodity Price Risk

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

 

Con Edison estimates that, as of December 31, 2005, each 10 percent change in market prices would result in a change in fair value of $161 million for the derivative instruments used by the Utilities to hedge purchases of electricity and gas, of which $130 million is for Con Edison of New York and $31 million is for O&R. Con Edison expects that any such change in fair value would be largely offset by directionally opposite changes in the cost of the electricity and gas purchased. In accordance with provisions approved by state regulators, the Utilities generally recover from customers the costs they incur for energy purchased for their customers, including gains and losses on certain derivative instruments used to hedge energy purchased and related costs. See “Recoverable Energy Costs” in Note A to the financial statements.

 

Con Edison’s competitive energy businesses use a value-at-risk (VaR) model to assess the market risk of their electricity and gas commodity fixed price purchase and sales commitments, physical forward contracts and commodity derivative instruments. VaR represents the potential change in fair value of instruments or the portfolio due to changes in market factors, for a specified time period and confidence level. These businesses estimate VaR across their electricity and natural gas commodity businesses using a delta-normal variance/covariance model with a 95 percent confidence level. Since the VaR calculation involves complex methodologies and estimates and assumptions that are based on past experience, it is not necessarily indicative of future results. VaR for transactions associated with hedges on generating assets and commodity contracts, assuming a one-day holding period, for the years ended December 31, 2005, and 2004, respectively, was as follows:

 

95% Confidence Level,
One-Day Holding Period
     2005      2004
       (Millions of Dollars)

Average for the period

     $ 3      $ 1

High

       15        3

Low

       1        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 competitive energy businesses. Credit risk relates to the loss that may result from a counterparty’s nonperformance. The Companies use credit policies to manage this risk, including an established credit approval process, monitoring of counterparty limits, netting provisions within agreements and collateral or prepayment arrangements. 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.

 

The Utilities had $272 million of credit exposure in connection with energy supply and hedging activities, net of collateral and reserves, at December 31, 2005, of which $175 million was with investment-grade counterparties and $97 million was with the New York Mercantile Exchange.

 

Con Edison’s competitive energy businesses had $158 million of credit exposure in connection with energy supply and hedging activities, net of collateral and reserves, at December 31, 2005, of which $133 million was with investment grade counterparties and $11 million was with commodity exchanges or independent system operators. The remaining $14 million was with entities which lacked ratings or whose ratings were not investment grade.

 

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, 2005, 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 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

 

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lesser value than the dollars originally borrowed. Also, to the extent the Companies’ prices change by more or less than inflation, the real price of the Companies’ services will increase or decline. Over the past 20 years, for example, the real price of electric service has declined substantially.

 

Material Contingencies

For information concerning potential liabilities arising from the Companies’ material contingencies, see “Application of Critical Accounting Policies – Accounting for Contingencies” and Notes G, H, I, K and M to the financial statements.

 

Results of Operations

Results of operations reflect, among other things, the Companies’ accounting policies (see “Application of Critical Accounting Policies,” above), 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, 2005 reflect higher net revenues resulting from the warmer than normal summer weather, growth in energy deliveries and the Con Edison of New York electric rate plan that became effective April 1, 2005 and gas and steam rate plans that became effective October 1, 2004. The higher net revenues were partially offset by higher operations and maintenance expenses, and a reduction in net credits for pensions and other postretirement benefits. In addition, depreciation and property taxes were higher in 2005, reflecting large continuing investments in energy delivery infrastructure. For Con Edison, results of operations also 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.

 

A discussion of the results of operations by principal business segment for the years ended December 31, 2005, 2004 and 2003 follows. For additional business segment financial information, see Note O to the financial statements.

 

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Year Ended December 31, 2005 Compared with Year Ended December 31, 2004

The Companies’ results of operations (which were discussed above under “Results of Operations—Summary”) in 2005 compared with 2004 were:

 

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

Operating revenues

  $ 1,932     19.8 %   $ 1,266     15.8 %   $ 121     17.2 %   $ 545     52.0 %

Purchased power

    783     19.8       303     9.9       74     30.1       406     62.5  

Fuel

    219     36.7       122     30.2       -     -       97     50.3  

Gas purchased for resale

    303     35.6       256     36.1       23     19.2       24     Large  

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

    627     14.4       585     15.3       24     7.1       18     9.8  

Other operations and maintenance

    190     12.7       187     15.2       3     1.7       -     -  

Depreciation and amortization

    33     6.0       32     6.7       1     3.0       -     -  

Taxes, other than income taxes

    105     9.7       101     10.0       (1 )   (2.1 )     5     26.3  

Income taxes

    72     24.7       49     17.5       14     82.4       9     Large  

Operating income

    227     24.4       216     26.2       7     10.8       4     9.8  

Other income less deductions and related federal income tax

    (24 )   (38.7 )     (25 )   (47.2 )     -     -       1     5.3  

Net interest charges

    20     4.5       15     4.3       4     20.0       1     1.3  

Income from continuing operations

    183     33.3       176     34.0       3     6.5       4     26.7  

Discontinued operations

    (1 )   (8.3 )     N/A     N/A       N/A     N/A       (1 )   (8.3 )

Net income

  $ 182     33.9 %   $ 176     34.0 %   $ 3     6.5 %   $ 3     11.1 %

 

* Represents the consolidated financial results of Con Edison and its businesses.
** Includes inter-company and parent company accounting.

 

Con Edison of New York

Electric

Con Edison of New York’s electric operating revenues were $840 million higher in 2005 than in 2004, due primarily to increased recoverable purchased power and fuel costs ($415 million), warmer summer weather and sales growth ($119 million), the electric rate plan that took effect in April 2005 ($282 million), the charge in 2004 to resolve certain issues relating primarily to the treatment of prior period pension credits ($100 million) and recovery of costs relating to the East River Repowering Project ($54 million), offset in part by lower revenue taxes ($76 million; see “State Income Tax” in Note A to the financial statements), and provision for refund to customers of shared earnings above the target level ($53 million).

 

Con Edison of New York’s electric sales and deliveries, excluding off-system sales, in 2005 compared with 2004 were:

 

   

Millions of kWhs

Twelve Months Ended

       

Percent

Variation

 
Description   December 31,
2005
 

December 31,

2004

  Variation    

Residential/Religious

  13,690   12,673   1,017     8.0 %

Commercial/Industrial

  15,402   16,966   (1,564 )   (9.2 )

Other

  252   229   23     10.0  

Total Full Service Customers

  29,344   29,868   (524 )   (1.8 )

Retail access customers

  16,848   14,143   2,705     19.1  

Sub-total

  46,192   44,011   2,181     5.0  

NYPA, Municipal Agency and Other Sales

  11,144   10,730   414     3.9  

Total Service Area

  57,336   54,741   2,595     4.7 %

 

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Electric sales and delivery volumes in Con Edison of New York’s service area increased 4.7 percent in 2005 compared with 2004, primarily reflecting warmer weather in the 2005 summer period compared with 2004 weather, growth in usage by existing customers and increased new business. After adjusting for variations, principally weather and billing days in each period, electric sales and delivery volumes in Con Edison of New York’s service area increased 2.4 percent in 2005 compared with 2004.

 

Con Edison of New York’s electric purchased power costs increased $295 million in 2005 compared with the 2004 period reflecting an increase in unit costs, partially offset by decreased purchased volumes associated with additional customers obtaining their energy supply through competitive providers. Electric fuel costs increased $120 million, reflecting higher sendout volumes from the company’s generating facilities and an increase in unit costs.

 

Con Edison of New York’s electric operating income increased $133 million in 2005 compared with 2004. The increase reflects higher net revenues ($423 million) due principally to warm weather and the new electric rate plan, offset in part by higher operations and maintenance costs ($200 million, due primarily to lower pension credits and higher costs addressed in the electric rate plan), taxes other than income taxes ($77 million, principally property taxes), depreciation ($11 million) and income taxes ($2 million).

 

Gas

Con Edison of New York’s gas operating revenues in 2005 increased $327 million compared with 2004, reflecting primarily an increase in recoverable gas costs ($256 million), the gas rate plan ($54 million) and the effect of the 2004 charge to resolve certain issues relating primarily to the treatment of prior period pension credits ($18 million). 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 2005 compared with 2004 were:

 

    Thousands of DTHs            
    Twelve Months Ended         Percent
Variation
 
Description   December 31,
2005
  December 31,
2004
  Variation    

Firm Sales

                   

Residential

  48,175   48,569   (394 )   (0.8 )%

General

  36,800   35,887   913     2.5  

Firm Transportation

  19,088   16,795   2,293     13.7  

Total Firm Sales and Transportation

  104,063   101,251   2,812     2.8  

Off Peak/Interruptible Sales

  13,128   13,187   (59 )   (0.4 )

Non-Firm Transportation of Gas

                   

NYPA

  22,305   18,623   3,682     19.8  

Generation Plants

  48,564   44,772   3,792     8.5  

Total NYPA and Generation Plants

  70,869   63,395   7,474     11.8  

Other

  18,103   18,534   (431 )   (2.3 )

Total Sales and Transportation

  206,163   196,367   9,796     5.0 %

 

Con Edison of New York’s sales and transportation volumes for firm customers increased 2.8 percent in 2005 compared with 2004 reflecting primarily increased new business and changes in service classification to firm from interruptible for certain customers that were no longer eligible for interruptible service, partially offset by the impact of the milder winter in the 2005 period. After adjusting for variations, principally weather and billing days in each period, firm gas sales and transportation volumes in the company’s service area increased 2.4 percent in the 2005 period.

 

Con Edison of New York’s purchased gas cost increased $256 million in 2005 compared with 2004 due to higher unit costs and higher sendout.

 

Con Edison of New York’s gas operating income increased $18 million in 2005 compared with 2004, reflecting primarily higher net revenues ($72 million) as a result of the October 2004 gas rate plan. This increase was partially offset by higher operations and maintenance expense ($27 million, due primarily to lower pension credits and higher costs addressed in the gas rate plan),

 

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taxes other than income taxes ($18 million, principally property taxes), income taxes ($7 million) and depreciation ($1 million).

 

Steam

Con Edison of New York’s steam operating revenues increased $99 million in 2005 compared with 2004, due primarily to the net increase in rates under the steam rate plan ($50 million), recovery from customers of costs associated with the East River Repowering Project ($28 million), the effect of the 2004 charge to resolve certain issues relating primarily to the treatment of prior period pension credits ($6 million), higher fuel and purchased power costs ($10 million) and a charge related to distribution losses in 2004 ($4 million).

 

Con Edison of New York’s steam sales and deliveries in 2005 compared with 2004 were:

 

    Millions of Pounds            
    Twelve Months Ended            
Description   December 31,
2005
  December 31,
2004
  Variation     Percent
Variation
 

General

  655   685   (30 )   (4.4 )%

Apartment house

  7,748   7,602   146     1.9  

Annual power

  18,474   17,842   632     3.5  

Total Sales

  26,877   26,129   748     2.9 %

 

Steam sales and delivery volumes increased 2.9 percent in 2005 compared with the 2004 period, reflecting primarily the impact of weather. After adjusting for variations, principally weather and billing days in each period, steam sales and deliveries increased 1.8 percent in 2005.

 

Con Edison of New York’s steam purchased power costs increased $8 million in 2005 compared with 2004 due primarily to higher unit costs, offset in part by lower purchased volumes. Steam fuel costs increased $2 million due primarily to higher sendout volumes, offset in part by savings resulting from the operation of the East River Repowering Project.

 

Steam operating income increased $66 million in 2005 compared with 2004. The increase is due to higher net revenues resulting from the steam rate plan ($60 million) and the recovery of costs related to the East River Repowering Project ($82 million), offset in part by higher income tax ($38 million), operations and maintenance expenses ($12 million), depreciation expense ($19 million) and taxes other than income taxes ($6 million, principally property taxes).

 

Taxes Other Than Income Taxes

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

 

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

 

(Millions of Dollars)    2005      2004     

Increase/

(Decrease)

 

Property taxes

   $ 796      $ 681      $ 115  

State and local taxes related to revenue receipts

     267        283        (16 )

Payroll taxes

     52        53        (1 )

Other taxes

     (1 )      (4 )      3  

Total

   $ 1,114 (a)    $ 1,013 (a)    $ 101  

 

(a) Including sales tax on customers’ bills, total taxes other than income taxes billed to customers in 2005 and 2004 were $1.5 billion and $1.4 billion, respectively.

 

Income Taxes

Operating income taxes increased $49 million in 2005 compared with 2004, due principally to higher income in the 2005 period.

 

Other Income (Deductions)

Other income (deductions) decreased $25 million in 2005 compared with 2004, due primarily to decreased allowance for equity funds used during construction related to the commencement of commercial operation of the East River Repowering Project.

 

Net Interest Charges

Net interest charges increased $15 million in 2005 compared with 2004, due principally to higher interest rates on variable-rate debt and additional interest expense on long-term debt issued in 2005.

 

O&R

Electric

O&R’s electric operating revenues increased $97 million in 2005 compared with 2004, due primarily to increased recoverable purchased power costs, higher sales and deliveries in 2005 and a one-time adjustment for unbilled revenues recorded in March 2005, offset in part by a reserve for earnings in excess of target level in accordance with its New York electric rate plan.

 

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O&R’s electric sales and deliveries, excluding off-system sales, in 2005 compared with 2004 were:

 

   

Millions of kWhs

Twelve Months Ended

       

Percent

Variation

 
Description  

December 31,

2005

 

December 31,

2004

  Variation    

Residential/Religious

  1,905   1,729   176     10.2 %

Commercial/Industrial

  2,276   2,046   230     11.2  

Other

  114   107   7     6.5  

Total Full Service Customers

  4,295   3,882   413     10.6  

Retail access customers

  1,836   1,861   (25 )   (1.3 )

Total Service Area

  6,131   5,743   388     6.8 %

 

Electric sales and delivery volumes in O&R’s service area in 2005 increased 6.8 percent compared with 2004 due primarily to the warmer summer weather, growth in the number of customers, and the unbilled revenue adjustment referenced above. Absent this adjustment and after adjusting for weather variations in each period, electric delivery volumes in O&R’s service area increased 2.3 percent in 2005.

 

O&R’s purchased power costs increased $74 million in 2005 compared with 2004 due to an increase in the average unit cost and higher delivery volumes.

 

Electric operating income increased by $7 million in 2005 compared with 2004 due primarily to higher net revenues ($23 million), offset by higher operations and maintenance expenses ($3 million) and income taxes ($12 million).

 

Gas

O&R’s gas operating revenues increased $24 million in 2005 compared with 2004. The increase is due primarily to higher costs of gas purchased for resale in 2005.

 

O&R’s revenues from gas sales are subject to a weather normalization clause that moderates, but does not eliminate, the effect of weather-related changes on net income.

 

O&R’s gas sales and deliveries, excluding off-system sales, in 2005 compared with 2004 were:

 

   

Thousands of DTHs

Twelve Months Ended

       

Percent

Variation

 
Description  

December 31,

2005

 

December 31,

2004

  Variation    

Firm Sales

                   

Residential

  9,307   9,487   (180 )   (1.9 )%

General

  2,269   2,487   (218 )   (8.8 )

Firm Transportation

  9,841   9,931   (90 )   (0.9 )

Total Firm Sales and Transportation

  21,417   21,905   (488 )   (2.2 )

Off Peak/Interruptible Sales

  6,458   6,996   (538 )   (7.7 )

Non-Firm Transportation of Gas

                   

Generation Plants

  1,434   659   775     Large  

Other

  1,072   1,068   4     0.4  

Total Sales and Transportation

  30,381   30,628   (247 )   (0.8 )%

 

Sales and transportation volumes for firm customers decreased 2.2 percent in 2005 compared with 2004 reflecting the impact of the milder winter weather. After adjusting for weather variations in each period, total firm sales and transportation volumes were 0.7 percent higher for 2005 than in 2004.

 

Non-firm transportation of customer-owned gas to electric generating plants increased substantially in 2005 compared with 2004 due to higher demand for generation related to the warmer than normal summer. The increase in gas usage had minimal impact on earnings because most revenues from these customers result from a fixed demand charge for local transportation.

 

Gas operating income was the same in 2005 as in 2004.

 

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Taxes Other Than Income Taxes

Taxes other than income taxes decreased $1 million in 2005 compared with 2004.

 

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

 

(Millions of Dollars)    2005      2004     

Increase/

(Decrease)

 

Property taxes

   $ 30      $ 29      $ 1  

State and local taxes related to revenue receipts

     13        15        (2 )

Payroll taxes

     4        4        -  

Total

   $ 47 (a)      48 (a)    $ (1 )

 

(a) Including sales tax on customers’ bills, total taxes other than income taxes, billed to customers in 2005 and 2004 were $68 million and $66 million, respectively.

 

Income Taxes

Operating income taxes increased by $14 million in 2005 compared with 2004 due primarily to the deferral of state income tax benefits for ratepayers in 2004 and higher taxable income in 2005 compared with 2004.

 

Net Interest Expense

O&R’s net interest expense increased by $4 million in 2005 compared with 2004, reflecting interest on the $40 million 5.3% 10-year debentures issued in March 2005 and the Transition Bonds associated with securitization of previously deferred purchased power costs of O&R’s New Jersey subsidiary.

 

Competitive Businesses and Other

Competitive Energy Businesses

The earnings of the competitive energy businesses were $2 million higher in 2005 than in 2004.

 

Operating revenues of the competitive energy businesses were $534 million higher in 2005 than in 2004, reflecting principally higher retail sales and prices of electricity.

 

Operating expenses excluding income taxes increased by $520 million, reflecting principally increased purchased power ($394 million), fuel ($97 million) and gas purchased for resale costs ($25 million) and taxes other than income taxes ($5 million).

 

Income taxes increased $3 million in 2005, reflecting primarily higher income.

 

Operating income for 2005 was $11 million higher than in 2004.

 

Other income (deductions) decreased $10 million in 2005 compared with 2004 due primarily to unrealized mark-to-market losses, compared with gains in 2004.

 

Other

Other includes the activity of the parent company and inter-company eliminations relating to operating revenues and operating expenses.

 

Discontinued Operations

Losses from the discontinued operations of Con Edison Communications were $1 million higher in 2005 than in 2004 reflecting primarily an after-tax impairment charge of $5 million, offset in part by the cessation of depreciation. See Note U to the financial statements.

 

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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    

Competitive Businesses

and Other**

 
(Millions of Dollars)   Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
 

Operating revenues

  $ (50 )   (0.5 )%   $ (160 )   (2.0 )%   $ (24 )   (3.3 )%   $ 134     14.6 %

Purchased power

    76     2.0       (60 )   (1.9 )     (5 )   (2.0 )     141     27.7  

Fuel

    93     18.5       46     12.8       -     -       47     32.2  

Gas purchased for resale

    (37 )   (4.2 )     (6 )   (0.8 )     -     -       (31 )   (57.4 )

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

    (182 )   (4.0 )     (140 )   (3.5 )     (19 )   (5.3 )     (23 )   (11.2 )

Other operations and maintenance

    57     4.0       77     6.7       4     2.4       (24 )   (21.6 )

Impairment charges

    (18 )   Large       -     -       -     -       (18 )   Large  

Depreciation and amortization

    35     6.8       19     4.1       (1 )   (2.9 )     17     70.8  

Taxes, other than income taxes

    (36 )   (3.2 )     (27 )   (2.6 )     (2 )   (4.0 )     (7 )   (26.9 )

Income taxes

    (107 )   (26.8 )     (92 )   (24.7 )     (17 )   (50.0 )     2     28.6  

Operating income

    (113 )   (10.8 )     (117 )   (12.4 )     (3 )   (4.4 )     7     20.6  

Other income less deductions and related federal income tax

    38     Large       17     47.2       3     Large       18     Large  

Net interest charges

    10     2.3       (27 )   (7.2 )     (1 )   (4.8 )     38     Large  

Income from continuing operations

    (85 )   (13.4 )     (73 )   (12.4 )     1     2.2       (13 )   Large  

Discontinued operations

    97     89.0       N/A     N/A       N/A     N/A       97     89.0  

Cumulative effect of changes in accounting principles

    (3 )   Large       -     -       -     -       (3 )   Large  

Net income

  $ 9     1.7 %   $ (73 )   (12.4 )%   $ 1     2.2 %   $ 81     75.0 %

 

* Represents the consolidated financial results of Con Edison and its businesses.
** Includes inter-company and parent company accounting.

 

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 electric rate plan effective April 2005 (see Note B 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

       

Percent

Variation

 
Description  

December 31,

2004

 

December 31,

2003

  Variation    

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 %

 

 

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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 increases in expense were offset in part by lower income tax ($80 million), state and local revenue taxes ($32 million), sales and use tax ($8 million).

 

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 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 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 Trans-
portation

  16,795   16,486   309     1.9  

Total Firm Sales and Trans-
portation

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

Off Peak/Interruptible Sales

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

Non-Firm Trans-
portation of Gas

                   

NYPA

  18,623   23,360   (4,737 )