CONSOLIDATED BALANCE SHEET
CONSOLIDATED EDISON, INC.
AT DECEMBER 31
-----------------------------
1999 1998
----------- -----------
(THOUSANDS OF DOLLARS)
ASSETS
UTILITY PLANT, AT ORIGINAL COST (NOTE A)
Electric.................................................... $11,323,826 $12,039,082
Gas......................................................... 2,197,735 1,838,550
Steam....................................................... 722,265 604,761
General..................................................... 1,328,544 1,204,262
Unregulated generating assets............................... 48,583 --
----------- -----------
Total....................................................... 15,620,953 15,686,655
Less: Accumulated depreciation.............................. 4,733,613 4,726,211
----------- -----------
Net......................................................... 10,887,340 10,960,444
Construction work in progress............................... 381,804 347,262
Nuclear fuel assemblies and components, less accumulated
amortization.............................................. 84,701 98,837
----------- -----------
NET UTILITY PLANT........................................... 11,353,845 11,406,543
----------- -----------
CURRENT ASSETS
Cash and temporary cash investments (Note A)................ 485,050 102,295
Accounts receivable--customer, less allowance for
uncollectible accounts of $34,821 and $24,957 at December
31, 1999 and 1998, respectively 647,545 521,648
Other receivables........................................... 122,474 49,381
Fuel, at average cost....................................... 24,271 33,289
Gas in storage, at average cost............................. 55,387 49,656
Materials and supplies, at average cost..................... 142,905 184,916
Prepayments................................................. 197,671 131,374
Other current assets........................................ 39,262 20,984
----------- -----------
TOTAL CURRENT ASSETS........................................ 1,714,565 1,093,543
----------- -----------
INVESTMENTS
Nuclear decommissioning trust funds......................... 305,717 265,063
Other....................................................... 182,201 113,382
----------- -----------
TOTAL INVESTMENTS (NOTE A).................................. 487,918 378,445
----------- -----------
DEFERRED CHARGES
Goodwill.................................................... 427,496 --
Regulatory assets (Notes A and J)........................... 1,382,265 1,359,135
Other deferred charges...................................... 165,387 143,737
----------- -----------
TOTAL DEFERRED CHARGES...................................... 1,975,148 1,502,872
----------- -----------
TOTAL....................................................... $15,531,476 $14,381,403
----------- -----------
CONSOLIDATED BALANCE SHEET
CONSOLIDATED EDISON, INC.
AT DECEMBER 31
-----------------------------
1999 1998
----------- -----------
(THOUSANDS OF DOLLARS)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (NOTE B)
COMMON SHAREHOLDERS' EQUITY
Common stock, $.10 par value, authorized 500,000,000 shares;
213,810,634 shares and 232,833,494 shares outstanding,
net of treasury stock, at December 31, 1999 and 1998,
respectively.............................................. $ 1,482,341 $ 1,482,341
Retained earnings........................................... 4,921,089 4,700,500
Treasury stock, at cost; 21,358,500 shares and 2,654,600
shares at December 31, 1999 and 1998, respectively........ (955,311) (120,790)
Capital stock expense....................................... (36,112) (36,446)
----------- -----------
TOTAL COMMON SHAREHOLDERS' EQUITY........................... 5,412,007 6,025,605
----------- -----------
Preferred stock subject to mandatory redemption............. 37,050 37,050
Other preferred stock....................................... 212,563 212,563
Long-term debt ............................................. 4,524,604 4,050,108
----------- -----------
TOTAL CAPITALIZATION........................................ 10,186,224 10,325,326
----------- -----------
NONCURRENT LIABILITIES
Obligations under capital leases............................ 34,544 37,295
Other noncurrent liabilities................................ 305,632 203,543
----------- -----------
TOTAL NONCURRENT LIABILITIES................................ 340,176 240,838
----------- -----------
CURRENT LIABILITIES
Long--term debt due within one year......................... 395,000 225,000
Notes payable............................................... 495,371 --
Accounts payable............................................ 615,983 371,274
Customer deposits........................................... 204,421 181,236
Accrued taxes............................................... 18,389 15,670
Accrued interest............................................ 60,061 76,466
Accrued wages............................................... 79,408 83,555
Other current liabilities................................... 232,706 188,186
----------- -----------
TOTAL CURRENT LIABILITIES................................... 2,101,339 1,141,387
----------- -----------
DEFERRED CREDITS
Accumulated deferred federal income tax (Note L)............ 2,267,548 2,392,812
Regulatory liabilities (Note J)............................. 636,022 281,018
Other deferred credits...................................... 167 22
----------- -----------
TOTAL DEFERRED CREDITS...................................... 2,903,737 2,673,852
----------- -----------
CONTINGENCIES (NOTE F)
TOTAL....................................................... $15,531,476 $14,381,403
----------- -----------
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED INCOME STATEMENT
CONSOLIDATED EDISON, INC.
YEAR ENDED DECEMBER 31
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
OPERATING REVENUES (NOTE A)
Electric.............................................. $ 5,792,673 $ 5,674,446 $ 5,635,575
Gas................................................... 1,000,083 959,609 1,093,880
Steam................................................. 340,026 321,932 391,799
Non-utility........................................... 358,541 137,061 74,898
----------- ----------- -----------
TOTAL OPERATING REVENUES.............................. 7,491,323 7,093,048 7,196,152
----------- ----------- -----------
OPERATING EXPENSES
Purchased power....................................... 1,824,023 1,253,783 1,349,587
Fuel.................................................. 430,050 579,006 596,824
Gas purchased for resale.............................. 485,155 437,308 552,597
Other operations...................................... 1,188,623 1,157,958 1,124,703
Maintenance........................................... 437,979 477,413 474,788
Depreciation and amortization (Note A)................ 526,182 518,514 503,455
Taxes, other than federal income tax.................. 1,179,796 1,208,102 1,181,156
Federal income tax (Notes A and L).................... 399,716 407,639 377,722
----------- ----------- -----------
TOTAL OPERATING EXPENSES.............................. 6,471,524 6,039,723 6,160,832
----------- ----------- -----------
OPERATING INCOME...................................... 1,019,799 1,053,325 1,035,320
----------- ----------- -----------
OTHER INCOME (DEDUCTIONS)
Investment income (Note A)............................ 14,842 11,801 12,214
Allowance for equity funds used during construction
(Note A)............................................ 3,810 2,431 4,448
Other income less miscellaneous deductions............ (13,571) (14,212) (4,100)
Federal income tax (Notes A and L).................... 26,891 2,229 (1,998)
----------- ----------- -----------
TOTAL OTHER INCOME.................................... 31,972 2,249 10,564
----------- ----------- -----------
INCOME BEFORE INTEREST CHARGES........................ 1,051,771 1,055,574 1,045,884
----------- ----------- -----------
Interest on long-term debt............................ 319,393 308,671 318,158
Other interest........................................ 20,065 18,400 17,083
Allowance for borrowed funds used during construction
(Note A)............................................ (1,895) (1,246) (2,180)
----------- ----------- -----------
NET INTEREST CHARGES.................................. 337,563 325,825 333,061
----------- ----------- -----------
PREFERRED STOCK DIVIDEND REQUIREMENTS................. 13,593 17,007 18,344
----------- ----------- -----------
NET INCOME FOR COMMON STOCK........................... $ 700,615 $ 712,742 $ 694,479
=========== =========== ===========
BASIC EARNINGS PER COMMON SHARE....................... $ 3.14 $ 3.04 $ 2.95
DILUTED EARNINGS PER COMMON SHARE..................... $ 3.13 $ 3.04 $ 2.95
AVERAGE NUMBER OF SHARES OUTSTANDING.................. 223,442,315 234,307,767 235,082,063
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
CONSOLIDATED EDISON, INC.
YEAR ENDED DECEMBER 31
------------------------------------
1999 1998 1997
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
BALANCE, JANUARY 1....................................... $4,700,500 $4,484,703 $4,283,935
Less: Stock options exercised............................ 1,922 -- --
Add: Orange & Rockland purchase accounting adjustment.... 51 -- --
NET INCOME FOR COMMON STOCK FOR THE YEAR................. 700,615 712,742 694,479
---------- ---------- ----------
TOTAL.................................................... 5,399,244 5,197,445 4,978,414
---------- ---------- ----------
Dividends declared on common, $2.14, $2.12 and $2.10 per
share, respectively.................................... 478,155 496,945 493,711
---------- ---------- ----------
BALANCE, DECEMBER 31..................................... $4,921,089 $4,700,500 $4,484,703
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED EDISON, INC.
YEAR ENDED DECEMBER 31
---------------------------------
1999 1998 1997
--------- --------- ---------
(THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Net income for common stock................................. $ 700,615 $ 712,742 $ 694,479
PRINCIPAL NON-CASH CHARGES (CREDITS) TO INCOME
Depreciation and amortization............................... 526,182 518,514 503,455
Federal income tax deferred (excluding taxes resulting from
divestiture of plant)..................................... 41,784 86,430 22,620
Common equity component of allowance for funds used during
construction.............................................. (3,730) (2,364) (4,321)
Other non-cash charges...................................... 42,050 11,297 17,268
CHANGES IN ASSETS AND LIABILITIES NET OF EFFECTS FROM
PURCHASE OF ORANGE AND ROCKLAND
Accounts receivable-customer, less allowance for
uncollectibles............................................ (66,371) 59,515 (37,159)
Materials and supplies, including fuel and gas in storage... 56,554 14,804 31,824
Prepayments, other receivables and other current assets..... (91,588) (50,689) 16,062
Deferred recoverable fuel costs............................. (66,655) 76,288 3,161
Cost of removal less salvage................................ (71,451) (72,033) (73,719)
Accounts payable............................................ 167,598 (68,840) 8,999
Other-net .................................................. (29,618) 104,165 103,490
--------- --------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES.................... 1,205,370 1,389,829 1,286,159
--------- --------- ---------
INVESTING ACTIVITIES INCLUDING CONSTRUCTION
Construction expenditures................................... (678,157) (618,844) (654,221)
Nuclear fuel expenditures................................... (16,537) (7,056) (14,579)
Contributions to nuclear decommissioning trust.............. (21,301) (21,301) (21,301)
Common equity component of allowance for funds used during
construction.............................................. 3,730 2,364 4,321
Payment for purchase of Orange and Rockland, net of cash and
cash equivalents.......................................... (509,083) -- --
Divestiture of utility plant (net of federal income tax).... 1,138,750 -- --
Unregulated subsidiary investments.......................... (101,953) (24,072) (66,032)
--------- --------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES INCLUDING
CONSTRUCTION.............................................. (184,551) (668,909) (751,812)
--------- --------- ---------
FINANCING ACTIVITIES INCLUDING DIVIDENDS
Repurchase of common stock.................................. (817,399) (115,247) --
Net proceeds from short-term debt........................... 430,196 -- --
Issuance of long-term debt.................................. 767,689 460,000 480,000
Retirement of long-term debt................................ (225,000) (200,000) (106,256)
Advance refunding of preferred stock and long-term debt..... (300,000) (773,645) --
Issuance and refunding costs................................ (16,440) (8,864) (8,930)
Funds held for refunding of debt............................ -- 328,874 (328,874)
Common stock dividends...................................... (477,110) (493,201) (493,711)
--------- --------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES INCLUDING
DIVIDENDS................................................. (638,064) (802,083) (457,771)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENTS............................................... 382,755 (81,163) 76,576
--------- --------- ---------
CASH AND TEMPORARY CASH INVESTMENTS AT JANUARY 1............ 102,295 183,458 106,882
--------- --------- ---------
CASH AND TEMPORARY CASH INVESTMENTS AT DECEMBER 31.......... $ 485,050 $ 102,295 $ 183,458
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest.................................................. $ 321,785 $ 285,956 $ 310,310
Income taxes.............................................. 846,559 355,707 335,586
--------- --------- ---------
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CAPITALIZATION
CONSOLIDATED EDISON, INC.
SHARES OUTSTANDING YEAR ENDED DECEMBER 31
------------------------------------- -----------------------
DECEMBER 31, 1999 DECEMBER 31, 1998 1999 1998
----------------- ----------------- ---------- ----------
(THOUSANDS OF DOLLARS)
COMMON SHAREHOLDERS' EQUITY (NOTE B)
Common stock.......................... 213,810,634 232,833,494 $1,482,341 $1,482,341
Retained earnings..................... 4,921,089 4,700,500
Treasury stock, at cost............... (955,311) (120,790)
Capital stock expense................. (36,112) (36,446)
---------- ----------
TOTAL COMMON SHAREHOLDERS' EQUITY..... 5,412,007 6,025,605
---------- ----------
PREFERRED STOCK (NOTE B)
Subject to mandatory redemption
Cumulative Preferred, $100 par value,
6 1/8% Series J..................... 370,500 370,500 37,050 37,050
---------- ----------
TOTAL SUBJECT TO MANDATORY
REDEMPTION.......................... 37,050 37,050
---------- ----------
OTHER PREFERRED STOCK
$5 Cumulative Preferred, without par
value, authorized 1,915,319 shares... 1,915,319 1,915,319 175,000 175,000
Cumulative Preferred, $100 par value,
authorized 6,000,000 shares*
4.65% Series C.................... 153,296 153,296 15,330 15,330
4.65% Series D.................... 222,330 222,330 22,233 22,233
---------- ----------
TOTAL OTHER PREFERRED STOCK........... 212,563 212,563
---------- ----------
TOTAL PREFERRED STOCK................. $ 249,613 $ 249,613
========== ==========
- ------------------------
* Represents total authorized shares of cumulative preferred stock, $100 par
value, including preferred stock subject to mandatory redemption.
LONG-TERM DEBT (NOTE B)
AT DECEMBER 31
-----------------------------
MATURITY INTEREST RATE SERIES 1999 1998
- -------- ------------- -------- ----------- -----------
(THOUSANDS OF DOLLARS)
Debentures:
1999...................................... 6 1/2 % 1992D $ -- $ 75,000
1999...................................... -- 1994B -- 150,000
2000...................................... 9 3/8 1990A 80,000 --
2000...................................... 7 3/8 1992A 150,000 150,000
2000...................................... 7.60 1992C 125,000 125,000
2000...................................... 6.14 1993C 20,000 --
2001...................................... 6 1/2 1993B 150,000 150,000
2001...................................... 6.22 * 1996B 150,000 150,000
2002...................................... 6 5/8 1993C 150,000 150,000
2002...................................... 6.18 * 1997A 150,000 150,000
2003...................................... 6 3/8 1993D 150,000 150,000
2003...................................... 6.56 1993D 35,000 --
2004...................................... 7 5/8 1992B 150,000 150,000
2005...................................... 6 5/8 1995A 100,000 100,000
2007...................................... 6.45 1997B 330,000 330,000
2008...................................... 6 1/4 1998A 180,000 180,000
2008...................................... 6.15 1998C 100,000 100,000
2009...................................... 7.15 1999B 200,000 --
2023...................................... 7 1/2 1993G 380,000 380,000
2026...................................... 7 3/4 1996A 100,000 100,000
2027...................................... 6 1/2 1997F 80,000 --
2028...................................... 7.10 1998B 105,000 105,000
2028...................................... 6.90 1998D 75,000 75,000
2029...................................... 7 1/8 1994A 150,000 150,000
2029...................................... 7.00 1999G 45,000 --
2039...................................... 7.35 1999A 275,000 --
----------- -----------
Total debentures.......................... 3,430,000 2,920,000
=========== ===========
LONG-TERM DEBT (NOTE B)--(CONTINUED)
Tax-exempt debt--notes issued to New York State Energy Research and
Development Authority for Facilities Revenue Bonds:
AT DECEMBER 31
-----------------------------
MATURITY INTEREST RATE SERIES 1999 1998
- -------- ------------- -------- ----------- -----------
(THOUSANDS OF DOLLARS)
2014...................................... 6.09 1994*** 55,000 --
2015...................................... 3.07 ** 1995*** 44,000 --
2020...................................... 5 1/4 1993B 127,715 127,715
2020...................................... 6.10 1995A 128,285 128,285
2022...................................... 5 3/8 1993C 19,760 19,760
2024...................................... 7 1/4 1989C -- 150,000
2025...................................... 7 1/2 1990A -- 150,000
2026...................................... 7 1/2 1991A 128,150 128,150
2027...................................... 6 3/4 1992A 100,000 100,000
2027...................................... 6 3/8 1992B 100,000 100,000
2028...................................... 6.00 1993A 101,000 101,000
2029...................................... 7 1/8 1994A 100,000 100,000
2034...................................... 4.12 ** 1999A 292,700 --
----------- -----------
Total tax-exempt debt..................... 1,196,610 1,104,910
=========== ===========
Subordinated deferrable interest
debentures:
2031...................................... 7 3/4 1996A 275,000 275,000
----------- -----------
Other long-term debt...................... 43,236 868
Unamortized debt discount................. (25,242) (25,670)
----------- -----------
Total..................................... 4,919,604 4,275,108
Less: long-term debt due within one
year.................................... 395,000 225,000
----------- -----------
Total long-term debt...................... 4,524,604 4,050,108
----------- -----------
Total capitalization...................... $10,186,224 $10,325,326
----------- -----------
- ------------------------
* Rates reset quarterly; December 31, 1999 rate shown.
** Rates reset weekly; December 31, 1999 rate shown.
*** Issued for pollution control financing for Bowline and Lovett generating
stations.
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These notes form an integral part of the accompanying consolidated financial
statements of Consolidated Edison, Inc. (Con Edison) and its subsidiaries.
CON EDISON
On January 1, 1998, Con Edison was established as the parent holding company
for Consolidated Edison Company of New York, Inc. (Con Edison of New York)
pursuant to an agreement and plan of exchange which provided for the exchange of
the outstanding shares of common stock, $2.50 par value, of Con Edison of New
York for an equal number of shares of common stock, $.10 par value, of Con
Edison.
Con Edison, through its subsidiaries, provides a wide range of
energy-related services to its customers.
Con Edison of New York, a regulated utility, provides electric service to
over three million customers and gas service to over a million customers in New
York City and Westchester County. It also provides steam service in parts of
Manhattan.
Orange and Rockland Utilities, Inc. (O&R), a regulated utility which Con
Edison acquired in July 1999 (see Note K), provides electric service to over
275,000 customers and gas service to over 100,000 customers in southeastern New
York and in adjacent sections of New Jersey and northeastern Pennsylvania.
Con Edison's non-utility subsidiaries provide competitive gas and electric
supply and energy-related products and services (Con Edison Solutions); invest
in and manage energy infrastructure projects (Con Edison Development); market
specialized energy supply services to wholesale customers (Con Edison Energy);
and invest in telecommunications infrastructure (Con Edison Communications).
These subsidiaries operate primarily in the Mid-Atlantic and New England states.
NORTHEAST UTILITIES MERGER
In October 1999 Con Edison agreed to acquire Northeast Utilities (Northeast)
for an estimated aggregate purchase price of not more than $3.8 billion, payable
50 percent in cash and 50 percent in stock and subject to adjustment as
discussed below.
To effect the acquisition, Con Edison will merge into a new parent holding
company (New Con Edison) and a subsidiary of New Con Edison will merge into
Northeast (collectively these mergers are referred to as the Merger). The Merger
is subject to certain conditions, including the approval of Con Edison's and
Northeast's shareholders and federal and state regulatory agencies.
Upon completion of the Merger, the former holders of Con Edison and
Northeast common shares will together own all of the outstanding shares of
common stock of New Con Edison, and New Con Edison will in turn own all of the
outstanding common shares of Con Edison of New York, O&R (which will continue to
own its regulated utility subsidiaries), its unregulated subsidiaries and
Northeast (which will continue to own its regulated utilities) and its
unregulated subsidiaries.
New Con Edison is expected to account for the Merger under the purchase
method of accounting in accordance with accounting principles generally accepted
in the United States.
Con Edison will pay a base price of $25 for each Northeast common share,
subject to adjustment as follows: (i) $1 per share will be added to the price
if, prior to the closing of the Merger, Northeast enters into binding agreements
and receives certain regulatory approvals with respect to the sale of certain
nuclear facilities (the "divestiture condition") and (ii) $0.0034 per share will
be added to the price for each day after August 5, 2000 through the day prior to
the closing of the Merger. The stock
consideration (i.e., the number of shares of New Con Edison common stock) to be
received by Northeast shareholders will be determined by dividing the adjusted
price to be paid for each Northeast share by a calculated average market price
of Con Edison common shares over a specified period prior to the closing. The
calculated average market price to be used in this determination is subject to a
"price collar" of not more than $46 per share or less than $36 per Con Edison
share. As a result of the price collar, Northeast shareholders may receive more
(if the calculated average market price of Con Edison's shares exceeds $46 per
share) or fewer (if the calculated average market price is less than $36 per
share) New Con Edison shares than they would have in the absence of the collar.
If the divestiture condition is satisfied following the completion of the Merger
but prior to December 31, 2000, the $1 per Northeast share referred to above
would be separately paid by New Con Edison to the former Northeast shareholders
in cash.
NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION Con Edison's consolidated financial statements
include the accounts of Con Edison and its consolidated subsidiaries, including
the regulated utilities, Con Edison of New York and O&R. Intercompany
transactions have been eliminated.
RESTRUCTURING AGREEMENTS In May 1996 the New York State Public Service
Commission (PSC), in its Competitive Opportunities proceeding, endorsed a
fundamental restructuring of the electric utility industry in New York State,
based on competition in the generation and energy services sectors of the
industry. In September 1997 the PSC approved a restructuring agreement between
Con Edison of New York, the PSC staff and certain other parties (the
Restructuring Agreement). The Restructuring Agreement provides for a transition
to a competitive electric market through the development of a "retail access"
plan, a rate plan for the period ending March 31, 2002, a reasonable opportunity
for recovery of "strandable costs" and the divestiture of electric generation
capacity by Con Edison of New York.
At December 31, 1999 approximately 70,000 Con Edison of New York customers
representing approximately 20 percent of aggregate customer load were purchasing
electricity from other suppliers under the electric Retail Choice program. In
February 2000 the PSC issued an order requiring Con Edison of New York to make
available the program to all of its electric customers by November 2000. Con
Edison of New York delivers electricity to customers in this program through its
regulated transmission and distribution systems. In general, Con Edison of New
York's delivery rates for Retail Choice customers are equal to the rates
applicable to other comparable Con Edison of New York customers, less an amount
representing the cost of the energy and capacity it avoids by not supplying
these customers. In its February 2000 order, the PSC reduced the delivery rate
for large electric Retail Choice customers and authorized Con Edison of New York
to recover the resulting lost revenues by recognizing a portion of the deferred
generation divestiture gain. See Note I.
Con Edison of New York reduced electric rates by $129 million in 1998 and
$80 million in April 1999 as part of the Restructuring Agreement's rate plan.
Under this plan, the revenues that the company receives over the five-year
transition period ending in March 2002 are reduced by $1 billion from the amount
that would have been received had the March 1997 rate levels remained in effect.
Pursuant to the rate plan, rate reductions of approximately $103 million and
$209 million are scheduled to take effect in April 2000 and 2001, respectively.
The April 2001 rate decrease will be partially offset by $36 million of a rate
increase attributable to the New York Power Authority, the recognition of which
is being deferred over the first four years of the rate plan, and $50 million of
deferred generation divestiture gain (see Note I). In addition, a regulatory
liability was established in 1997 for rate reductions for certain customers that
is being amortized over the remaining years of the rate plan.
Con Edison of New York's potential electric strandable costs are those prior
utility investments and commitments that may not be recoverable in a competitive
electric supply market. These include
the unrecovered book cost of its remaining electric generating plants, including
its Indian Point 2 nuclear generating unit, the future cost of decommissioning
Indian Point 2 and its retired Indian Point 1 nuclear generating unit and
charges under contracts with non-utility generators (NUGs). Con Edison of New
York is recovering these costs in the rates it charges all customers, including
those customers purchasing electricity from others. Pursuant to the
Restructuring Agreement, following March 31, 2002, Con Edison of New York will
be given a reasonable opportunity to recover, through a non-bypassable charge to
customers, any remaining strandable costs, including a reasonable return on
investment. For any remaining fossil-related strandable costs, the recovery
period will be 10 years. For additional information about nuclear generation,
see "Rate Recovery" in Note G. For information about NUG-related strandable
costs, see Note H.
Pursuant to the Restructuring Agreement, as amended by a July 1998 PSC
order, Con Edison of New York has sold approximately 6,300 MW of the
approximately 8,300 MW of generating capacity that it owned. See Note I.
In late 1997 the PSC, in its Competitive Opportunities proceeding, approved
a four-year O&R Restructuring Plan. Under this plan, O&R has sold all of its
generating assets and has made retail access available to all of its electric
customers effective May 1, 1999. O&R's electric rates have been reduced by
approximately $32.4 million through rate reductions implemented in December 1997
and 1998. No further rate reductions are required under the plan. In 1998 and
1999 similar plans for O&R's utility subsidiaries in Pennsylvania and New Jersey
were approved by state regulators. The Pennsylvania plan provides for retail
access for all customers effective May 1999. The New Jersey plan provides for
rate reductions of $6.8 million effective August 1999, an additional reduction
of $2.7 million effective January 2001 and a final reduction of $6.3 million
effective August 2002.
In accordance with the April 1999 PSC order approving Con Edison's
acquisition of O&R, Con Edison of New York is accruing approximately $27 million
over the three-year period ending March 2002 for the future benefit of its
electric customers and has reduced its gas rates by approximately $2 million.
O&R reduced its electric rates by $6.1 million and its gas rates by
approximately $1.1 million.
ACCOUNTING POLICIES The accounting policies of Con Edison and its
subsidiaries conform to accounting principles generally accepted in the United
States. For regulated public utilities, like Con Edison of New York and O&R,
accounting principles generally accepted in the United States include Statement
of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation," and, in accordance with SFAS No. 71, the
accounting requirements and rate-making practices of the Federal Energy
Regulatory Commission (FERC) and the PSC.
The standards in SFAS No. 101, "Regulated Enterprises--Accounting for the
Discontinuation of Application of the Financial Accounting Standards Board
(FASB) Statement No. 71," apply to the non-nuclear electric supply portion of
Con Edison of New York's business that is being deregulated as a result of the
Restructuring Agreement (the Deregulated Business). The Deregulated Business
includes all of Con Edison of New York's fossil electric generating assets and
its NUG contracts and related regulatory assets and liabilities. The application
of SFAS No. 101 to the Deregulated Business had no material adverse effect on
the financial position or results of operations of Con Edison or Con Edison of
New York.
No impairment of Con Edison of New York's fossil generating assets has been
recognized under SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," because most of these
assets have been sold at a gain (see Note I) and the estimated cash flows from
the operation and/or sale of the remaining generating assets, together with the
cash flows from the strandable cost recovery provisions of the Restructuring
Agreement, will not be less than the net carrying amount of the fossil
generating assets.
Likewise, there has been no charge against earnings for the deferred charges
(regulatory assets--principally relating to future federal income taxes) and
deferred credits (regulatory liabilities) relating to the Deregulated Business
because recovery of regulatory assets net of regulatory liabilities is probable
under the Restructuring Agreement. At December 31, 1999 net regulatory assets
amounted to approximately $750 million. See Note J.
No loss has been accrued for Con Edison of New York's NUG contracts under
SFAS No. 5, "Accounting for Contingencies," because it is not probable that the
charges by NUGs under the contracts will exceed the cash flows from the sale by
Con Edison of New York of the electricity provided by the NUGs, together with
the cash flows provided pursuant to the Restructuring Agreement. See Note H.
UTILITY PLANT AND DEPRECIATION The capitalized cost of additions to utility
plant includes indirect costs such as engineering, supervision, payroll taxes,
pensions, other benefits and an allowance for funds used during construction
(AFDC). The original cost of property, together with removal cost, less salvage,
is charged to accumulated depreciation as property is retired. The cost of
repairs and maintenance is charged to expense, and the cost of betterments is
capitalized.
Rates used for AFDC include the cost of borrowed funds and a reasonable rate
on Con Edison of New York's own funds when so used, determined in accordance
with PSC and FERC regulations. The AFDC rate was 9.1 percent in 1999, 1998 and
1997. The rate was compounded semiannually, and the amounts applicable to
borrowed funds were treated as a reduction of interest charges.
The annual charge for depreciation is computed using the straight-line
method for financial statement purposes with rates based on average lives and
net salvage factors, with the exception of Indian Point 2, Con Edison of New
York's share of the jointly-owned Roseton generating station, certain leaseholds
and certain general equipment, which are depreciated using a remaining life
amortization method. Con Edison's depreciation rates averaged approximately 3.4
percent in 1999, 1998 and 1997.
Con Edison of New York has a 40 percent ownership interest in the 1,200-MW
Roseton electric generating station operated by Central Hudson Gas & Electric
Corp. This station is expected to be sold not later than July 2001.
Con Edison of New York's investment in the Roseton station at original cost
and as included on its balance sheet at December 31, 1999 and 1998 was:
1999 1998
---------- ----------
(THOUSANDS OF DOLLARS)
Plant in service........................................ $147,194 $146,778
Construction work in progress........................... 391 262
Accumulated depreciation................................ (86,950) (80,944)
-------- --------
Net investment.......................................... $ 60,635 $ 66,096
======== ========
NUCLEAR GENERATION For information about the accounting policies followed
for Con Edison of New York's nuclear generation, see Note G.
REVENUES Con Edison's utility subsidiaries recognize revenues for electric,
gas and steam service on a monthly billing cycle basis. O&R accrues revenues at
the end of each month for estimated energy usage not yet billed to customers,
while Con Edison of New York does not accrue such revenues. Con Edison of New
York defers for refund to firm gas sales and transportation customers over a
12-month period all net interruptible gas revenues not authorized by the PSC to
be retained by the company.
RECOVERABLE FUEL COSTS Con Edison's utility subsidiaries' fuel, purchased
power and gas costs that are above the levels included in base rates are
recoverable under electric, gas and steam fuel adjustment clauses. If costs fall
below these levels, the difference is credited to customers. For electric and
steam, such costs are deferred until the period in which they are billed or
credited to customers (between one and two months after the costs are incurred).
For gas, the excess or deficiency is accumulated for refund or surcharge to
customers on an annual basis.
The electric fuel adjustment clauses provide for the utility subsidiaries to
share with customers any savings or excess costs resulting from the difference
between actual costs for electric fuel and purchased power and monthly target
amounts. The subsidiaries will retain or bear 10 to 30 percent of the savings or
excess costs, as the case may be.
TEMPORARY CASH INVESTMENTS Temporary cash investments are short-term, highly
liquid investments which generally have maturities of three months or less. They
are stated at cost which approximates market. Con Edison considers temporary
cash investments to be cash equivalents.
INVESTMENTS For 1999 and 1998, investments consisted primarily of the
external nuclear decommissioning trust fund and investments of Con Edison
Solutions and Con Edison Development. The nuclear decommissioning trust fund is
stated at market, net of federal income tax; investments of Con Edison Solutions
and Con Edison Development are recorded using the equity method. Earnings on the
nuclear decommissioning trust fund are not recognized in income but are included
in the accumulated depreciation reserve. See "Decommissioning" in Note G.
GAS HEDGING Con Edison of New York uses derivative instruments under its gas
hedging program in order to hedge its gas in storage and anticipated gas
purchases against adverse market price fluctuations. Con Edison of New York
defers the related hedging gains and losses until the underlying gas commodity
is withdrawn from storage or purchased from a supplier and then adjusts the cost
of its gas accordingly. All hedging gains or losses are credited or charged to
customers through Con Edison of New York's gas fuel adjustment clause.
Con Edison Solutions uses derivative instruments to hedge natural gas
transactions in order to minimize the risk of unfavorable market price
fluctuations. Gains or losses on these instruments are deferred until gas is
purchased, at which time gas expense is adjusted accordingly. At December 31,
1999, deferred gains or losses were not material.
Neither Con Edison nor any of its consolidated subsidiaries enters into
derivative transactions that do not meet the criteria for hedges and that do not
qualify for deferred accounting treatment. If for any reason a derivative
transaction were no longer classified as a hedge, the cost of gas in storage or
gas expense, as appropriate, would be adjusted for unrealized gains and losses
relating to the transaction.
NEW FINANCIAL ACCOUNTING STANDARDS SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," was to be effective for fiscal years
beginning after June 15, 1999. In June 1999 the FASB issued SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133," that postponed the
effective date to fiscal years beginning after June 15, 2000. The application of
SFAS No. 133 is not expected to have a material effect on the financial position
or results of operations of Con Edison or materially change its current
disclosure practices.
FEDERAL INCOME TAX In accordance with SFAS No. 109, "Accounting for Income
Taxes," Con Edison's utility subsidiaries have recorded an accumulated deferred
federal income tax liability for substantially all temporary differences between
the book and tax bases of assets and liabilities at current tax rates. In
accordance with rate agreements, the utility subsidiaries have recovered amounts
from customers for a portion of the tax expense they will pay in the future as a
result of the reversal or "turn-around" of these temporary differences. As to
the remaining temporary differences, in
accordance with SFAS No. 71, the utility subsidiaries have established
regulatory assets for the net revenue requirements to be recovered from
customers for the related future tax expense. (See Notes J and L.) In 1993 the
PSC issued an Interim Policy Statement proposing accounting procedures
consistent with SFAS No. 109 and providing assurances that these future
increases in taxes will be recoverable in rates. The final policy statement is
not expected to differ materially from the Interim Policy Statement.
Accumulated deferred investment tax credits are amortized ratably over the
lives of the related properties and applied as a reduction in future federal
income tax expense. Con Edison and its subsidiaries file a consolidated federal
income tax return. Income taxes are allocated to each company based on its
taxable income.
RESEARCH AND DEVELOPMENT COSTS Research and development costs relating to
specific construction projects are capitalized. All other such costs are charged
to operating expenses as incurred. Research and development costs in 1999, 1998
and 1997, amounting to $12.4 million, $20.3 million and $25.9 million,
respectively, were charged to operating expenses. No research and development
costs were capitalized in these years.
RECLASSIFICATION Certain prior year amounts have been reclassified to
conform with current year presentation.
ESTIMATES The accompanying consolidated financial statements reflect
judgments and estimates made in the application of the above accounting
policies.
NOTE B CAPITALIZATION
CAPITALIZATION OF CON EDISON Con Edison's outstanding capitalization, on a
consolidated basis, consists of its common shareholders' equity and the
outstanding preferred stock and long-term debt of its utility subsidiaries. Con
Edison's authorized capitalization also includes six million authorized, but
unissued, Preferred Shares, $1.00 par value.
PREFERRED STOCK NOT SUBJECT TO MANDATORY REDEMPTION Con Edison of New York
has the option to redeem its $5 cumulative preferred stock at $105 and its
cumulative preferred stock, Series C and Series D, at a price of $101 per share
(in each case, plus accrued and unpaid dividends).
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION Con Edison of New York is
required to redeem its cumulative preferred stock, Series J shares on August 1,
2002. The redemption price is $100 per share (plus accrued and unpaid
dividends). Series J shares may not be called for redemption while dividends are
in arrears on outstanding shares of $5 cumulative preferred stock or other
cumulative preferred stock.
COMMON STOCK In May 1998 Con Edison commenced a repurchase program for up to
$1 billion of its common stock. Through December 31, 1999, a total of 21.4
million Con Edison shares were repurchased by Con Edison of New York, at a total
cost of $940.5 million. In January 2000 Con Edison announced the expansion of
its stock repurchase program by an additional $300 million.
DIVIDENDS Beginning in 1998, with the establishment of Con Edison as a
holding company, dividends on Con Edison's common shares depend primarily on the
dividends and other distributions that Con Edison of New York and Con Edison's
other subsidiaries pay to Con Edison and the capital requirements of Con Edison
and its subsidiaries. The Restructuring Agreement limits the dividends that Con
Edison of New York may pay to not more than 100 percent of Con Edison of New
York's income available for dividends, calculated on a two-year rolling average
basis. Excluded from the calculation of "income available for dividends" are
non-cash charges to income resulting from accounting changes or charges to
income resulting from significant unanticipated events. The restriction also
does not apply to dividends paid in order to transfer to Con Edison proceeds
from major transactions, such as asset sales, or to dividends reducing Con
Edison of New York's equity ratio to a level appropriate to its business risk.
Payment of Con Edison of New York's common stock dividends to Con Edison is
subject to certain additional restrictions. No dividends may be paid, or funds
set apart for payment, on Con Edison of New York's common stock until all
dividends accrued on the $5 cumulative preferred stock and other cumulative
preferred stock have been paid, or declared and set apart for payment, and
unless Con Edison of New York is not in arrears on its mandatory redemption
obligation for the Series J cumulative preferred stock. No dividends may be paid
on any of Con Edison of New York's capital stock during any period in which Con
Edison of New York has deferred payment of interest on its subordinated
deferrable interest debentures.
LONG-TERM DEBT Long-term debt maturing in the period 2000-2004 is as
follows:
(MILLIONS OF DOLLARS)
---------------------
2000....................................................... $395
2001....................................................... 300
2002....................................................... 300
2003....................................................... 185
2004....................................................... 150
Long-term debt of Con Edison's utility subsidiaries is stated at cost which,
as of December 31, 1999, approximates fair value (estimated based on current
rates for debt of the same remaining maturities).
NOTE C SHORT TERM BORROWING
At December 31, 1999 Con Edison and its utility subsidiaries had commercial
paper programs, under which short-term borrowings are made at prevailing market
rates, totaling $950 million. These programs are supported by revolving credit
agreements with banks. At December 31, 1999, $495.4 million, at a weighted
average interest rate of 5.03 percent per annum, was outstanding under Con
Edison of New York's $500 million program. No amounts were outstanding at
December 31, 1999 under Con Edison's $350 million program or O&R's $100 million
program. No amounts were outstanding at December 31, 1998 under the Con Edison
or Con Edison of New York programs. During 1999, Con Edison expanded, and
subsequently reduced, its program by $600 million in connection with its July
1999 acquisition of O&R. In February 2000, the FERC authorized Con Edison of New
York to expand its program to $800 million.
Bank commitments under the revolving credit agreements may terminate upon a
change of control of Con Edison, and borrowings under the agreements are subject
to certain conditions, including that the ratio (calculated in accordance with
the agreements) of debt to total capital of the borrower not at any time exceed
0.65 to 1. At December 31, 1999 this ratio was .49 to 1 for Con Edison, .52 to 1
for Con Edison of New York and .55 to 1 for O&R.
NOTE D PENSION BENEFITS
CON EDISON OF NEW YORK
Con Edison of New York has non-contributory pension plans that cover
substantially all of its employees and certain employees of other Con Edison
subsidiaries. The plans are designed to comply with the Employee Retirement
Income Security Act of 1974 (ERISA).
Investment gains and losses are recognized over five years and unrecognized
actuarial gains and losses are amortized over 10 years.
The company offered a special retirement program in 1999 providing enhanced
pension benefits for those employees who met specified eligibility requirements
and retired within specific time limits. These incentives fall within the
category of special termination benefits as described in SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits." The increase in pension obligations
as a result of this program amounts to $45.0 million. These obligations have
been deferred for disposition by the PSC in accordance with the Restructuring
Agreement.
The components of the company's net periodic pension cost for 1999, 1998 and
1997 were as follows:
1999 1998 1997
-------- -------- --------
(MILLIONS OF DOLLARS)
Service cost--including administrative expenses* $105.1 $104.7 $111.4
Interest cost on projected benefit obligation............... 358.7 346.8 334.3
Expected return on plan assets.............................. (486.6) (445.1) (407.3)
Amortization of net actuarial (gain)........................ (90.1) (71.7) (42.0)
Amortization of prior service cost.......................... 10.5 10.3 10.2
Amortization of transition obligation....................... 3.0 3.0 3.0
------ ------ ------
Net periodic pension cost................................... (99.4) (52.0) 9.6
------ ------ ------
Amortization of regulatory asset**.......................... 2.2 2.2 2.2
------ ------ ------
Total pension cost.......................................... $(97.2) $(49.8) $ 11.8
------ ------ ------
Cost capitalized............................................ (19.2) (9.2) 2.5
Cost charged to operating expenses.......................... (78.0) (40.6) 9.3
- ------------------------
* Effective January 1, 1998, an assumption for administrative expenses is
included as a component of service cost.
** Relates to $33.3 million increase in pension obligations from a 1993 special
retirement program.
The funded status of the plans at December 31, 1999, 1998 and 1997 was as
follows:
1999 1998 1997
-------- -------- --------
(MILLIONS OF DOLLARS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $5,384.1 $4,940.6 $4,703.0
Service cost--excluding administrative expenses............. 103.8 103.4 111.4
Interest cost on projected benefit obligation............... 358.7 346.8 334.3
Plan amendments............................................. 0.8 2.1 0.5
Actuarial (gain) loss....................................... (728.0) 192.6 (24.2)
Special termination benefits................................ 45.0 -- --
Benefits paid............................................... (249.3) (201.4) (184.4)
-------- -------- --------
Benefit obligation at end of year........................... $4,915.1 $5,384.1 $4,940.6
-------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $6,679.2 $5,988.7 $5,269.3
Actual return on plan assets................................ 1,017.2 903.3 886.9
Employer contributions...................................... 1.7 1.4 25.2
Benefits paid............................................... (249.3) (201.4) (184.4)
Administrative expenses..................................... (18.0) (12.8) (8.3)
-------- -------- --------
Fair value of plan assets at end of year.................... $7,430.8 $6,679.2 $5,988.7
-------- -------- --------
Funded status............................................... $2,515.7 $1,295.1 $1,048.1
Unrecognized net (gain)..................................... (2,491.6) (1,339.8) (1,157.4)
Unrecognized prior service costs............................ 72.5 82.2 90.4
Unrecognized net transition liability at January 1, 1987*... 5.3 8.3 11.3
-------- -------- --------
Prepaid (accrued) benefit cost.............................. $ 101.9 $ 45.8 $ (7.6)
======== ======== ========
- ------------------------
* Being amortized over approximately 15 years.
The actuarial assumptions at December 31, 1999, 1998 and 1997 were as
follows:
1999 1998 1997
-------- -------- --------
Discount rate....................................... 8.00% 6.75% 7.25%
Expected return on plan assets...................... 8.50% 8.50% 8.50%
Rate of compensation increase....................... 4.80% 4.80% 5.80%
PENSION BENEFITS
ORANGE AND ROCKLAND
Orange and Rockland (O&R) has a non-contributory defined benefit retirement
plan, covering substantially all employees. The plan is designed to comply with
the Employee Retirement Income Security Act of 1974 (ERISA).
Investment gains and losses are recognized over three years and unrecognized
actuarial gains and losses are amortized over 10 years.
During 1999, O&R sold its electric generating assets to Southern Energy.
Also during 1999, O&R offered a special retirement program providing enhanced
pension benefits for those employees who met specified eligibility requirements
and retired within specific time limits. Because of the relative number of O&R
employees who stopped accruing benefits in the plan as a result of these events,
a curtailment charge was recorded in accordance with SFAS No. 88. A portion of
this curtailment charge was recorded as a regulatory asset in accordance with
SFAS No. 71 and a portion was expensed.
The acquisition of O&R by Con Edison in July 1999 triggered purchase
accounting requirements that are reflected in the net periodic pension cost.
Under such accounting O&R's accrued pension liability was adjusted to recognize
all previously unrecognized gains or losses arising from past experience
different from that assumed, all unrecognized prior service costs, and the
remainder of any unrecognized obligation or asset existing at the date of the
initial application of SFAS No. 87, "Employers' Accounting for Pensions." A
portion of these adjustments was recorded as a regulatory liability in
accordance with SFAS No. 71 and a portion was expensed.
O&R is currently allowed to recover in rates pension costs recognized under
SFAS No. 87. In accordance with the provisions of SFAS No. 71, the company
defers for future recovery any difference between expenses recognized under SFAS
No. 87 and the current rate allowance authorized by each regulatory jurisdiction
in which it operates.
The components of O&R's net periodic pension cost for 1999, 1998 and 1997
were as follows:
1999 1998 1997
-------- -------- --------
(THOUSANDS OF DOLLARS)
Service cost--including administrative expenses............. $ 5,824 $ 6,868 $ 6,535
Interest cost on projected benefit obligation............... 19,702 19,194 17,993
Expected return on plan assets.............................. (19,024) (17,480) (15,838)
Amortization of net actuarial (gain)........................ (2,725) (6,338) (4,688)
Amortization of prior service cost.......................... 2,128 4,251 3,822
Amortization of transition (asset).......................... (504) (1,009) (1,009)
Recognition of curtailment and termination benefits......... 7,321 -- --
Recognition of purchase accounting.......................... 3,229 -- --
------- ------- -------
Net periodic pension cost................................... $15,951 $ 5,486 $ 6,815
------- ------- -------
Amortized/(deferred and capitalized)........................ 66 90 (751)
------- ------- -------
Net expense*................................................ $16,017 $ 5,576 $ 6,064
======= ======= =======
- ------------------------
* Net expense for the period July 1, 1999 through December 31, 1999 was $1.9
million. This amount is reflected in Con Edison's consolidated financial
statements and excludes the effects of curtailment, termination benefits,
and purchase accounting.
The funded status of the plan at December 31, 1999, 1998 and 1997 was as
follows:
1999 1998 1997
-------- -------- --------
(THOUSANDS OF DOLLARS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $289,765 $260,306 $232,990
Service cost--excluding administrative expenses............. 5,825 6,868 6,535
Interest cost on projected benefit obligation............... 19,702 19,194 17,993
Plan amendments............................................. 54 -- 12,852
Actuarial loss.............................................. 22,551 18,375 2,387
Curtailment and termination benefits........................ 4,707 -- --
Benefits paid............................................... (16,132) (14,978) (12,451)
-------- -------- --------
Benefit obligation at end of year........................... $326,472 $289,765 $260,306
-------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $266,511 $247,523 $225,997
Actual return on plan assets................................ 29,811 34,640 34,526
Employer contributions...................................... 10,023 -- --
Benefits paid............................................... (14,799) (14,131) (11,637)
Administrative expenses..................................... (2,235) (1,521) (1,363)
-------- -------- --------
Fair value of plan assets at end of year.................... $289,311 $266,511 $247,523
-------- -------- --------
Funded status............................................... $(37,161) $(23,254) $(12,783)
Unrecognized net loss (gain)................................ 13,390 (57,031) (66,108)
Unrecognized prior service costs............................ -- 35,830 40,081
Unrecognized net transition asset at January 1, 1987*....... -- (3,026) (4,034)
-------- -------- --------
Prepaid (accrued) benefit cost.............................. $(23,771) $(47,481) $(42,844)
======== ======== ========
- ------------------------
* Was being amortized over approximately 15 years.
The actuarial assumptions at December 31, 1999, 1998 and 1997 were as
follows:
1999 1998 1997
-------- -------- --------
Discount rate............................................. 8.00% 6.75% 7.50%
Expected return on plan assets............................ 8.50% 8.00% 8.00%
Rate of compensation increase
Hourly................................................ 3.00% 3.00% 3.00%
Management............................................ 1.00% 1.00% 1.00%
NOTE E POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (OPEB)
CON EDISON OF NEW YORK
Con Edison of New York has a contributory comprehensive hospital, medical
and prescription drug program for all retirees, their dependents and surviving
spouses. The company also has a contributory life insurance program for
bargaining unit employees. In addition the company provides basic life insurance
benefits up to a specified maximum at no cost to retired management employees.
Retired management employees must contribute to the cost of supplemental life
insurance benefits in excess of the specified maximum. Certain employees of
other Con Edison subsidiaries are eligible to receive benefits under these
programs. The company has reserved the right to amend or terminate these
programs.
Investment gains and losses are recognized over five years and unrecognized
actuarial gains and losses are amortized over 10 years.
The components of the company's postretirement benefit (health and life
insurance) costs for 1999, 1998 and 1997 were as follows:
1999 1998 1997
-------- -------- --------
(MILLIONS OF DOLLARS)
Service cost................................................ $13.7 $14.9 $15.7
Interest cost on accumulated postretirement benefit
obligation................................................ 72.5 70.8 71.0
Expected return on plan assets.............................. (41.5) (38.2) (36.5)
Amortization of net actuarial loss.......................... 26.8 20.9 21.4
Amortization of prior service cost.......................... 1.4 -- --
Amortization of transition obligation....................... 17.4 21.5 25.9
----- ----- -----
Net periodic postretirement benefit cost.................... $90.3 $89.9 $97.5
----- ----- -----
Cost capitalized............................................ 17.8 16.7 20.0
Cost charged to operating expenses.......................... 72.5 73.2 77.5
===== ===== =====
The program's funded status at December 31, 1999, 1998 and 1997 was as
follows:
1999 1998 1997
-------- -------- --------
(MILLIONS OF DOLLARS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $1,097.0 $ 964.1 $ 999.1
Service cost................................................ 13.7 14.9 15.7
Interest cost on accumulated postretirement benefit
obligation................................................ 72.5 70.8 71.0
Plan amendments............................................. -- (44.8) (66.5)
Actuarial (gain) loss....................................... (211.8) 133.7 (13.4)
Benefits paid and administrative expenses................... (58.1) (51.7) (50.2)
Participant contributions................................... 10.7 10.0 8.4
-------- -------- -------
Benefit obligation at end of year........................... $ 924.0 $1,097.0 $ 964.1
-------- -------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $ 665.8 $ 574.1 $ 444.2
Actual return on plan assets................................ 100.5 119.3 100.4
Employer contributions...................................... 115.5 14.1 71.3
Participant contributions................................... 10.7 10.0 8.4
Benefits paid............................................... (53.9) (47.7) (46.7)
Administrative expenses..................................... (4.2) (4.0) (3.5)
-------- -------- -------
Fair value of plan assets at end of year.................... $ 834.4 $ 665.8 $ 574.1
-------- -------- -------
Funded status............................................... $ (89.6) $ (431.2) $(390.0)
Unrecognized net (gain) loss................................ (224.6) 73.0 41.3
Unrecognized prior service costs............................ 11.2 12.6 --
Unrecognized transition obligation at January 1, 1993*...... 226.2 243.6 322.6
-------- -------- -------
Accrued postretirement benefit cost......................... $ (76.8) $ (102.0) $ (26.1)
======== ======== =======
- ------------------------
* Being amortized over a period of 20 years.
The actuarial assumptions at December 31, 1999, 1998 and 1997 were as
follows:
1999 1998 1997
-------- -------- --------
Discount rate............................................. 8.00% 6.75% 7.25%
Expected return on plan assets
Tax-exempt assets..................................... 8.50% 8.50% 8.50%
Taxable assets........................................ 7.50% 7.50% 8.50%
The health care cost trend rate assumed for 1999 was 7.5 percent; for 2000,
7.0 percent; and then declining one-half percent per year to 5 percent for 2004
and thereafter.
A one-percentage point change in the assumed health care cost trend rates
would have the following effects:
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
(MILLIONS OF DOLLARS)
Effect on accumulated postretirement benefit obligation..... $113.4 $99.3
Effect on service cost and interest cost components......... $ 12.7 $10.8
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (OPEB)
ORANGE AND ROCKLAND
Orange and Rockland (O&R) has a contributory medical and prescription drug
program for all retirees, their dependents and surviving spouses. The company
also has a non-contributory life insurance program for retirees.
Investment gains and losses are recognized over three years and unrecognized
actuarial gains and losses are amortized over 10 years.
During 1999, O&R sold its electric generating assets to Southern Energy.
Because of the relative number of O&R employees who stopped accruing benefits in
the plan as a result of this event, a curtailment charge was recorded in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits
other than Pensions."
The acquisition of O&R by Con Edison in July 1999 triggered purchase
accounting requirements that are reflected in the net periodic benefit cost.
Under purchase accounting O&R's accrued postretirement liability was adjusted to
recognize all previously unrecognized gains or losses arising from past
experience different from that assumed, all unrecognized prior service costs,
and the remainder of any unrecognized obligation or asset existing at the date
of the initial application of SFAS 106. The total of these adjustments along
with the curtailment charge discussed above were recorded as a regulatory asset
in accordance with SFAS No. 71.
O&R is currently allowed to recover in rates OPEB costs recognized under
SFAS No. 106. In accordance with the provisions of SFAS No. 71, the company
defers for future recovery any difference between expenses recognized under SFAS
No. 106 and the current rate allowance authorized by each regulatory
jurisdiction in which it operates.
The components of O&R's postretirement benefit (health and life insurance)
costs for 1999, 1998 and 1997 were as follows:
1999 1998 1997
-------- -------- --------
(THOUSANDS OF DOLLARS)
Service cost................................................ $1,699 $ 1,463 $1,863
Interest cost on accumulated postretirement benefit
obligation................................................ 5,302 5,326 6,013
Expected return on plan assets.............................. (2,174) (1,654) (907)
Amortization of net actuarial loss.......................... 383 21 1,011
Amortization of prior service cost.......................... 4 9 84
Amortization of transition obligation....................... 1,213 2,427 2,572
------ ------- ------
Net periodic postretirement benefit cost.................... 6,427 7,592 10,636
------ ------- ------
Amortized/(deferred and capitalized)........................ (1,147) 3,169 (1,009)
------ ------- ------
Net expense................................................. $5,280 $10,761 $9,627
------ ------- ------
- ------------------------
* Net expense for the period July 1, 1999 through December 31, 1999 was $2.3
million. This amount is reflected in Con Edison's consolidated financial
statements and excludes the effects of curtailment, termination benefits,
and purchase accounting.
The program's funded status at December 31, 1999, 1998 and 1997 was as
follows:
1999 1998 1997
-------- -------- --------
(THOUSANDS OF DOLLARS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ 80,477 $ 80,625 $ 82,999
Service cost................................................ 1,699 1,463 1,863
Interest cost on accumulated postretirement benefit
obligation................................................ 5,302 5,326 6,013
Plan amendments............................................. -- 98 (6,898)
Actual loss (gain).......................................... 6,314 (1,802) 1,230
Benefits paid and administrative expenses................... (5,405) (5,334) (4,582)
Participant contributions................................... 149 101 --
-------- -------- --------
Benefit obligation at end of year........................... $ 88,536 $ 80,477 $ 80,625
-------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $ 31,180 $ 22,238 $ 14,822
Actual return on plan assets................................ 3,512 2,086 735
Employer contributions...................................... 5,512 12,089 11,263
Participant contributions................................... 54 101 --
Benefits paid and administrative expenses................... (2,368) (5,334) (4,582)
-------- -------- --------
Fair value of plan assets at end of year.................... $ 37,890 $ 31,180 $ 22,238
-------- -------- --------
Funded status............................................... $(50,646) $(49,297) $(58,387)
Unrecognized net loss/(gain)................................ 9,008 5,016 6,393
Unrecognized prior service costs............................ -- 89 --
Unrecognized transition obligation at January 1, 1993*...... -- 34,601 37,027
-------- -------- --------
Accrued postretirement benefit cost......................... $(41,638) $ (9,591) $(14,967)
-------- -------- --------
- ------------------------
* Being amortized over a period of 20 years.
The actuarial assumptions at December 31, 1999, 1998 and 1997 were as
follows:
1999 1998 1997
-------- -------- --------
Discount rate............................................. 8.00% 6.75% 7.50%
Expected return on plan assets
Tax-exempt assets....................................... 8.50% 6.25% 6.25%
Taxable assets.......................................... 7.50% 6.25% 6.25%
The health care cost trend rate assumed for 1999 was 6.5 percent for health
care and 8.0 percent for prescription drug; for 2000, 7.0 percent; and then
declining one-half percent per year to 5 percent for 2004 and thereafter.
A one-percentage point change in the assumed health care cost trend rates
would have the following effects:
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
(THOUSANDS OF DOLLARS)
Effect on accumulated postretirement benefit obligation..... $9,431 $7,930
Effect on service cost and interest cost components......... $ 940 $ 770
NOTE F ENVIRONMENTAL MATTERS
Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and
coal tar, have been used or generated in the course of operations of Con
Edison's utility subsidiaries and may be present in their facilities and
equipment.
The Federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980 (Superfund) and similar state statutes impose joint and several
strict liability, regardless of fault, upon generators of hazardous substances
for resulting removal and remedial costs and environmental damages. Liabilities
under these laws can be material and in some instances may be imposed without
regard to fault, or may be imposed for past acts, even though such past acts may
have been lawful at the time they occurred.
At December 31, 1999, Con Edison had accrued a $38 million liability as its
best estimate of the utility subsidiaries' liability for sites as to which they
have received process or notice alleging that hazardous substances generated by
them (and, in most instances, other potentially responsible parties) were
deposited. There will be additional liability at these sites and other sites,
the amount of which is not presently determinable but may be material to Con
Edison's financial position, results of operations or liquidity.
Under Con Edison of New York's current electric, gas and steam rate
agreements, site investigation and remediation costs in excess of $5 million
annually incurred with respect to hazardous waste for which it is responsible is
to be deferred and subsequently reflected in rates. At December 31, 1999, $10
million of such costs had been deferred as a regulatory asset.
Suits have been brought in New York State and federal courts against Con
Edison's utility subsidiaries and many other defendants, wherein a large number
of plaintiffs sought large amounts of compensatory and punitive damages for
deaths and injuries allegedly caused by exposure to asbestos at various premises
of the utility subsidiaries. Many of these suits have been disposed of without
any payment by the utility subsidiaries, or for immaterial amounts. The amounts
specified in all the remaining suits total billions of dollars but Con Edison
believes that these amounts are greatly exaggerated, as were the claims already
disposed of. Based on the information and relevant circumstances known to Con
Edison this time, it does not believe that these suits will have a material
adverse effect on its financial position, results of operations or liquidity.
NOTE G NUCLEAR GENERATION
Con Edison of New York owns the Indian Point 2 nuclear generating unit,
which has a capacity of approximately 1,000 MW, and the retired Indian Point 1
nuclear generating unit.
The book value of Indian Point 2, net of accumulated depreciation, was $382
million and $459 million at December 31, 1999 and 1998, respectively. The net
book value of Indian Point 2 was reduced by $50 million in 1999 as a result of
the use of a portion of the net after-tax gain from fossil plant sales to
increase its accumulated depreciation reserve (see Note I).
In 1999 Con Edison of New York announced its intention to explore
alternatives to its continued ownership and operation of Indian Point 2 and the
retired Indian Point 1. In February 2000 the company announced an auction
process for the Indian Point 2 unit, the retired Indian Point 1 unit and related
gas turbines. A proceeding initiated in 1998 by the PSC to consider the future
of nuclear generating facilities in New York State is continuing. The
Restructuring Agreement does not contemplate the divestiture of Indian Point 2,
and any such divestiture would be subject to regulatory approvals, including the
approvals of the PSC and the Nuclear Regulatory Commission.
OUTAGE ACCOUNTING Scheduled refueling and maintenance outages are generally
required after a cycle of approximately 22 months. Con Edison of New York's
electric rates reflect a charge for the cost of scheduled refueling and
maintenance outages. Under Con Edison of New York's current and previous
electric rate agreements, these charges have been deferred for recognition in
income during the period in which expenses are incurred for the outage. The
costs of unscheduled outages are expensed as incurred and are not reflected in
rates.
RATE RECOVERY Pursuant to the Restructuring Agreement, Con Edison of New
York is recovering its investment in Indian Point 2 and funds to decommission
Indian Point 1 and 2 in the rates it charges all its electric customers. Under
the Restructuring Agreement, following March 31, 2002, Con Edison of New York
will be given a reasonable opportunity to recover its remaining investment in
Indian Point 2 and additional funds needed to decommission Indian Point 1 and 2
through a non-bypassable charge to customers over a period that will extend no
longer than the end of Indian Point 2's operating license in 2013.
Reconciliation of estimated and actual decommissioning costs may be reflected in
rates after 2013.
DECOMMISSIONING Since 1975 Con Edison of New York has been collecting costs
of decommissioning from customers and accruing such amounts within its internal
accumulated depreciation reserve. Amounts collected to fund decommissioning of
the nuclear portions of the units have been deposited in external trust funds
and earnings on such funds have been accrued as additional accumulated
depreciation. The trust funds amounted to $305.7 million and $265.1 million,
respectively, at December 31, 1999 and 1998. See "Investments" in Note A.
Accumulated decommissioning provisions at December 31, 1999 and 1998 were as
follows:
AMOUNTS INCLUDED IN
ACCUMULATED
DEPRECIATION
-----------------------
1999 1998
-------- --------
(MILLIONS OF DOLLARS)
Nuclear.................................................. $305.7 $265.1
Non-nuclear.............................................. 55.4 56.7
------ ------
Total.................................................... $361.1 $321.8
====== ======
The Restructuring Agreement continued in rates annual expense allowances of
$21.3 million and $1.8 million, respectively, to fund the estimated costs of
decommissioning the nuclear and non-nuclear portions of the Indian Point 1 and 2
units. These amounts were established pursuant to a 1995 electric rate agreement
based upon a 1994 site-specific study. The study estimated the decommissioning
costs to be approximately $657 million in 1993 dollars (assuming 2016 as the
midpoint for decommissioning expenditures), including $252 million for extended
storage of spent nuclear fuel. The minimum decommissioning fund estimate
calculated in accordance with Nuclear Regulatory Commission (NRC) regulations
was between $507 million and $862 million as of December 31, 1998. A new
site-specific study is currently underway.
The FASB is currently reviewing the utility industry's accounting treatment
of nuclear and certain other plant decommissioning costs. In an exposure draft
issued in February 1996, the FASB concluded that decommissioning costs should be
accounted for as a liability at expected present value, with a corresponding
asset in utility plant, rather than as a component of depreciation. The FASB
expects to issue a new exposure draft in the first quarter of 2000.
NUCLEAR FUEL Nuclear fuel assemblies and components are amortized to
operating expense based on the quantity of heat produced in the generation of
electricity. Nuclear fuel costs are recovered in revenues through base rates or
through the fuel adjustment clause.
Nuclear fuel costs include provisions for payments to the U.S. Department of
Energy (DOE) for future off-site storage of the spent fuel and for a portion of
the costs to decontaminate and decommission the DOE facilities used to enrich
uranium purchased by Con Edison of New York. Such payments amounted to $10.0
million in 1999.
The DOE has defaulted on its obligation to Con Edison of New York to begin
to take title to the spent nuclear fuel generated at Indian Point 2. Con Edison
of New York and a number of other utilities are pursuing their legal remedies
against the DOE. Con Edison of New York estimates that it has adequate on-site
capacity for interim storage of its spent fuel until 2005 after which, absent
regulatory or technological developments, additional on-site or other spent fuel
storage facilities would be required. The operation of Indian Point 2 would be
curtailed if appropriate arrangements for the storage of its spent fuel are not
made.
STEAM GENERATORS Nuclear generating units similar in design to Indian Point
2 have experienced problems that have required steam generator replacement.
Inspections of the Indian Point 2 steam generators since 1976 have revealed
various problems, some of which appear to have been arrested. The remaining
service life of the steam generators is uncertain. The projected service life of
the steam generators is reassessed periodically in the light of the inspections
made during scheduled outages of the unit. Based on the latest available data
and current NRC criteria, Con Edison of New York estimates that steam generator
replacement will not be required before 2002. On February 15, 2000 Con Edison of
New York shut down Indian Point 2 following a leak in one if its steam
generators. The cause of the leak is being investigated.
Con Edison of New York has replacement steam generators, which are stored at
the site. Replacement of the steam generators would require estimated additional
expenditures of up to $100 million (exclusive of replacement power costs) and an
outage of approximately three months. However, securing necessary permits and
approvals or other factors could require a substantially longer outage if steam
generator replacement is required on short notice.
NUCLEAR INSURANCE The insurance policies covering Con Edison of New York's
nuclear facilities for property damage, excess property damage, and outage costs
permit assessments under certain conditions to cover insurers' losses. As of
December 31, 1999, the highest amount that could be assessed for losses during
the current policy year under all of the policies was $18.6 million. While
assessments may also be made for losses in certain prior years, Con Edison of
New York is not aware of any losses in such years that it believes are likely to
result in an assessment. Under certain circumstances, in the event of nuclear
incidents at facilities covered by the federal government's third-party
liability indemnification program, Con Edison of New York could be assessed up
to $88.1 million per incident, of which not more than $10 million may be
assessed in any one year.
NOTE H NON-UTILITY GENERATORS
Con Edison of New York has contracts with NUGs for approximately 2,100 MW
of electric generating capacity. Assuming performance by the NUGs, Con Edison of
New York is obligated over the terms of the contracts (which extend for various
periods, up to 2036) to make capacity and other fixed payments.
For the years 2000-2004, the capacity and other fixed payments under the
contracts are estimated to be $477 million, $485 million, $494 million, $503
million and $516 million. Such payments gradually increase to approximately $600
million in 2013, and thereafter decline significantly. For energy delivered
under these contracts, Con Edison of New York is obligated to pay variable
prices that are estimated to be approximately at market levels.
Under the terms of its Restructuring Agreement, Con Edison of New York is
recovering in rates the charges it incurs under contracts with NUGs (see
"Restructuring Agreements" in Note A). The Restructuring Agreement provides
that, following March 31, 2002, Con Edison of New York will be given a
reasonable opportunity to recover, through a non-bypassable charge to customers,
the amount, if any, by which the actual costs of its purchases under the
contracts exceed market value.
The Restructuring Agreement provided for a potential NUG contract
disallowance of the lower of (i) 10 percent of the above-market costs or (ii)
$300 million (in 2002 dollars). As contemplated by the Restructuring Agreement,
Con Edison of New York may offset the potential disallowance by NUG contract
mitigation and by 10 percent of the gross proceeds of any generating unit sales
to third parties. Con Edison of New York will be permitted a reasonable
opportunity to recover any costs subject to disallowance that are not offset by
these two factors if it makes good faith efforts in implementing provisions of
the Restructuring Agreement leading to the development of a competitive electric
market in its service territory, including providing a choice of suppliers to
its customers through its Retail Choice program and working to establish an
independent system operator, which would administer the wholesale electric
market in New York State.
In October 1998 the PSC allowed Con Edison of New York to offset the
potential disallowance by approximately $115 million (in 2002 dollars) as a
result of termination of NUG contracts for 42.5 MW of capacity. As permitted by
the PSC, Con Edison of New York has retained revenues relating to capacity costs
avoided as a result of the terminations. As a result, $92 million remained
available at December 31, 1999 to offset a potential NUG contract disallowance.
In June and August 1999, Con Edison of New York completed the sale of its
in-City fossil electric generating units to third parties for a total of $1.8
billion, resulting in an additional $180 million of credit against a possible
disallowance. Any additional NUG contract mitigation and 10 percent of the gross
proceeds of any additional generating unit sales, including the planned sale of
Con Edison of New York's share of the Roseton plant by Central Hudson Gas &
Electric, would further offset any potential disallowance. (See Note I.)
NOTE I GENERATION DIVESTITURE
In 1999 Con Edison of New York completed the sales of almost 6,300 MW of
its approximately 8,300 MW of electric generating assets for an aggregate price
of $1.8 billion. The net book value of the assets sold was approximately $1
billion, and the net after-tax gain from the sales was $379 million, of which
$29 million of accumulated deferred taxes and investment tax credits relating to
the assets sold were recognized in income in 1999.
Consistent with the Restructuring Agreement, as amended by a July 1998 PSC
order relating to the divestiture, $50 million of the net after-tax gain has
been retained for shareholders, approximately $250 million has been deferred for
disposition by the PSC and $50 million was applied as an increase to the
accumulated depreciation reserve for Indian Point 2 (see Note G). The $50
million retained for shareholders will be recognized in income during the last
year of the Restructuring Agreement (12 months ending March 31, 2002) as a
partial offset to the rate reductions scheduled for that year, pursuant to the
Restructuring Agreement. (See "Restructuring Agreements" in Note A.)
The approximately 2,000 MW of electric generating assets that Con Edison of
New York continues to own include the 1,000 MW Indian Point 2 plant and its 480
MW interest in the jointly-owned Roseton generating station (see "Utility Plant
and Depreciation" in Note A).
O&R completed the sale of all of its generating assets prior to the
completion of Con Edison's purchase of O&R in July 1999.
The Restructuring Agreement and related PSC orders provide for the recovery
of the incremental cost of capacity and energy required by Con Edison of New
York to serve its remaining full-service customers. Con Edison of New York has
agreed to purchase capacity from the buyers of the generating assets it sold for
at least the period until the Installed Capacity (ICAP) market of the New York
Independent System Operator (NYISO) is operational, and has submitted a petition
to the PSC relating to the recovery of the incremental cost of this capacity.
Such incremental capacity costs, which are estimated will total about $75
million if the NYISO ICAP market commences operation as now scheduled in May
2000, are being deferred as a regulatory asset. (See Note J.) In the event of a
prolonged delay in the commencement of the NYISO ICAP market, additional
incremental capacity costs could be material. The cost of the electric energy
actually purchased from the buyers of the generating assets is recoverable under
the electric fuel adjustment clause. (See "Recoverable Fuel Costs" in Note A.)
NOTE J REGULATORY ASSETS AND LIABILITIES
The utility subsidiaries of Con Edison have established various regulatory
assets to defer specific costs that the applicable regulatory agencies have
permitted or are expected to permit to be recovered in rates over time.
Similarly, certain regulatory liabilities have been established to defer
specific gains or credits to be refunded to customers over time. The principal
regulatory assets and liabilities included in the deferred charges at December
31, 1999 and 1998 were as follows:
1999 1998
--------- ----------
(THOUSANDS OF DOLLARS)
REGULATORY ASSETS
Future federal income tax (See Note A)...................... $ 785,014 $ 951,016
Recoverable fuel costs (See Note A)......................... 95,162 22,013
Power contract termination costs (See Note H)............... 71,861 70,621
Accrued unbilled gas revenues (See Note A).................. 67,775 43,594
MTA business tax surcharge*................................. 60,712 66,274
O&R Pension/OPEB expenses (See Notes D and E)............... 57,630 2,774
Enlightened Energy program costs**.......................... 34,065 68,381
Other....................................................... 210,046 134,462
--------- ----------
Total Regulatory Assets..................................... 1,382,265 1,359,135
--------- ----------
REGULATORY LIABILITIES
Gain on divestiture (See Note I)............................ 306,867 --
Accumulated deferred investment tax credits (See Note A).... 139,838 154,970
NYPA rate increase (See Note A)............................. 25,630 16,175
O&R Pension expenses (See Note D)........................... 23,854 --
Interruptible sales credits (See Note A).................... 23,745 20,969
Nuclear refueling outage expenses (See Note G).............. 22,273 --
Electric rate decrease (See Note A)......................... 12,000 16,250
Other....................................................... 81,815 72,654
--------- ----------
Total Regulatory Liabilities................................ 636,022 281,018
--------- ----------
NET REGULATORY ASSETS/LIABILITIES........................... $ 746,243 $1,078,117
--------- ----------
- ------------------------
* Business tax surcharge imposed by New York State to provide funds to the
Metropolitan Transit Authority; recovered from customers annually.
** Cost of demand-side management programs; recovered from customers
generally over a five-year period.
NOTE K ORANGE AND ROCKLAND UTILITIES (O&R)
In July 1999 Con Edison completed its acquisition of O&R for $791.5 million
in cash. Con Edison is accounting for the acquisition under the purchase method
of accounting in accordance with generally accepted accounting principles. The
results of operations of O&R for the six months ended December 31, 1999 have
been included in the consolidated income statement of Con Edison for the year
ended December 31, 1999. Con Edison has recorded in its consolidated financial
statements all of the assets and liabilities of O&R. The fair value of O&R's
regulatory assets approximates book value. All other assets and liabilities of
O&R were adjusted to their estimated fair values. The $437 million excess of the
purchase price paid by Con Edison over the estimated fair value of net assets
acquired and liabilities assumed was recorded as goodwill (O&R Goodwill) and is
being amortized over 40 years. In accordance with regulatory settlements, costs
to achieve the merger have been deferred as regulatory assets and are being
amortized over a five-year period ending May 2004.
The unaudited pro forma consolidated Con Edison financial information shown
below has been prepared based upon the historical consolidated income statements
of Con Edison and O&R, giving effect to Con Edison's acquisition of O&R as if it
had occurred at the beginning of each period. The historical information has
been adjusted to reflect the amortization of O&R Goodwill for the entire period
and the after-tax cost Con Edison would have incurred for financing the
acquisition of O&R by issuing debt at the beginning of the period at an assumed
8.0 percent per annum interest rate. The pro forma information is not
necessarily indicative of the results that Con Edison would have had if its
acquisition of O&R had been completed prior to July 1999, or the results that
Con Edison will have in the future.
1999 1998
---------- ----------
(THOUSANDS OF DOLLARS)
Revenues............................................. $7,794,204 $7,719,152
Operating income..................................... 969,916 1,077,185
Net income........................................... 646,435 705,579
Non-recurring charges................................ 19,782 --
Adjusted net income.................................. 666,217 --
Average shares outstanding (000)..................... 223,442 234,308
Earnings per share................................... $ 2.98 $ 3.01
NOTE L FEDERAL INCOME TAX
The components of federal income taxes are as follows:
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
(THOUSANDS OF DOLLARS)
Charged to operations:
Current................................................. $836,783 $322,259 $354,112
Deferred--net........................................... (428,859) 94,090 32,440
Amortization of investment tax credit................... (8,208) (8,710) (8,830)
-------- -------- --------
Total charged to operations......................... 399,716 407,639 377,722
-------- -------- --------
Charged to other income:
Current................................................. 1,430 (3,279) 2,988
Deferred--net........................................... 851 1,050 (990)
Amortization of investment tax credit................... (164) -- --
Amortization of accumulated deferred investment tax
credits and excess income tax reserves associated with
divested generating plants............................ (29,008) -- --
-------- -------- --------
Total charged to other income....................... (26,891) (2,229) 1,998
-------- -------- --------
Total....................................................... $372,825 $405,410 $379,720
-------- -------- --------
The tax effect of temporary differences which gave rise to deferred tax
assets and liabilities is as follows:
AS OF DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
(MILLIONS OF DOLLARS)
Liabilities:
Depreciation............................................ $1,284.6 $1,307.6 $1,188.7
Excess deferred federal income tax on depreciation...... 159.5 186.7 190.4
Advance refunding of long-term debt..................... 32.5 35.5 30.1
Other................................................... 204.2 86.9 118.3
-------- -------- --------
Total liabilities................................... 1,680.8 1,616.7 1,527.5
-------- -------- --------
Assets:
Unbilled revenues....................................... (86.1) (87.2) (98.3)
Federal income tax audit adjustments--1992-1994......... (30.5) -- --
Other................................................... (81.7) (87.7) (94.5)
-------- -------- --------
Total assets........................................ (198.3) (174.9) (192.8)
-------- -------- --------
Regulatory liability--future federal income taxes........... 785.0 951.0 973.1
-------- -------- --------
Net liability............................................... $2,267.5 $2,392.8 $2,307.8
-------- -------- --------
Reconciliation of the difference between federal income tax expenses and the
amount computed by applying the prevailing statutory income tax rate to income
before income taxes is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----------- ----------- -----------
(% OF PRE-TAX INCOME)
Statutory tax rate.......................................... 35% 35% 35%
Changes in computed taxes resulting from:
Excess book over tax depreciation....................... 8% 7% 7%
Cost of removal......................................... -3% -2% -3%
Amortization of deferred federal income tax on
depreciation.......................................... -3% -3% -3%
Amortization of accumulated deferred investment tax
credits and excess income tax reserves associated with
divested generating plants............................ -3% -- --
Other................................................... -- -1% -1%
----------- ----------- -----------
Effective tax rate.......................................... 34% 36% 35%
----------- ----------- -----------
NOTE M STOCK-BASED COMPENSATION
Under Con Edison's Stock Option Plan, options may be granted to officers and
key employees for up to 10 million shares of Con Edison's common stock.
Generally, options become exercisable three years after the grant date and
remain exercisable until 10 years from the grant date. Options that were granted
in 1996 became exercisable in 1999.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," Con
Edison has elected to follow Accounting Principles Board Opinion No. 25 (APB 25)
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of Con Edison's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Disclosure of pro-forma information regarding net income and earnings per
share is required by SFAS No. 123. The information presented below is in regards
to the income and earnings per share of Con Edison. This information has been
determined as if Con Edison had accounted for its employee stock options under
the fair value method of that statement. The fair values of 1999, 1998 and 1997
options are $7.90, $4.76 and $2.84 per share, respectively. They were estimated
at the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
1999 1998 1997
-------- -------- --------
Risk-free interest rate................................ 5.24% 5.61% 6.46%
Expected lives--in years............................... 8 8 8
Expected stock volatility.............................. 18.76% 12.68% 14.08%
Dividend yield......................................... 4.46% 4.98% 6.67%
The following table reflects pro forma net income and earnings per share had
Con Edison elected to adopt the fair value approach of SFAS 123 (income in
millions):
1999 1998 1997
-------- -------- --------
Net income:
As reported........................................ $ 701 $ 713 $ 694
Pro forma.......................................... 697 711 694
Diluted earnings per share:
As reported........................................ $3.13 $3.04 $2.95
Pro forma.......................................... 3.11 3.03 2.95
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years. For 1999
the number of total shares after giving effect to the dilutive common stock
equivalents is 223,890,546.
A summary of the status of Con Edison's Stock Option Plan as of December 31,
1999, 1998 and 1997 and changes during those years is as follows:
WEIGHTED
AVERAGE
SHARES PRICE
--------- --------
Outstanding at 12/31/96.................................. 697,200 $27.875
Granted.............................................. 834,600 31.500
Exercised............................................ 0 0
Forfeited............................................ (14,100) 29.620
--------- ------
Outstanding at 12/31/97.................................. 1,517,700 29.850
Granted.............................................. 901,650 42.605
Exercised............................................ 0 0
Forfeited............................................ (20,600) 37.055
--------- ------
Outstanding at 12/31/98.................................. 2,398,750 34.584
Granted.............................................. 1,279,000 47.938
Exercised............................................ (113,440) 27.875
Forfeited............................................ (74,800) 37.559
--------- ------
Outstanding at 12/31/99.................................. 3,489,510 $39.632
The following summarizes the Plan's stock options outstanding:
WEIGHTED
AVERAGE SHARES
EXERCISE OUTSTANDING REMAINING
PLAN YEAR PRICE AT 12/31/99 CONTRACTUAL LIFE
- --------- -------- ----------- ----------------
1999......................................... $47.938 1,261,000 9 years
1998......................................... $42.605 871,350 8 years
1997......................................... $31.500 798,200 7 years
1996......................................... $27.875 558,960 6 years
CONSOLIDATED EDISON, INC.
NOTE N FINANCIAL INFORMATION BY BUSINESS SEGMENT (a)
ELECTRIC STEAM
------------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
---------- ---------- ---------- -------- -------- --------
(THOUSANDS OF DOLLARS)
Operating revenues.................... $ 5,792,673 $ 5,674,446 $ 5,635,575 $ 340,026 $ 321,932 $ 391,799
Intersegment revenues................. 150,488 53,464 11,341 1,667 1,655 1,619
Depreciation and amortization......... 433,203 439,869 429,407 17,996 17,361 16,239
Income tax expense.................... 339,630 351,088 311,878 2,910 5,057 8,442
Operating income...................... 858,681 905,976 855,061 19,450 19,416 36,080
Total assets.......................... 10,670,017 10,919,857 10,972,735 565,945 575,018 557,607
Construction expenditures............. $ 530,068 $ 465,258 $ 504,644 $ 28,488 $ 30,512 $ 29,905
GAS UNREGULATED AND OTHER
--------------------------------- ---------------------------------
1999 1998 1997 1999 1998 1997
--------- --------- --------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
Operating revenues.................. $1,000,083 $ 959,609 $ 1,093,880 $ 358,541 $ 137,061 $ 74,898
Intersegment revenues............... 2,812 2,460 2,177 -- 290 --
Depreciation and amortization....... 66,262 60,596 57,133 8,721 688 676
Income tax expense.................. 60,598 58,665 62,590 (3,422) (7,171) (5,188)
Operating income.................... 152,212 141,680 154,247 (10,544) (13,747) (10,068)
Total assets........................ 2,097,200 1,795,567 1,730,048 2,198,314 1,090,961 1,462,128
Construction expenditures........... $ 119,601 $ 123,074 $ 119,672 $ -- $ -- $ --
TOTAL
------------------------------------
1999 1998 1997
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Operating revenues....................................... $ 7,491,323 $ 7,093,048 $ 7,196,152
Intersegment revenues.................................... 154,967 57,869 15,137
Depreciation and amortization............................ 526,182 518,514 503,455
Income tax expense....................................... 399,716 407,639 377,722
Operating income......................................... 1,019,799 1,053,325 1,035,320
Total assets............................................. 15,531,476 14,381,403 14,722,518
Construction expenditures................................ $ 678,157 $ 618,844 $ 654,221
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(a) For a description of Con Edison, see "Con Edison" appearing before Note A.