<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-2.
[ ] Confidential for the Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
</TABLE>
CONSOLIDATED EDISON, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-12.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE> 2
LOGO
- --------------------------------------------------------------------------------
LETTER TO
STOCKHOLDERS
NOTICE OF 2000
ANNUAL MEETING,
PROXY STATEMENT
AND 1999 FINANCIAL
REPORT
MAY 15, 2000
CON EDISON HEADQUARTERS
4 IRVING PLACE
NEW YORK, N.Y.
<PAGE> 3
LOGO
4 Irving Place, New York, N.Y. 10003
- --------------------------------------------------------------------------------
EUGENE R. MCGRATH
CHAIRMAN OF THE BOARD
April 3, 2000
Dear Stockholders:
You are cordially invited to attend the Annual Meeting of Consolidated
Edison, Inc. ("CEI" or the "Company"). I hope that you will join the Board of
Directors and management of your Company at the Company's Headquarters Building
at 4 Irving Place, New York, N.Y., on Monday, May 15, 2000 at 10:00 a.m.
The accompanying Proxy Statement contains information about matters to be
considered at the Annual Meeting. At the Annual Meeting, stockholders will be
asked to vote on the election of Directors and the ratification of the
appointment of independent accountants for 2000. In addition to the matters
described above, stockholders will be asked to vote on a proposal submitted by
an individual stockholder described in the attached Proxy Statement, if the
proposal is properly presented at the Annual Meeting. For the reasons stated in
the Proxy Statement, the Board of Directors and management recommend that
stockholders vote against this proposal.
Whether or not you plan to attend the Annual Meeting, please date, sign and
return the enclosed proxy in the envelope provided. It is very important that as
many shares as possible be represented at the meeting. Stockholders of record
may also vote their shares by telephone or by the Internet. Instructions for
using the telephone or the Internet service are set forth on the enclosed proxy
card.
If after voting your proxy you come to the meeting, you may vote in person
even though you have previously voted your proxy.
Sincerely,
/s/ Eugene R. McGrath
Eugene R. McGrath
<PAGE> 4
LOGO
4 Irving Place, New York, N.Y. 10003
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Dear Stockholders:
The Annual Meeting of Stockholders of Consolidated Edison, Inc. will be
held at the Company's Headquarters Building, 4 Irving Place, New York, New York,
on Monday, May 15, 2000 at 10:00 a.m., E.D.S.T. for the following purposes:
a. To elect the members of the Board of Directors as described in the
attached Proxy Statement;
b. To ratify and approve the appointment of PricewaterhouseCoopers,
LLP ("PwC") as independent accountants for the year 2000;
c. To act on a stockholder proposal as set forth in the Proxy
Statement (attached hereto and incorporated herein by reference) and
d. To transact such other business as may properly come before the
meeting, or any adjournment thereof.
You are cordially invited to attend the meeting. IF YOU PLAN TO ATTEND,
please mark the appropriate box on the enclosed proxy card and we will send you
an admission ticket. If you are a stockholder of record and vote by telephone or
the Internet, you will have the opportunity to indicate that you plan to attend
the meeting and a ticket will be sent to you.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, WE URGE YOU TO
VOTE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE, OR VOTE YOUR PROXY BY TELEPHONE OR THE INTERNET IN
ACCORDANCE WITH THE INSTRUCTIONS ACCOMPANYING THE PROXY CARD. WE WILL SINCERELY
APPRECIATE YOUR DOING SO.
By Order of the Board of Directors,
ARCHIE M. BANKSTON
Secretary
Dated: April 3, 2000
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Notice of Annual Meeting....................................
Consolidated Edison, Inc. 2000 Proxy Statement.............. 1
Appendix: 1999 Financial Report............................. 19
Selected Financial Data, Selected Quarterly Information,
Market Price Range and Dividends.......................... A-1
Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................. A-2
Report of Independent Accountants........................... A-12
Consolidated Financial Statements........................... A-13
Notes to Consolidated Financial Statements.................. A-19
</TABLE>
<PAGE> 6
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is provided to stockholders of Consolidated Edison,
Inc. ("CEI" or the "Company") in connection with the Annual Meeting of
Stockholders and any adjournments or postponements of the meeting. The Annual
Meeting will be held at the Company's principal executive offices at 4 Irving
Place, New York, New York, on Monday, May 15, 2000 at 10:00 a.m.
SOLICITATION OF PROXIES
The Proxy Statement and the accompanying proxy card are furnished in
connection with the solicitation of proxies by the Board of Directors of CEI,
for use at the 2000 Annual Meeting of Stockholders. The Proxy Statement and the
form of proxy are being mailed to stockholders on or about April 3, 2000.
Included as an Appendix to this Proxy Statement are the Company's
consolidated financial statements and accompanying notes for the year ended
December 31, 1999, and other information relating to the Company's financial
condition and results of operations. The Company's Summary Annual Report to
Stockholders also accompanies the mailing of this proxy statement.
This solicitation of proxies for the Annual Meeting is being made by
management on behalf of the Board of Directors and will be made by mail,
telephone, the Internet, facsimile and electronic transmission or overnight
delivery. The expense of the solicitation will be borne by the Company. The
expense will include reimbursement for postage and clerical expenses to
brokerage houses and other custodians, nominees or fiduciaries for forwarding
proxy material and other documents to beneficial owners of stock held in their
names. In addition, Morrow & Co. of New York, New York, has been retained to
assist in the solicitation of proxies by the means described above. The
estimated cost of Morrow's services is $17,000, plus out-of-pocket expenses.
RECORD DATE, OUTSTANDING
VOTING SECURITIES AND VOTING RIGHTS
The Board of Directors has established March 28, 2000, as the record date
for the determination of CEI's stockholders entitled to receive notice of and to
vote at the meeting. On the record date, there were 212,292,190 shares of Common
Stock which are entitled to one vote per share upon the propositions to be
presented. The holders will vote on the election of Directors, the ratification
of the appointment of independent accountants and the stockholder proposal.
The enclosed proxy card is for the number of shares registered in your name
with CEI, together with any additional full shares held in your name in CEI's
Automatic Dividend Reinvestment and Cash Payment Plan. The instructions on the
proxy card provide that any shares registered in your name and any full shares
held for your account in the Plan will be voted in the same manner.
In all matters other than the election of Directors, the affirmative vote
of a majority of the shares present in person or represented by proxy at the
Annual Meeting, entitled to vote and voting on the subject matter, shall be the
act of the stockholders. Abstentions and broker non-votes are voted neither
"for" nor "against," and have no effect on the vote, but are counted in the
determination of the quorum. Directors will be elected by a plurality of the
votes present in person or represented by proxy at the Annual Meeting, entitled
to vote and voting on the election of Directors.
VOTING AND REVOCATION OF PROXIES
All shares represented by properly executed proxies received in time for
the Annual Meeting will be voted at the Annual Meeting in the manner specified
by the persons giving those proxies. If the proxy is signed but no voting
instructions are made, the shares represented by the proxy will be voted for the
election of Directors and in accordance with the recommendations of the Board on
other proposals.
1
<PAGE> 7
Instead of submitting a signed proxy card, if you are a stockholder of
record located in the United States, you may vote your proxy by telephone using
the control number and instructions set forth on the proxy card. You may also
vote the Internet using the control number that has been assigned to you. Voting
by telephone or the Internet eliminates the need to return the proxy card. The
telephone and Internet voting procedures may not be available to stockholders
who hold their shares through a broker, nominee, fiduciary or other custodian.
Voting by use of a proxy on the enclosed proxy card, telephone or on the
Internet does not preclude a shareholder from voting in person at the Annual
Meeting. A shareholder may revoke a proxy at any time prior to its exercise by
mailing to the Secretary of the Company a duly executed revocation or by
submitting a duly executed proxy, telephone or Internet vote to the Company with
a later date or by appearing at the Annual Meeting and voting in person.
Shareholders may revoke a proxy by any of these methods, regardless of the
method used to cast his or her previous vote. Attendance at the Annual Meeting
without voting will not itself revoke a proxy.
ATTENDANCE AND PROCEDURES AT THE ANNUAL MEETING
Attendance at the Annual Meeting will be limited to stockholders of record,
beneficial owners of Common Stock entitled to vote at the meeting having
evidence of ownership, the authorized representative (one only) of an absent
stockholder, and invited guests of management. Any person claiming to be an
authorized representative of a stockholder must, upon request, produce written
evidence of the authorization. In order to assure the holding of a fair and
orderly meeting and to accommodate as many stockholders as possible who may wish
to speak at the Annual Meeting, management will limit the general discussion
portion of the meeting to one hour and permit only stockholders or their
authorized representatives to address the meeting. In addition, management will
require that all signs, banners, placards and protest-type materials be left
outside the meeting room.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
ELECTION OF DIRECTORS
(ITEM 1 ON PROXY CARD)
Twelve Directors are to be elected, respectively, at the Annual Meeting to
hold office until the next annual meeting and until their respective successors
are elected and qualified. Of the Board members standing for election, two
(Eugene R. McGrath and Joan S. Freilich) are officers of CEI. The current
non-officer nominees bring to the Company the benefit of their broad expertise
and experience in many diverse fields.
Since the last Annual Meeting, the number of Directors constituting the
entire Board of Directors remains at twelve; however, there were changes
regarding the members of the Board. Mr. Michael Del Giudice was elected to the
Board of Directors, effective July 8, 1999, after the Company's completion of
the acquisition of Orange and Rockland Utilities, Inc. Dr. George Campbell, Jr.,
was elected to the Board of Directors, effective February 17, 2000. He is the
President and Chief Executive Officer of the National Action Council for
Minorities in Engineering ("NACME, Inc."), and was appointed to his present
position in 1989. At the opening of business on May 15, 2000, Mr. Schwartz will
retire from the Board following 11 years of outstanding and dedicated service to
the Company.
With the exception of Mr. Del Giudice and Dr. Campbell, all of the nominees
were elected Directors at the last Annual Meeting. The Company's management
believes that all of the nominees will be able and willing to serve as Directors
of the Company. All of the Directors, except Mr. Del Giudice, also serve as
Trustees of CEI's subsidiary, Consolidated Edison Company of New York Inc. ("Con
Edison of New York"). Mr. McGrath and Mr. Del Giudice also serve on the Board of
CEI's subsidiary, Orange and Rockland Utilities, Inc.
2
<PAGE> 8
Shares represented by every properly signed proxy will be voted at the
Annual Meeting for the election of Directors of the persons nominated by
management, except where the right to vote such shares is withheld as provided
in the proxy or otherwise instructed. If one or more of the nominees is unable
or unwilling to serve, the shares represented by the proxies will be voted for
the other nominees and for any substitute nominee or nominees as shall be
designated by management.
INFORMATION ABOUT NOMINEES
The name and age of each of the nominees, the year in which each was first
elected a Director or Trustee of Con Edison of New York, the principal
occupation and business experience of each during the past five years, the
number of shares of Common Stock beneficially owned by each as of the close of
business on January 31, 2000, their directorships in other publicly-held
business corporations and the more significant of their directorships in
charitable and educational organizations as of that date are set forth below,
based on information provided by the nominees.
<TABLE>
<CAPTION>
NAME, AGE, LENGTH OF SERVICE AS A DIRECTOR AND TRUSTEE
AND PRINCIPAL OCCUPATION AND BUSINESS
EXPERIENCE DURING PAST 5 YEARS
<S> <C>
LOGO E. VIRGIL CONWAY, 70
Chairman, Metropolitan Transportation Authority, New York,
N.Y. (public transportation) since April 1995. Mr. Conway
has been a Trustee of Con Edison of New York since 1970 and
a Director of CEI since December 1997. Mr. Conway was
Chairman of The Financial Accounting Standards Advisory
Council from 1992 to July 1995. Director or Trustee,
Accuhealth, Inc., Atlantic Mutual Insurance Company,
Centennial Insurance Company, HRE Properties, certain mutual
funds managed by Phoenix Investment Partners, Union Pacific
Corporation, Josiah Macy, Jr. Foundation, Pace University,
and Chairman, New York Housing Partnership Development
Corporation.
Shares owned: 14,013
LOGO PETER W. LIKINS, 63
President, University of Arizona, Tucson, Arizona since
October 1, 1997. Dr. Likins was previously President of
Lehigh University, Bethlehem, Pa. Dr. Likins has been a
Trustee of Con Edison of New York since 1978 and a Director
of CEI since December 1997. Director or Trustee, COMSAT
Corporation, Parker-Hannifin Corporation, Udall Foundation
and University Medical Center. Member, National Academy of
Engineering.
Shares owned: 4,503
LOGO RUTH M. DAVIS, 71
President and Chief Executive Officer, The Pymatuning Group,
Inc., Alexandria, Va. (technology management). Dr. Davis has
been a Trustee of Con Edison of New York since 1981 and a
Director of CEI since December 1997. Director or Trustee,
BTG, Inc., Ceridian Corporation, Premark International,
Inc., Principal Mutual Life Insurance Company, Tupperware
Corporation, Varian Associates and The Aerospace Corporation
(Chairman). Member, American Academy of Arts and Sciences,
National Academy of Engineering and University of Maryland
Board of Visitors.
Shares owned: 3,443
</TABLE>
3
<PAGE> 9
<TABLE>
<CAPTION>
NAME, AGE, LENGTH OF SERVICE AS A DIRECTOR AND TRUSTEE
AND PRINCIPAL OCCUPATION AND BUSINESS
EXPERIENCE DURING PAST 5 YEARS
<S> <C>
LOGO EUGENE R. MCGRATH, 58
Chairman of the Board, President and Chief Executive Officer
of CEI since October 1997. Chairman and Chief Executive
Officer of Con Edison of New York since September 1990. He
was also President of Con Edison of New York from September
1990 through February 1998. Mr. McGrath has been a Trustee
of Con Edison of New York since 1987, a Director of CEI
since October 1997 and a Director of O&R since July 1999.
Director or Trustee, Atlantic Mutual Insurance Company,
Federal Reserve Bank of N.Y., Schering-Plough Corp.,
Business Council of New York State, Inc., New York City
Partnership and Chamber of Commerce, American Museum of
Natural History, Barnard College, National Action Council
for Minorities in Engineering, Inc., American Woman's
Economic Development Corporation, The Fresh Air Fund, the
Wildlife Conservation Society and the United Way of New York
City. Member, National Academy of Engineering.
Shares owned: 154,830*
LOGO GORDON J. DAVIS, 58
Partner, LeBoeuf, Lamb, Greene & MacRae, L.L.P., Attorneys
at Law, New York, N.Y. Mr. Davis has been a Trustee of Con
Edison of New York since 1989 and a Director of CEI since
December 1997. Director or Trustee, Phoenix Home Life Mutual
Insurance Company, certain mutual funds managed by the
Dreyfus Corporation, Lincoln Center for the Performing Arts,
Inc., Jazz at Lincoln Center, Inc. (Chairman) and the New
York Public Library.
Shares owned: 2,276
LOGO ELLEN V. FUTTER, 50
President and Trustee, American Museum of Natural History,
New York, N.Y. Ms. Futter has been a Trustee of Con Edison
of New York since 1989 and a Director of CEI since December
1997. Director, Trustee or Member, American International
Group, Inc., Bristol-Myers Squibb Company, J.P. Morgan &
Co., Inc., Council on Foreign Relations, New York City
Partnership and Yale School of Management Advisory Board.
Fellow, American Academy of Arts and Sciences.
Shares owned: 2,413
LOGO RICHARD A. VOELL, 66
Private investor and retired President and Chief Executive
Officer of The Rockefeller Group, New York, N.Y. (real
estate, real estate services and communications and
communications services) from 1982 to June 1995. Mr. Voell
has been a Trustee of Con Edison of New York since 1990 and
a Director of CEI since December 1997. Member, Council on
Foreign Relations. Director and Member of the Nominating
Committee of the Wildlife Conservation Society. Vice
Chairman, United Nations Association and Past Chairman,
Economic Club of New York.
Shares owned: 5,291
LOGO SALLY HERNANDEZ-PINERO, 47
Senior Vice President, The Related Companies, L.P. since May
1, 1999. Mrs. Hernandez-Pinero was a Managing Director of
Fannie Mae from July 1998 to April 30, 1999. She was of
counsel to the law firm of Kalkines, Arky, Zall & Bernstein,
New York, N.Y. from 1994 to May 1998. Mrs. Hernandez-Pinero
has been a Trustee of Con Edison of New York since 1994 and
a Director of CEI since December 1997. Director or Trustee,
Accuhealth, Inc., American Museum of Natural History, The
Dime Savings Bank, Goodwill Industries and Tarragon Realty
Investors, Inc.
Shares owned: 1,369
</TABLE>
4
<PAGE> 10
<TABLE>
<CAPTION>
NAME, AGE, LENGTH OF SERVICE AS A DIRECTOR AND TRUSTEE
AND PRINCIPAL OCCUPATION AND BUSINESS
EXPERIENCE DURING PAST 5 YEARS
<S> <C>
LOGO STEPHEN R. VOLK, 63
Senior Partner, Shearman & Sterling, Attorneys at Law, New
York, N.Y. Mr. Volk has been a Trustee of Con Edison of New
York since 1996 and a Director of CEI since December 1997.
Member, Council on Foreign Relations and the Harvard Law
School Dean's Advisory Board. Director and Member of
Executive Committee, New York City Partnership.
Shares owned: 2,649
LOGO JOAN S. FREILICH, 58
Executive Vice President and Chief Financial Officer of CEI
and Con Edison of New York since March 1998. She was Senior
Vice President and Chief Financial Officer of CEI from
October 1997 to February 1998 and of Con Edison of New York
from July 1996 to February 1998. Ms. Freilich has been a
Trustee of Con Edison of New York since 1997 and a Director
of CEI since October 1997. Trustee, Citizens Budget
Commission. Member, Financial Executives Institute.
President, New York State Women in Communications and
Energy.
Shares owned: 35,977**
LOGO MICHAEL J. DEL GIUDICE, 57
Managing Director/Principal , Millennium Credit Markets,
LLC, New York, N.Y. He co-founded Millennium in 1996. Mr.
Del Giudice was a Managing Director and General Partner of
Lazard Freres & Co., LLC. Mr. Del Giudice has been a
Director of CEI since July 1999. He has been a Director of
O&R since 1988, and was Chairman of the Board from February
1998 to July 1999. Board of Directors, Barnes and Noble,
Inc. Chairman of the Governor's Committee on Scholastic
Achievement. Member, Curran & Connor, Inc. Advisory Board.
Shares owned: 1,482
LOGO GEORGE CAMPBELL, JR., 54
President and Chief Executive Officer, NACME, Inc., New
York, N.Y. (Engineering education, scholarships, research
and policy). Dr. Campbell has been a Director of CEI and a
Trustee of Consolidated Edison of New York since February
17, 2000. He has been appointed President of The Cooper
Union for the Advancement of Science and Art, New York,
N.Y., effective July 1, 2000. Trustee, Rensselaer
Polytechnic Institute, Polytechnic University and New York
Hall of Science. Member, Congressional Commission on the
Advancement of Women and Minorities in Science, Engineering
and Technology and the President's Circle, National Academy
of Sciences, Fellow, American Association for the
Advancement of Science.
Shares owned: 1,200***
</TABLE>
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* Includes 140,000 shares underlying currently exercisable options.
** Includes 34,000 shares underlying currently exercisable options.
*** As of March 1, 2000.
The number of shares of Common Stock beneficially owned as of January 31,
2000, by each of the executive officers named in the compensation table on page
13 who are not also nominees is set forth below.
<TABLE>
<CAPTION>
NAME SHARES OWNED*
---- -------------
<S> <C>
J. Michael Evans............................................ 41,358
Charles F. Soutar........................................... 39,250
Stephen B. Bram............................................. 32,476
</TABLE>
- ---------------
* Includes shares underlying currently exercisable options for: Mr.
Evans -- 40,000; Mr. Soutar -- 32,000 and Mr. Bram -- 32,000.
5
<PAGE> 11
As of January 31, 2000, no nominee or officer was the beneficial owner of
any class of equity securities of CEI or beneficially owned more than [0.072]
percent of the total outstanding Common Stock. As of the same date all officers
and members of the Board as a group beneficially owned 662,915 shares, including
552,500 shares underlying currently exercisable options, (0.311 percent) of the
outstanding Common Stock. Each officer and member of the Board held his or her
shares with sole voting power and sole investment power, except for shares as to
which voting power, or investment power, or both, were shared with a spouse or a
relative of such person.
The following table provides, as of December 31, 1999, information with
respect to persons who are known to the Company to beneficially own more than
five percent of the common shares of CEI.
<TABLE>
<CAPTION>
SHARES OF
COMMON
STOCK BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED PERCENT OF CLASS
------------------------------------ ------------------ ----------------
<S> <C> <C>
Capital Research and Management Company..................... 11,928,200(1) 5.4%
333 South Hope Street
Los Angeles, CA 90071
</TABLE>
- ---------------
(1) Capital Research and Management Company has sole dispositive power for
11,928,200 shares.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Directors
and executive officers of the Company to file reports of ownership and changes
in ownership of the equity securities of the Company and its affiliates with the
Securities and Exchange Commission and to furnish copies of these reports to the
Company. Based upon its review of the reports furnished to the Company for 1999
pursuant to Section 16(a) of the Act and written representations from certain
reporting persons, the Company believes that all of the reports were filed on a
timely basis.
BOARD MEMBERS' FEES AND ATTENDANCE
Those members of the Board who are not employees of the Company or its
subsidiaries are paid an annual retainer of $30,000, a fee of $1,200 for each
meeting of the Board or of the Board of its subsidiaries attended, and a fee of
$1,000 for each meeting of a Committee of the Board or of the Board of its
subsidiaries attended, except that if a Committee meeting is held on the same
day as a Board meeting, the fee paid for attending the Committee meeting is
$800. CEI will reimburse Board members, who are not currently officers of the
Company for expenses incurred in attending Board and Committee meetings. No
person who serves on both the CEI Board and on the Board of its subsidiary, Con
Edison of New York, and corresponding Committees, is paid additional
compensation for concurrent service.
The Chairs of the Audit, Budget and Contracts, Environmental, Executive
Personnel and Pension, Finance, Nominating and Planning Committees each receive
an annual retainer fee of $4,000, provided, however, that if any Director is
serving at the same time as the Chairman of the Budget and Contracts Committee
and the Finance Committee he or she is paid only one such annual retainer. The
Acting Chairman of any Board Committee is paid an additional meeting fee of $200
for any Committee meeting at which he or she presides. Members of the Board may
participate in the Discount Stock Purchase Plan, the Deferred Compensation Plan
and the Retirement Plan for Non-Officer Directors described below. Members of
the Board who are officers of the Company or its subsidiaries receive no
retainer or meeting fees for their service on the Board.
The Company has a restricted common stock plan for non-officer directors.
Under the plan each non-officer Director received 200 shares of CEI Common Stock
on the adoption of the plan. Each Director receives an additional award of 200
shares following each Annual Meeting. A new Director receives 200 shares upon
joining the Board. The shares are purchased on the open market. Shares of stock
received under the plan may not be transferred by the Director (except to a
family member or a trust or other entity for estate planning purposes) without
the permission of CEI's
6
<PAGE> 12
Board or the Executive Personnel and Pension Committee of the Board until the
earlier of (i) five years from the date of grant, (ii) retirement from the Board
at age 72 or earlier with the permission of the Board or the Committee, (iii)
the death of the Director or (iv) a change in control of CEI.
The Company has a deferred compensation plan applicable to non-officer
members of the Board. A Board member who elects to participate in the plan may
defer all or a portion of the compensation paid by the Company with interest. As
of April 1, 2000, one former Trustee of Con Edison of New York was a participant
in the plan.
The Company has a retirement plan for those Board members who are not
entitled to receive employee pension benefits from the Company. The plan
provides that a member who retires from the Board and who has completed ten full
years of service on the Board shall receive annually, for life, commencing at
age 65 or the date of retirement, whichever is later, a benefit in an amount
equal to the then annual retainer being paid to the active members of the Board,
changing as and when such annual retainer changes. The benefits for a Board
member who retires with less than ten years of service are prorated. As of April
1, 2000, three former Trustees of Con Edison of New York were participants in
the plan.
The Discount Stock Purchase Plan permits employees of Con Edison, including
executive officers, to contribute up to 20 percent of their salaries into the
plan, but not more than $25,000 per year. Non-officer members of the Board are
eligible to participate and may contribute up to $1,000 per month. Also,
dividends may be reinvested. The Company contributes one-ninth of the
participant's contributions, including reinvested dividends. The contributions
are used to purchase outstanding shares of Common Stock of CEI for the
participants. The Company pays brokerage and other expenses relating to the
plan.
The law firm of LeBoeuf, Lamb, Greene & MacRae of which Mr. Davis is a
partner provided services to Con Edison of New York in 1999 and will provide
services in 2000. The law firm of Shearman & Sterling of which Mr. Volk is
Senior Partner provided services to Con Edison of New York in 1999.
The Board of Directors held ten regular and two special meetings in 1999.
During 1999 each incumbent member of the Board attended more than 75 percent of
the combined meetings of the Board of Directors and the Board Committees on
which he or she served.
STANDING COMMITTEES OF THE BOARD
The Audit Committee, composed of five non-officer Directors (Mrs.
Hernandez-Pinero, Chair, Dr. Davis, Mr. Del Giudice, Ms. Futter and Mr.
Schwartz), meets with the Company's management, including Con Edison of New
York's General Auditor and the Company's independent accountants, several times
a year to discuss internal controls and accounting matters, the Company's
financial statements and the scope and results of the auditing programs of the
independent accountants and of the Con Edison of New York's internal auditing
department. The Audit Committee also recommends to the Board of Directors the
appointment of the independent accountants for the Company, subject to
stockholder approval at the Annual Meeting. The Audit Committee held three
meetings in 1999.
The Budget and Contracts Committee, composed of five non-officer Directors
(Dr. Davis, Chair and Messrs. Conway, Davis, Likins and Schwartz), examines and
makes recommendations to the Board and to the Board of Con Edison of New York
with respect to the annual capital budgets of CEI and Con Edison of New York,
major purchase authorizations, investments and contractual commitments, and the
annual operating budget, receives a five-year forecast of capital budget
expenditures and reviews major real estate transactions and litigation
settlements. The Budget and Contracts Committee held eight meetings during 1999.
The Environmental Committee, composed of five non-officer Directors (Ms.
Futter, Chair, Dr. Davis, Mrs. Hernandez-Pinero and Messrs. Davis and Likins),
provides advice and counsel to
7
<PAGE> 13
the Company's management on corporate environmental policy and on such other
environmental matters as from time to time the Committee deems appropriate;
reviews significant new developments in environmental laws and governmental
agency actions as they affect the Company's corporate environmental policies;
reviews significant issues relating to the Company's compliance with
environmental laws and regulations and corporate environmental policies; meets
annually with the Planning Committee to review and evaluate planning and
environmental issues; submits recommendations to the Board with respect to
environmental-related matters; and makes such other reviews and recommends to
the Board such other actions as it may deem necessary or desirable to help
promote sound planning by the Company with due regard to the protection of the
environment. The Environmental Committee held three meetings in 1999.
The Executive Committee, composed of Mr. McGrath, the Chairman of the Board
and of the Committee, and four non-officer Directors (Messrs. Conway, Likins,
Voell and Volk), may exercise during intervals between the meetings of each
Board all the powers vested in the Board, except for certain specified matters.
No meetings of the Executive Committee were held in 1999.
The Executive Personnel and Pension Committee, composed of four non-officer
Directors (Mr. Conway, Chair, Mrs. Hernandez-Pinero and Messrs. Schwartz and
Voell), reports and makes recommendations to the Board relating to officer and
senior management appointments and compensation. In addition, the Committee
makes incentive compensation awards to officers participating in Con Edison of
New York's Executive Incentive Plan, subject to confirmation by the Board and
administers CEI's Stock Option Plan, including determining the recipients of,
and the number of shares covered by, stock option grants. The Committee also
reviews and make recommendations as necessary to provide for orderly succession
and transition in the executive management of the Company and receives reports
and make recommendations with respect to minority and female recruitment,
employment and promotion. It also oversees and makes recommendations to the
Board with respect to compliance with the Employee Retirement Income Security
Act of 1974 ("ERISA"), and reviews and makes recommendations with respect to new
benefit plans and plan amendments, the selection of plan trustees and the
funding policy and contributions to the funded plans, and reviews the
performance of the funded plans. The Executive Personnel and Pension Committee
held seven meetings during 1999.
The Finance Committee, which is composed of five non-officer Directors (Mr.
Schwartz, Chair, Dr. Davis and Messrs. Conway, Davis and Likins), reviews and
makes recommendations to the Board with respect to the Company's financial
condition and policies, its dividend policy, bank credit arrangements,
financings, investments, nuclear decommissioning funds, and other financial
matters, and reviews five-year financial forecasts. The Finance Committee held
four meetings during 1999.
The Nominating Committee, composed of five non-officer Directors (Mr.
Voell, Chair, Ms. Futter and Messrs. Conway, Schwartz and Volk), is responsible
for recommending candidates to fill vacancies on the Board. In addition, the
Committee assists with respect to the composition and size of the Board and of
all Committees of the Board. The Committee also makes recommendations to the
Board as to the compensation of Board members and members of the Committees as
well as other corporate governance matters. The Nominating Committee held five
meetings in 1999. The Committee has no formal procedures for consideration of
recommendations for nominations to the Board. It considers candidates proposed
by stockholders. Nominations for candidates, accompanied by biographical
material for evaluation, may be sent to the Secretary of the Company. Each
nomination should include information as to the qualifications of the candidate
and should be accompanied by a written statement (presented to the Secretary of
the Company) from the suggested candidate, to the effect that the candidate is
both willing and affirmatively desirous of serving.
The Planning Committee, composed of six non-officer Directors (Dr. Likins,
Chair, Dr. Davis, Ms. Futter, Mrs. Hernandez-Pinero and Messrs. Davis and Volk),
examines and makes recommen-
8
<PAGE> 14
dations to the Board regarding long range planning for the Company. The Planning
Committee held three meetings in 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mrs. Hernandez-Pinero and Messrs. Conway, Schwartz and Voell were the
members of CEI's Executive Personnel and Pension Committee in 1999. The Company
believes that there are no interlocks with the members who serve on the
Committee.
MANAGEMENT PROPOSAL
(ITEM 2 ON PROXY CARD)
PROPOSAL NO. 2--Ratification of the Appointment of PricewaterhouseCoopers, LLP
as Independent Accountants for the Year 2000.
At the Annual Meeting, the Board will recommend that the stockholders
ratify and approve the selection of PricewaterhouseCoopers, LLP ("PwC") as
independent accountants for the Company for the year 2000. PwC has acted in the
same capacity for the Company for many years.
Before the Audit Committee recommended the appointment of PwC, it
considered that firm's qualifications. This included a review of PwC's
performance in prior years, as well as PwC's reputation for integrity and for
competence in the fields of accounting and auditing. The Audit Committee has
expressed its satisfaction with PwC in these respects. The Audit Committee
reviewed information provided by PwC concerning litigation involving that firm
and the existence of any investigations by the Securities and Exchange
Commission into the financial reporting practices of companies audited by them.
As to these matters, the Audit Committee has concluded that the ability of PwC
to perform services in 2000 for the Company is not in any way adversely affected
by any litigation or investigations reflected in such information.
Representatives of PwC will be present at the Annual Meeting and will be
afforded the opportunity to make a statement if they desire to do so and to
respond to appropriate questions.
In connection with the 1999 audit of CEI, PwC reviewed the Company's and
its subsidiaries' financial statements, reviewed interim financial statements
and certain of the Company's or its subsidiaries' filings with the Federal
Energy Regulatory Commission and the Securities and Exchange Commission. PwC
also performed audits of the financial statements of the Company's pension and
certain other benefit plans. Fees for PwC's audit services performed in 1999
totaled $950,000.
Adoption of Proposal No. 2 requires the affirmative vote of a majority of
the shares of Common Stock voted on the proposal at the Annual Meeting.
THE BOARD RECOMMENDS A VOTE FOR PROPOSAL NO. 2.
9
<PAGE> 15
STOCKHOLDER PROPOSAL
(ITEM 3 ON PROXY CARD)
PROPOSAL NO. 3--Mrs. Evelyn Y. Davis, Watergate Office Building, 2600 Virginia
Avenue, N.W., Suite 215, Washington, D.C. 20037, who owns 200 shares of Common
Stock, has submitted the following proposal:
"RESOLVED: That the shareholders recommend that the Board take the
necessary steps that Con Edison specifically identify by name and corporate
title in all future proxy statements those executive officers, not
otherwise so identified, who are contractually entitled to receive in
excess of $250,000 annually as a base salary, together with whatever other
additional compensation bonuses and other cash payments were due them."
The statement made in support of this proposal is as follows:
"In support of such proposed Resolution it is clear that the shareholders
have a right to comprehensively evaluate the management in the manner in which
the Corporation is being operated and its resources utilized. At present only a
few of the most senior executive officers are so identified, and not the many
other senior executive officers who should contribute to the ultimate success of
the Corporation. Through such additional identification the shareholders will
then be provided an opportunity to better evaluate the soundness and efficacy of
the overall management.
"Last year the owners of 14,929,630 shares, representing approximately
10.3% of shares voting, voted FOR my similar proposal.
"If you AGREE, please mark your proxy FOR this proposal."
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE AGAINST PROPOSAL NO. 3 FOR
THE FOLLOWING REASONS:
Disclosure of executive compensation is governed by the Securities and
Exchange Commission's proxy solicitation rules. In accordance with those rules
CEI currently provides information on pages 11 through 17 of the Proxy Statement
concerning compensation for the five highest paid executive officers.
The proposal would impose on CEI more stringent disclosure requirements
than those imposed on other companies by the Commission's rules. The Board
believes that any changes in the disclosure requirements should emanate from the
Commission and should be uniformly applicable to all companies subject to the
proxy rules.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST PROPOSAL NO. 3.
- --------------------------------------------------------------------------------
Adoption of the preceding stockholder resolution (Proposal 3) would require
the affirmative vote of a majority of shares of Common Stock voted thereon at
the meeting.
- --------------------------------------------------------------------------------
10
<PAGE> 16
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation of the Company's Chief
Executive Officer and the four most highly compensated executive officers other
than the Chief Executive Officer who were serving as executive officers at the
end of 1999. The positions shown are the officers' positions with the Company or
with the Company's principal subsidiary, Con Edison of New York, as of December
31, 1999.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- ------------
OTHER NUMBER OF
ANNUAL OPTION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SHARES COMPENSATION(4)
- --------------------------- ---- ------ ----- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Eugene R. McGrath................ 1999 $943,333 $585,000 $17,996 150,000 $42,458
Chairman of the Board 1998 $865,000 $594,750 $17,636 70,000 $26,116
and Chief Executive Officer(1)(2) 1997 $790,000 $518,700 $17,251 70,000 $25,641
J. Michael Evans(3).............. 1999 $428,000 $220,000 -- 30,000 $12,368
President and Chief Operating 1998 $396,333 $220,000 -- 20,000 $ 7,650
Officer 1997 $349,667 $150,000 -- 20,000 $ 7,650
Charles F. Soutar(3)............. 1999 $411,333 $140,000 -- 20,000 $11,918
Executive Vice President -- 1998 $391,333 $150,000 -- 20,000 $ 7,650
Central Services 1997 $371,333 $145,000 -- 18,000 $ 7,650
Joan S. Freilich................. 1999 $338,333 $170,000 -- 50,000 $10,388
Executive Vice President 1998 $271,553 $167,500 -- 20,000 $ 7,500
and Chief Financial Officer(1) 1997 $210,000 $101,000 -- 18,000 $ 6,300
Stephen B. Bram(3)............... 1999 $343,417 $ 90,000 -- 16,000 $10,363
Senior Vice President -- 1998 $327,333 $ 90,000 -- 16,000 $ 7,650
Central Operations 1997 $309,500 $ 80,000 -- 16,000 $ 7,650
</TABLE>
- ------------
(1) Holds same positions with Con Edison of New York.
(2) Also President of CEI.
(3) Positions with Con Edison of New York.
(4) The amounts shown in this column consist of amounts contributed by Con
Edison of New York under its Thrift Savings Plan for Management Employees
(Thrift Plan) and Deferred Income Plan (DIP) and amounts paid for life insurance
for Mr. McGrath, as follows: For 1999, Mr. McGrath, life insurance--$18,957;
Thrift Plan--$6,225 and DIP--$17,276; Mr. Evans, Thrift Plan--$6,225;
DIP--$6,143; Mr. Soutar, Thrift Plan--$6,225; DIP--$5,693; Ms. Freilich, Thrift
Plan--$6,225; DIP--$4,163; Mr. Bram, Thrift Plan--$6,225; DIP--$4,138. For 1998,
Mr. McGrath, life insurance--$18,466; Thrift Plan--$7,650; Mr. Evans, Thrift
Plan--$7,650; Mr. Soutar, Thrift Plan--$7,650; Ms. Freilich, Thrift
Plan--$7,500; Mr. Bram, Thrift Plan--$7,650. For 1997, Mr. McGrath, life
insurance--$17,991; Thrift Plan--$7,650; Mr. Evans, Thrift Plan--$7,650; Mr.
Soutar, Thrift Plan--$7,650; Ms. Freilich, Thrift Plan--$6,300; Mr. Bram, Thrift
Plan--$7,650.
EMPLOYMENT CONTRACTS OF EXECUTIVE OFFICERS LISTED IN THE SUMMARY COMPENSATION
TABLE
Mr. McGrath has an agreement with the Company that provides for his
employment on a year-to-year basis with automatic one-year extensions unless the
Company or Mr. McGrath terminates the agreement upon at least twelve months'
prior notice. The agreement provides for Mr. McGrath to receive an annual salary
of $975,000 (effective September 1, 1999), plus annual deferred compensation of
$25,000 with interest. Effective January 1, 2000, Mr. McGrath ceased receiving
annual deferred compensation of $25,000 and will receive this sum in annual
salary. Mr. McGrath's salary is reviewed annually by the Executive Personnel and
Pension Committee and, with the concurrence of the Board, may be increased as a
result of that review. The agreement also provides for the purchase of
supplemental term life insurance for Mr. McGrath, the premiums for which are
included in the Summary Compensation Table.
11
<PAGE> 17
REPORT ON EXECUTIVE COMPENSATION
The Company's executive compensation policies are administered by the
Executive Personnel and Pension Committee of the Board which was composed of
four Board members in 1999. All action by the Committee pertaining to executive
compensation, except for awards under the 1996 Stock Option Plan, is submitted
to the full Board for approval. The Committee submits the following report
related to compensation matters for 1999.
The Committee's compensation policy -- The Committee believes that total
executive compensation should be such as to attract to the Company, motivate and
reasonably reward individuals of the highest professional and personal
qualifications and, at the same time, secure substantial and proportionate value
for the Company. In 1999, compensation of the Company's executive officers
consisted primarily of base salary, which is reviewed by the Committee annually,
a potential award under Con Edison of New York's Executive Incentive Plan, which
is shown in the Summary Compensation Table on page 11 under the caption "Bonus"
and a potential award under the 1996 Stock Option Plan (the "Stock Option
Plan"), which was approved by the stockholders at the 1996 Annual Meeting. In
making its recommendations to the Board, with respect to salaries of officers
other than Mr. McGrath, and awards under the Executive Incentive Plan of
officers other than Mr. McGrath, and in making awards under the Stock Option
Plan for officers other than Mr. McGrath, the Committee considers
recommendations made by Mr. McGrath. The Committee initiates the recommendations
that are made to the Board with respect to Mr. McGrath's salary, any award under
the Executive Incentive Plan and any grants the Committee makes to him under the
Stock Option Plan.
Individual performance is the primary factor considered in determining base
salary, within a range appropriate to that individual's position, although in
some cases corporate performance may also be relevant to base salary
determinations. Awards under the Executive Incentive Plan are based on both
individual and corporate performance. Grants under the Stock Option Plan are
based on individual performance and on an assessment of the individual's
responsibility for the success and growth of the Company and its subsidiaries.
Base salary ranges are identified for the officers with reference to salaries
paid by other utilities and industry in general, as reflected in surveys by such
organizations as the Edison Electric Institute and in general industry studies
conducted by compensation consulting firms. These surveys are not identical to
the surveys referred to in the next paragraph. In addition, an attempt is made
to assure internal equity by maintaining appropriate salary relationships.
Increases for individuals are based on the current salary's relationship to the
range for the position (but not to any specific level within the range) and the
individual's performance with respect to the requirements of the individual's
position.
In considering the level of Mr. McGrath's compensation, the Committee
reviewed surveys of the total compensation, including base salary and incentive
compensation, paid to the chief executive officers of other utilities with
revenues exceeding $2 billion and a survey by the Edison Electric Institute of
the compensation paid to the chief executive officers in the electric utility
industry. The Committee does not target Mr. McGrath's compensation to any
specific level within the ranges of compensation paid by these comparison
companies but uses the surveys as references. The utilities included in the
surveys referred to in this paragraph and the previous paragraph are some but
not all of the utilities included in the Standard & Poor's Electric Utilities
Index shown on the performance graph on page 17. None of the non-utility
companies in the surveys are in the Index.
The Committee believes that an evaluation of corporate performance must
take into account many factors affecting the Company's operations, over some of
which management has total or considerable control and over others of which it
has little or no control. In this context the Committee look not only at current
reported financial operating results and financial condition (as reflected in
such factors as earnings per share and return on common equity), but also at a
wide range of other information relating to the quality of service provided to
customers, the efficiency of
12
<PAGE> 18
operations, the development and management of personnel and the effectiveness of
management's efforts to strengthen the Company for the future. In recommending
the base salaries or awards under the Executive Incentive Plan or grants under
the Stock Option Plan, the Committee does not have a predetermined list of
criteria nor does it have a formula for weighing or applying the criteria the
Committee members consider. The process is neither arithmetic nor formulaic, but
judgmental.
1999 Base Salary Determinations -- In 1999 individual performance and
overall compensation ranges relevant to officers were the factors considered by
the Executive Personnel and Pension Committee in determining the base salaries
recommended for such individuals.
1999 Executive Incentive Plan Awards -- Each year under the Executive
Incentive Plan, a maximum fund is established by the Committee, subject to the
approval of the Board, based on the salaries of the eligible participants at the
end of the prior year. This maximum fund may not exceed one half of one percent
of Con Edison of New York's net income for the year. Awards may be made by the
Committee, subject to approval by the Board, to eligible executives based on
their performance during the year. Payment of one-third of the award is deferred
for five years and is subject to forfeiture in certain circumstances. Portions
of awards that are required to be deferred are treated during the mandatory
deferral period as if the portions were invested in the Company's Common Stock
and are credited with dividend equivalents and credited or debited for increases
or decreases in the market value of an equivalent number of shares.
In recommending the amount awarded under the Executive Incentive Plan for
plan year 1999, the Committee considered the following financial factors for
1999: Earnings per share of $3.14 were higher than budgeted and ten cents higher
than 1998; earnings available for common stock of $700.6 million for 1999
exceeded the budget by $72.7 million; the stock price decreased 34.8%, which
compares with an increase of 19.5% in the Standard & Poor's ("S&P") 500 stock
index and a 23.2% decrease for the S&P Electric Utilities Index; total market
return on the Company's Common Stock was a negative 31.4%; the rate of return on
shareholders' equity in 1999 was 12.4% compared to 12% for 1998; the dividend
was increased by two cents or 0.9% in 1999; interest coverage was 4.04 times
compared with 4.29 for 1998; in June and August 1999, fossil-fueled electric
generating facilities in New York City were sold for about $1.8 billion, about
two times their average book value; in July 1999 the Company completed its
acquisition of Orange and Rockland Utilities after negotiating acceptable
regulatory agreements; uncollectibles, as measured by net loss per $100
revenues, dropped from $0.40 in 1998 to $0.37 in 1999, the lowest since 1988;
electric sales increased from 1998 by 2.7% on a weather-adjusted basis, while
firm gas sales and firm transportation increased by 1.3% and steam sales
decreased 1.4%, both on a weather adjusted-basis.
The Committee also considered the following additional factors: the Company
and Northeast Utilities agreed to a merger agreement under which the Company
will acquire Northeast Utilities and the combined company will be the largest
electric distribution company in the nation and third largest gas distribution
company in the Northeast; Con Edison of New York's Retail Choice Program
continues to meet the New York State Public Service Commission's requirements
and commitments made in the Competitive Opportunities Proceeding; the Company's
commitment to fostering a competitive electricity market and its lead role in
the formation of the New York Independent System Operator, which took control
over electric bulk power transmission in New York State in November 1999; the
formation of a steam business unit, which consolidated all steam-related
functions; the receipt of the beginning of the licensing process for the East
River Repowering Project; satisfaction of the $300 million stranded cost
mitigation provided under the 1997 Competitive Opportunities Proceeding
Settlement Agreement; Con Edison of New York supplied a new record electric
system peak load of 11,850 MW on July 6, 1999; the unprecedented heat wave
during the period July 3 through July 7, 1999 and the events leading to the
shutdown of the Washington Heights network; the initiation of a comprehensive
load relief and reliability plan to improve the high reliability of the
distribution system; the failure to meet the NYPSC's targets for electric
distribution system interruption rates and outage duration; the continuous
operation of Indian Point 2 from September 22, 1998 until August 31, 1999, the
second longest period of continuous
13
<PAGE> 19
operation in the plant's history; the events surrounding the Indian Point 2
reactor trip on August 31, 1999 that resulted in a declaration of notification
of unusual event to the Nuclear Regulatory Commission; the rate of customer
contacts with the NYPSC in 1999 was 4.2 contacts per 100,000 customers, the
lowest on record; the consolidation of four telephone call centers into one
location that will reduce costs and improve service; Con Edison of New York's
environmental program became the first corporate-wide environmental program to
be certified by the International Standard -- ISO 14000; the successful
completion of a ten year steam enhancement program on time and under budget; and
that Con Edison of New York's minority representation level in senior management
increased from 13.4% in 1998 to 15.2% in 1999, while female representation in
upper management increased from 14.5% in 1998 to 19.1% in 1999; overall minority
representation increased from 31.4% in 1998 to 32.7% in 1999 and overall female
representation increased from 14.4% in 1998 to 14.6% in 1999.
Based on the Committees review of the Company's performance in 1999, as
reflected in the factors mentioned above, for 1999 the Committee recommended,
and the Board approved, that the total amount awarded under the Executive
Incentive Plan to all participants as a group be 90 percent of the maximum
amount provided by the Plan.
CEO Compensation -- In making its recommendations to the Board with respect
to both the base salary and the Executive Incentive Plan award for 1999 of Mr.
McGrath and the Stock Option grant made to him in 1999, the Committee considered
among other things, the Company's good financial and operating results; the
Company's strong financial condition; the Company's progress in achieving the
goal of environmental excellence; Mr. McGrath's success in positioning the
Company for the future as evidenced by the successful completion of the
acquisition of Orange and Rockland Utilities and the entering into of a merger
agreement with Northeast Utilities; the continued successful implementation of
Con Edison of New York's and Orange and Rockland's retail choice programs; the
progress of the Company's unregulated subsidiaries; and compensation levels of
the chief executive officers of the other companies included in the compensation
surveys referred to on page 12.
I.R.S. Limitations on Deductibility of Executive Compensation -- Federal
law restricts the deductibility, for federal income tax purposes, of certain
executive compensation above a specified threshold. In 1999, a portion of Mr.
McGrath's compensation exceeded the threshold. In the Committee's judgment, the
non-deductibility of the compensation is not material. The Committee intends to
take into account these tax law provisions in structuring the Company's
executive compensation in future years.
The Executive Personnel and Pension
Committee
E. Virgil Conway (Chairman)
Sally Hernandez-Pinero
Robert G. Schwartz
Richard A. Voell
14
<PAGE> 20
STOCK OPTIONS
The purpose of the Stock Option Plan, which provides for granting options
to purchase shares of the Company's Common Stock, is to promote the interests of
the Company and its stockholders by providing long-term incentives to those
persons with significant responsibility for the success and growth of the
Company and its subsidiaries, by strengthening their ability to attract and
retain officers and other employees, and by aligning the interests of such
persons with those of the Company's stockholders by facilitating their purchase
of an equity interest in the Company. All grants of stock options outstanding
under the 1996 Stock Option Plan have a term of 10 years from date of grant and
an exercise price equal to 100 percent of fair market value on the date of
grant. The stock options are non-transferable and become exercisable three years
after the date of grant. In the event of a change in control of the Company, the
Executive Personnel and Pension Committee of the Board may provide for
appropriate adjustments including (i) rescinding or taking any other action with
respect to any option to the extent necessary to permit the Company to engage in
a merger, consolidation or business combination intended to be accounted for as
a pooling of interests transaction or (ii) accelerating any exercisability or
expiration dates, and settlements of options either at the time the option is
granted or at a subsequent date.
OPTION GRANTS IN LAST FISCAL YEAR (1999)
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES EXERCISE OR EXPIRATION PRESENT
NAME GRANTED IN 1999 BASE PRICE DATE VALUE(1)
- ---- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Eugene R. McGrath.................. 150,000 11.8% $47.9375 2/22/09 $1,185,000
J. Michael Evans................... 30,000 2.4% $47.9375 2/22/09 $ 237,000
Charles F. Soutar.................. 20,000 1.6% $47.9375 2/22/09 $ 158,200
Joan S. Freilich................... 50,000 3.9% $47.9375 2/22/09 $ 395,000
Stephen B. Bram.................... 16,000 1.3% $47.9375 2/22/09 $ 126,400
</TABLE>
- ---------------
(1) The grant date present values were calculated using the Black-Scholes option
pricing model applied as of the grant date, February 22, 1999. The values
generated by this model depend upon the following assumptions: an option
exercise date eight years after the grant date, a constant dividend yield on
the underlying stock of 4.46 percent, an assumed annual volatility of the
underlying stock of 18.76 percent; and a risk-free rate of return for the
option period of 5.24 percent. The market value on the grant date is the
closing price of the Common Stock on the day preceding the grant date. No
assumptions were made regarding restrictions on vesting or the likelihood of
vesting.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1999)
AND FISCAL YEAR-END OPTION VALUES (12/31/99)
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS IN THE MONEY OPTIONS AT
SHARES AT FISCAL YEAR END FISCAL YEAR END(1)
ACQUIRED VALUE ---------------------------- ----------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eugene R. McGrath.... 0 0 70,000 290,000 $463,750 $210,000
J. Michael Evans..... 0 0 20,000 70,000 $132,500 $ 60,000
Charles F. Soutar.... 0 0 16,000 58,000 $106,000 $ 54,000
Joan S. Freilich..... 0 0 16,000 88,000 $106,000 $ 54,000
Stephen B. Bram...... 0 0 16,000 48,000 $106,000 $ 54,000
</TABLE>
- ---------------
(1) Represents the difference between the market price of the Company's Common
Stock and the exercise price of the option at 12/31/99. The amounts may not
be realized. Actual values, if any, will be realized at the time of any
exercise.
15
<PAGE> 21
PENSION PLANS
The following table shows, for the salary levels and years of service
indicated, the annual pension benefit payable commencing at age 65 under Con
Edison of New York's Retirement Plan for Management Employees (the "Management
Plan"), a funded, tax-qualified, defined benefit pension plan, and Con Edison of
New York's Supplemental Retirement Income Plan, an unfunded, non-qualified plan
(together referred to as the "Plans"), as supplemented in the case of Messrs.
McGrath and Evans by separate agreements. CEI does not have a separate pension
plan.
<TABLE>
<CAPTION>
FINAL
AVERAGE
SALARY YEARS OF SERVICE
------- ----------------------------------------------------------------------------------
15 20 25 30 35 40 45
-- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C>
$50,000.... $ 11,250 $ 15,000 $ 19,000 $ 24,000 $ 25,250 $ 26,500 $ 27,750
$100,000... $ 23,750 $ 31,666 $ 40,083 $ 50,499 $ 52,999 $ 55,499 $ 57,999
$200,000... $ 51,500 $ 68,666 $ 86,833 $ 108,999 $ 113,999 $ 118,999 $ 123,999
$300,000... $ 79,250 $105,666 $133,583 $ 167,499 $ 174,999 $ 182,499 $ 189,999
$400,000... $107,000 $142,666 $180,333 $ 225,999 $ 235,999 $ 245,999 $ 255,999
$500,000... $134,750 $179,666 $227,083 $ 284,499 $ 296,999 $ 309,499 $ 321,999
$600,000... $162,500 $216,666 $273,833 $ 342,999 $ 357,999 $ 372,999 $ 387,999
$700,000... $190,250 $253,666 $320,583 $ 401,499 $ 418,999 $ 436,499 $ 453,999
$800,000... $218,000 $290,666 $367,333 $ 459,999 $ 479,999 $ 499,999 $ 519,999
$900,000... $245,750 $327,666 $414,083 $ 518,499 $ 540,999 $ 563,499 $ 585,999
$1,000,000.. $273,500 $364,666 $460,833 $ 576,999 $ 601,999 $ 626,999 $ 651,999
$1,100,000.. $301,250 $401,666 $507,583 $ 635,499 $ 662,999 $ 690,499 $ 717,999
$1,200,000.. $329,000 $438,666 $554,333 $ 693,999 $ 723,999 $ 753,999 $ 783,999
$1,300,000.. $356,750 $475,666 $601,083 $ 752,499 $ 784,999 $ 817,499 $ 849,999
$1,400,000.. $384,500 $512,666 $647,833 $ 810,999 $ 845,999 $ 880,999 $ 915,999
$1,500,000.. $412,250 $549,666 $694,583 $ 869,499 $ 906,999 $ 944,499 $ 981,999
$1,600,000.. $440,000 $586,666 $741,333 $ 927,999 $ 967,999 $1,007,999 $1,047,999
$1,700,000.. $467,750 $623,666 $788,083 $ 986,499 $1,028,999 $1,071,499 $1,113,999
$1,800,000.. $495,500 $660,666 $834,833 $1,044,999 $1,089,999 $1,134,999 $1,179,999
$1,900,000.. $523,250 $697,666 $881,583 $1,103,499 $1,150,999 $1,198,499 $1,245,999
$2,000,000.. $551,000 $734,666 $928,333 $1,161,999 $1,211,999 $1,261,999 $1,311,999
</TABLE>
The Plans provide pension benefits based on (i) the participant's highest
average salary for 60 consecutive months within the 120 consecutive months prior
to retirement ("final average salary"), (ii) the portion of final average salary
in excess of the Social Security taxable wage base in the year of retirement,
and (iii) the participant's length of service. For purposes of the Plans, a
participant's salary for a year is deemed to include any award under the
Executive Incentive Plan (See "Report on Executive Compensation" above) for that
year; provided that the portions of awards that are required to be deferred will
not be included in the pension calculation if such portions are forfeited in
accordance with the plan. Participants in the Plans whose age and years of
service equal 75 are entitled to an annual pension benefit for life, payable in
equal monthly installments. Participants may earn increased pension benefits by
working additional years. Benefits payable to a participant who retires between
ages 55 and 59 with less than 30 years of service are subject to a reduction of
1 1/2 percent for each full year of retirement before age 60. Early retirement
reduction factors are not applied to pensions of employees electing retirement
at age 55 or older with at least 30 years of service. However, benefits payable
on the portion of final average salary in excess of the Social Security taxable
wage base to a participant who retires before age 65 are subject to IRS
reduction factors. The years of service covered by the Plans are for: Mr.
McGrath, 37 years; Mr. Evans,
16
<PAGE> 22
26 years; Mr. Soutar, 42 years; Mr. Bram, 37 years and Ms. Freilich, 22 years.
Current compensation rates covered by the Plans for Messrs. McGrath, Evans,
Soutar, Bram and Ms. Freilich are approximately equal to the sum of the amounts
set forth under the captions "Salary" and "Bonus" in the summary compensation
table on page 11. The Plans provide an annual adjustment equal to the lesser of
3% or 3/4 of the annual increase in the Consumer Price Index to offset partially
the effects of inflation.
Mr. McGrath's agreement provides that under certain circumstances, if he
elects upon termination of his employment to defer the commencement of his
pension as permitted by the Plans, the Company will accrue and later pay with
interest the amounts that Mr. McGrath would have been entitled to receive under
the Plans during the deferral period, as supplemented by his agreement.
PERFORMANCE GRAPH
The following performance graph compares the Company's cumulative total
stockholder return on its Common Stock for a five year period (December 31, 1994
to December 31, 1999) with the cumulative total return of the Standard & Poor's
Electric Utilities Index and the Standard & Poor's 500 Stock Index.
COMPARISON OF FIVE YEAR TOTAL CUMULATIVE RETURN*
CEI, S&P ELECTRIC UTILITIES INDEX AND S&P 500 INDEX
DECEMBER 31, 1994 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
CON EDISON S&P ELECTRICS S&P 500
---------- ------------- -------
<S> <C> <C> <C>
1994 100.0 100.0 100.0
1995 132.0 131.1 137.6
1996 129.9 130.9 169.2
1997 192.6 165.2 225.6
1998 259.2 190.8 290.1
1999 178.1 153.8 351.1
</TABLE>
* Based on $100 invested at December 31, 1994; reinvestment of all dividends in
equivalent shares of stock; and market price changes on all such shares.
17
<PAGE> 23
CERTAIN INFORMATION AS TO INSURANCE AND INDEMNIFICATION
No stockholder action is required with respect to the following information
which is included to fulfill the requirements of Sections 725 and 726 of the
Business Corporation Law of the State of New York.
Effective December 2, 1999, the Company purchased insurance providing for
reimbursement, with certain exclusions and deductions, to (a) CEI or its
subsidiaries for payments they make to indemnify directors, trustees, officers
and assistant officers of CEI and its subsidiaries (b) directors, trustees,
officers and assistant officers for losses, costs and expenses incurred by them
in actions brought against them in connection with their acts in those
capacities for which they are not indemnified by CEI or its subsidiaries and (c)
CEI and its subsidiaries for any payments they make resulting from a securities
claim. The insurers are: A.C.E. Insurance Company, Ltd., Continental Casualty
Company, Federal Insurance Company, Lumbermens Mutual Casualty Company, and
Zurich American Insurance Company. The cost of this insurance was $667,500 for a
one year term. The Company also purchased from Federal Insurance Company, Royal
Insurance Company of America and Zurich American Insurance Company additional
insurance coverage, for one year effective January 1, 2000, insuring the
directors, trustees, officers and employees of CEI and its subsidiaries and
certain other parties against certain liabilities which could arise in
connection with the administration of the employee benefit plans of the Company
and its subsidiaries. The cost of such coverage was $194,000.
STOCKHOLDER PROPOSALS FOR 2001 ANNUAL MEETING
In order to be included in the proxy statement and form of proxy relating
to the Company's 2001 Annual Meeting, stockholder proposals must be received by
the Company at its principal offices at 4 Irving Place, New York, New York
10003, Attention: Corporate Secretary, by December 4, 2000.
OTHER MATTERS TO COME BEFORE THE MEETING
Management intends to bring before the meeting only the election of
Directors and Proposal No. 2 above and knows of no matters to come before the
meeting other than the matters set forth herein. If other matters or motions
come before the meeting, it is the intention of the persons named in the
accompanying form of proxy to vote such proxy in accordance with their judgment
on such matters or motions, including any matters dealing with the conduct of
the meeting. If a proposal offered by a stockholder that would require executive
compensation be directly related to stockholders return, which was omitted from
this proxy statement pursuant to applicable regulations, is presented to the
meeting, it is the intention of the persons named in the form of the proxy to
vote against it.
PLEASE VOTE, SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN
THE ENCLOSED POSTAGE PAID ENVELOPE, OR VOTE YOUR PROXY BY TELEPHONE OR ON THE
INTERNET IN ACCORDANCE WITH THE INSTRUCTIONS SET FORTH ON THE PROXY CARD. YOUR
VOTE IS IMPORTANT. Stockholders planning to attend the meeting but choosing not
to return the proxy card should send a note requesting an admission ticket in
the envelope provided.
By Order of the Board of Directors,
ARCHIE M. BANKSTON
Secretary
New York, N.Y.
April 3, 2000
18
<PAGE> 24
APPENDIX: 1999 FINANCIAL REPORT
19
<PAGE> 25
<TABLE>
Selected Financial Data
<CAPTION>
Con Edison
Year Ended December 31 (Millions of Dollars) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $7,491.3 $7,093.0 $7,196.2 $7,133.1 $6,620.0
Purchased power 1,824.0 1,253.8 1,349.6 1,272.9 1,107.2
Fuel 430.1 579.0 596.8 573.3 504.1
Gas purchased for resale 485.2 437.3 552.6 590.4 342.0
Operating income 1,019.8 1,053.3 1,035.3 1,012.5 1,040.6
Net income for common stock 700.6 712.7 694.5 688.2 688.3
Total assets 15,531.5 14,381.4 14,722.5 14,057.2 13,949.9
Long-term debt 4,524.6 4,050.1 4,188.9 4,238.6 3,917.2
Preferred stock subject to
mandatory redemption 37.1 37.1 84.6 84.6 100.0
Common shareholders' equity 5,412.0 6,025.6 5,930.1 5,727.6 5,522.7
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 3.14 $ 3.04 $ 2.95 $ 2.93 $ 2.93
Diluted earnings per share $ 3.13 $ 3.04 $ 2.95 $ 2.93 $ 2.93
Cash dividends per common share $ 2.14 $ 2.12 $ 2.10 $ 2.08 $ 2.04
- -----------------------------------------------------------------------------------------------------------------------
Average common shares
outstanding (millions) 223.4 234.3 235.1 235.0 234.9
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Selected Quarterly Information
<CAPTION>
Con Edison First Second Third Fourth
1999 (Millions of Dollars) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $1,776.6 $1,479.1 $2,346.2 $1,889.4
Operating income 258.5 149.7 423.3 188.3
Net income for common stock 176.6 66.4 336.0 121.6
Basic earnings per common share $ 0.76 $ 0.30 $ 1.50 $ 0.58
Diluted earnings per common share $ 0.76 $ 0.30 $ 1.50 $ 0.57
</TABLE>
<TABLE>
<CAPTION>
1998 (Millions of Dollars)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $1,853.1 $1,561.0 $2,061.6 $1,617.3
Operating income 254.6 148.0 438.4 212.3
Net income for common stock 171.9 62.0 347.0 131.8
Basic and diluted earnings per common share $ 0.73 $ 0.26 $ 1.49 $ 0.56
- -----------------------------------------------------------------------------------------------------------------------
In the opinion of Con Edison, these quarterly amounts include all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation.
</TABLE>
Market Price Range in Consolidated Reporting System
and Dividends Paid on Common Stock
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------
Dividends Dividends
High Low Paid High Low Paid
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $53-7/16 $45-1/8 $ 0.535 $47-7/8 $39-1/16 $ 0.53
2nd Quarter 49-7/8 43-7/8 0.535 47-1/8 41-1/8 0.53
3rd Quarter 46-5/8 40 0.535 52-1/4 42 0.53
4th Quarter 43-1/16 33-9/16 0.535 56-1/8 48-1/2 0.53
- ------------------------------------------------------------------------------------
As of January 31, 2000 there were 116,467 holders of record of common stock.
</TABLE>
A-1
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This discussion and analysis relates to the accompanying consolidated financial
statements of Consolidated Edison, Inc. (Con Edison) and should be read in
conjunction with the consolidated financial statements and the notes thereto.
CON EDISON'S BUSINESS
Con Edison is a holding company that provides a wide range of energy-related
services to its customers through its regulated and unregulated subsidiaries.
Con Edison's core business is energy distribution and it is also pursuing
related growth opportunities in competitive businesses.
Con Edison's principal subsidiary is Consolidated Edison Company of New York,
Inc. (Con Edison of New York), a regulated utility which 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) is also a regulated utility subsidiary
of Con Edison. O&R, along with its regulated utility subsidiaries, 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.
In October 1999, Con Edison agreed to acquire Northeast Utilities (Northeast),
which, through its three regulated utility subsidiaries, provides electric
service to over 1.7 million customers in Connecticut, New Hampshire and western
Massachusetts and, following completion of its acquisition of Yankee Energy
System, Inc., will provide gas service to over 185,000 customers in Connecticut.
SIGNIFICANT DEVELOPMENTS
Several significant developments in 1999 materially affected Con Edison's
financial condition and results of operations. In July 1999 Con Edison completed
its $791.5 million acquisition of O&R. See Note K to the financial statements.
In June and August 1999, Con Edison of New York completed the sales of almost
6,300 megawatts (MW) of its approximately 8,300 MW of electric generating
capacity, for a total of $1.8 billion. See Note I to the financial statements.
During 1999, Con Edison substantially completed its $1 billion common stock
repurchase program. See "Liquidity and Capital Resources - Stock Repurchases,"
below.
Significant developments are also expected in 2000, including the completion of
the acquisition of Northeast for an estimated aggregate price of not more than
$3.8 billion and additional purchases of common stock under a $300 million
expansion of the repurchase program. See "Liquidity and Capital Resources -
Northeast Utilities Merger and Stock Repurchases," below. Con Edison of New York
has also announced that it will conduct an auction for the possible sale of the
Indian Point 2 nuclear generating unit. See "Nuclear Generation," below.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND SHORT-TERM BORROWING
Cash and temporary cash investments and commercial paper outstanding at December
31, 1999 and 1998 were:
<TABLE>
<CAPTION>
(Million of Dollars) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and temporary
cash investments $ 485.1 $102.3
Commercial paper $ 495.4 --
</TABLE>
The 1999 amounts reflect short-term borrowing in December 1999 in anticipation
of January 2000
A-2
<PAGE> 27
cash requirements. Con Edison's cash requirements are subject to substantial
fluctuations due to seasonal variations in cash flow and generally peak in
January and July of each year when semi-annual payments of New York City
property taxes are due.
Con Edison's average daily commercial paper outstanding in 1999 was $125 million
compared to $35 million in 1998. The weighted average interest rate was
approximately 5.0 percent in 1999 compared to approximately 5.6 percent in 1998.
The increased commercial paper issuance during 1999 reflects temporary
short-term borrowing to complete the O&R acquisition and to continue the common
stock repurchase program. This borrowing was repaid with cash proceeds from the
generation divestiture. The increased borrowing also reflects Con Edison's plan
to maintain commercial paper as a cost-effective component of its capital
structure.
For additional information about Con Edison's commercial paper programs, see
Note C to the financial statements.
CASH FLOWS FROM OPERATIONS
Net cash flows from operating activities for years 1997 through 1999 were as
follows:
<TABLE>
<CAPTION>
(Millions of Dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash flows from
operating activities $ 1,205 $ 1,390 $ 1,286
Common stock
dividends (477) (493) (494)
- --------------------------------------------------------------------------------
Net cash flows $ 728 $ 897 $ 792
</TABLE>
Net cash flows from operations in 1999 were lower than in 1998 due to higher
capacity charges and other cash flow effects of the generation divestiture. Net
cash flows in 1998 were higher than in 1997 due principally to higher electric
sales revenue from warmer than normal summer weather and an improved New York
City economy.
Customer accounts receivable, less allowance for uncollectible accounts,
increased at December 31, 1999 compared to December 31, 1998, primarily because
of Con Edison's acquisition of O&R and increased sales by Con Edison's
unregulated subsidiaries. See "Unregulated Subsidiaries," below. For Con Edison
of New York, the equivalent number of days of revenue outstanding (ENDRO) of
customer accounts receivable was 28.8 days at December 31, 1999, compared with
28.0 days at December 31, 1998. For O&R, the ENDRO was 40.4 days at December 31,
1999.
Net utility plant decreased at December 31, 1999 compared to December 31, 1998
reflecting the net effect of generation divestiture and the acquisition of O&R.
Accounts payable was higher at December 31, 1999 primarily because of increased
purchased power billings and the acquisition of O&R. Other receivables were
higher at December 31, 1999 primarily because of the acquisition of O&R.
Materials and supplies decreased at December 31, 1999 reflecting the sale of
inventory along with the generating plants.
Prepayments at December 31, 1999 reflect cumulative credits to pension expense
of $116.0 million compared with $62.0 million at December 31, 1998, resulting
primarily from the amortization of past investment gains. See Note D to the
financial statements.
For information about regulatory assets and liabilities, see Note J to the
financial statements.
CAPITAL RESOURCES
Con Edison expects to finance its operations, capital requirements (other than
those relating to its pending acquisition of Northeast) and the payment of
dividends to its shareholders primarily from dividends and other distributions
it receives from its subsidiaries and through external borrowings, including
commercial paper. For information about restrictions on the payment of dividends
by Con Edison of New York, see Note B to the financial statements. For
information about Con Edison's capital requirements relating to its pending
acquisition of Northeast, see "Northeast Utilities Merger," below.
In February 2000 Con Edison of New York and O&R requested the New York State
Public Service
A-3
<PAGE> 28
Commission (PSC) to authorize additional long-term debt issuances of up to $1.5
billion and $150 million, respectively, prior to 2003. The PSC has already
authorized Con Edison of New York to issue securities for the refunding of its
outstanding debt and preferred stock from time to time prior to the year 2003.
O&R has requested similar authorization to refund its outstanding debt
securities.
Con Edison's ratio of earnings to fixed charges for 1999, 1998 and 1997 and
common equity ratio at December 31, 1999, 1998 and 1997 were:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Earnings to fixed
charges (SEC basis) 4.04 4.29 4.09
Common equity 53.1 58.4 56.8
</TABLE>
The changes in interest coverage in these years reflect changes in pre-tax
income and changes in interest charges due to debt issuances and refundings. The
decrease in the equity ratio for 1999 reflects the $1 billion common stock
repurchase program and debt issuances. Con Edison expects that these ratios will
decrease in 2000 when it expects to complete the acquisition of Northeast and
continue to repurchase its common stock. Con Edison's interest coverage and
equity ratio are currently among the highest in the industry.
Con Edison of New York issued $275 million aggregate principal amount of 40-year
7.35 percent debentures in June 1999 and $200 million aggregate principal amount
of 10-year 7.15 percent debentures in December 1999. In addition, it repaid at
maturity $150 million of floating rate taxable debentures in July 1999 and $75
million of 7-year 6.5 percent debentures in September 1999.
Con Edison of New York issued $292.7 million of 35-year adjustable rate
tax-exempt debt in July 1999, the proceeds of which, along with other funds,
were used in August 1999 to redeem $150 million of 7 -1/4 percent Series 1989 C
tax-exempt debt and $150 million of 7 -1/2 percent Series 1990 A tax-exempt
debt. In 1998, it issued $385 million of debentures with interest rates ranging
from 6.15 to 7.10 percent to refund debentures and tax-exempt debt with interest
rates ranging from 7-1/8 to 8.05 percent and $75 million of 30-year 6.90 percent
debentures to redeem three series of preferred stock.
The commercial paper of Con Edison and its utility subsidiaries is rated P-1 and
A-1, respectively, by Moody's Investor Service (Moody's) and Standard and Poor's
Rating Group (S&P). S&P has assigned an issuer rating of A to Con Edison, which
has not yet issued any long-term debt. The debentures of Con Edison's utility
subsidiaries are rated A1 and A+, respectively, by Moody's and S&P. The rating
agencies are reviewing these ratings in light of Con Edison's pending
acquisition of Northeast.
CAPITAL REQUIREMENTS
The following table compares Con Edison's capital requirements, other than
requirements relating to its stock repurchases and pending Northeast
acquisition, for the years 1997 through 1999 and estimated amounts for 2000 and
2001:
<TABLE>
<CAPTION>
(Millions of Dollars) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Utility
construction
expenditures $ 908 $ 829 $ 678 $ 619 $ 654
Investment in
unregulated
subsidiaries 293 221 165 56 86
Nuclear
decommissioning
trust 21 21 21 21 21
Nuclear fuel 47 28 17 7 15
Retirement of
long-term debt at
maturity 300 395 525 200 106
- --------------------------------------------------------------------------------
Total $1,569 $1,494 $1,406 $ 903 $ 882
</TABLE>
The increased utility construction expenditures in 2000 and 2001 reflect
expenditures to repower Con Edison of New York's East River steam-electric
generating plant, expenditures related to meeting load growth on the electric
distribution system and the construction programs of O&R. The repowering will
provide additional, more efficient and lower-cost steam capacity, and will allow
for the retirement and sale of the Waterside generating station. See "Regulatory
Matters - Steam," below.
A-4
<PAGE> 29
STOCK REPURCHASES
During 1999 18.7 million shares of Con Edison common stock were repurchased at
an average price of $43.82 per share, and a total cost of $819.7 million under
the previously announced $1 billion repurchase program. Through December 31,
1999, a total of 21.4 million shares was purchased under the program at an
average price of $44.03 per share, and 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. Con Edison expects that purchases will be
made from time to time on the open market, as determined by market conditions
and Con Edison's other financial needs.
Con Edison purchased 432,400 shares of its common stock (at an aggregate cost of
approximately $19.8 million) in April and May 1999 to be used for exercises of
options under its 1996 Stock Option Plan. At December 31, 1999, approximately
318,960 of these shares remained available for future option exercises. Shares
of Con Edison common stock to be issued upon the exercise of options may be
either purchased on the market or newly issued shares. See Note M to the
financial statements.
NORTHEAST UTILITIES MERGER
In October 1999 Con Edison agreed to acquire Northeast Utilities for an
estimated aggregate purchase price of not more than $3.8 billion, payable 50
percent in cash and 50 percent in common stock (subject to election and
proration procedures). Con Edison expects that, following receipt of all
required shareholder and regulatory approvals, it will complete the merger in
2000.
In January 2000 Con Edison and Northeast submitted filings relating to the
merger with the relevant federal and state agencies, including the Federal
Energy Regulatory Commission (FERC), Securities and Exchange Commission (SEC),
Department of Justice and Nuclear Regulatory Commission (NRC).
Con Edison has not yet entered into any agreements or made any arrangements with
respect to financing the cash portion of the merger consideration. Con Edison
expects to meet this need with a combination of cash on hand and issuance of
long-term or short-term debt, and does not expect to experience any difficulty
in obtaining the requisite financing. See "Financial Market Risks," below.
For additional information about the merger, see "Northeast Utilities Merger"
which precedes Note A in the footnotes to the financial statements.
UNREGULATED SUBSIDIARIES
Con Edison's unregulated 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 New England and Mid-Atlantic states.
Con Edison's investment in these subsidiaries was $284.4 million at December 31,
1999. See "Capital Requirements," above.
Northeast also has unregulated subsidiaries that provide telecommunications,
energy management and marketing and other energy related services.
The unregulated subsidiaries participate in new unregulated energy supply and
services businesses that are subject to competition and different investment
risks than those involved in the businesses of the regulated utility
subsidiaries.
REGULATORY MATTERS
Federal and state initiatives have resulted in a fundamental restructuring of
Con Edison and the rest of the utility industry by promoting the development of
competition in the sale of electricity and gas. These initiatives "unbundle," or
separate, the integrated supply and delivery
A-5
<PAGE> 30
services that utilities have traditionally provided, and enable customers to
purchase electric and gas supply from others for delivery by the utilities over
their electric and gas systems.
ELECTRIC
In 1996 the FERC issued its Order 888 requiring electric utilities to make their
transmission facilities available to wholesale sellers and buyers of electric
energy and allow utilities to recover related legitimate and verifiable stranded
costs subject to FERC's jurisdiction. In November 1999 following FERC approval,
the New York State Independent System Operator (ISO) commenced operations and
began controlling and operating most electric transmission facilities in New
York as an integrated system. Con Edison's utility subsidiaries continue to own
and maintain, but not operate, their transmission facilities and receive fees
for use of the facilities.
In 1996 the 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 provides for:
- cumulative rate reductions of approximately $1 billion;
- "retail choice" for all electric customers;
- the divestiture of electric generation capacity; and
- a reasonable opportunity for recovery of "strandable costs."
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.
Additional rate reductions of approximately $103 million and $209 million are
scheduled to take effect in April 2000 and 2001, respectively.
At December 31, 1999, approximately 70,000 Con Edison of New York customers
representing approximately 20 percent of the 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 the program available 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 system. 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 to the financial
statements).
Con Edison's utility subsidiaries have sold most of their electric generating
assets (see Note I to the financial statements). Con Edison of New York still
owns about 2,000 MW of generating assets and has contracts with non-utility
generators (NUGs) for approximately 2,100 MW of electric generating capacity
(see Note H to the financial statements). Con Edison's utility subsidiaries use
these remaining generating resources, and energy and capacity purchased from the
buyers of the generating assets sold and others, to supply electricity to their
full-service customers (i.e., those customers who are not participants in the
electric retail access program) and to other suppliers who supply electricity
under the retail access programs.
Con Edison's utility subsidiaries no longer earn an equity return on the
generating assets that were sold. Instead, the utility subsidiaries purchase
electricity from the buyers of the generating assets sold and recover the cost
of the electricity either in base rates or pursuant to applicable fuel
adjustment
A-6
<PAGE> 31
clauses. See Note A - Recoverable Fuel Costs and Note I to the financial
statements.
Con Edison does not expect its utility subsidiaries to add long-term electric
generation resources other than in connection with the repowering of the East
River generating plant, which will add incremental electric capacity of 250 MW.
In a July 1998 order, the PSC indicated that it "agree(s) generally that Con
Edison of New York need not plan on constructing new generation as the
competitive market develops," but considers "overly broad" and did not adopt its
request for a declaration that, solely with respect to providing generating
capacity, it will no longer be required to engage in long-range planning to meet
potential demand and, in particular, that it will no longer have the obligation
to construct new generating facilities, regardless of the market price of
capacity. Con Edison's unregulated subsidiaries, which at December 31, 1999 have
invested in 450 MW of electric generating assets, may invest in additional
generating assets.
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, including 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 NUGs. Con
Edison of New York is recovering potential electric strandable 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 investments. For any remaining strandable costs
relating to fossil-fueled generating assets, the recovery period will be 10
years. For additional information about nuclear generation and NUG-related
strandable costs, see Notes G and H to the financial statements.
O&R has entered into settlement agreements or similar arrangements with the PSC
and the New Jersey and Pennsylvania public utility commissions which also
provide for a transition to a competitive electric market, including the
divestiture of its generating assets. See "Restructuring Agreements" in Note A
to the financial statements.
GAS
Under Con Edison of New York's gas Retail Choice program, which began in 1996,
all of its gas customers may purchase gas from other suppliers. At December 31,
1999, approximately 22,000 Con Edison of New York customers representing
approximately 25 percent of aggregate firm customer load were participating in
the program. The delivery of gas continues to be through Con Edison of New
York's distribution system.
In January 1997 the PSC approved a four-year gas rate settlement agreement with
the following major provisions: base rates will, with limited exceptions, remain
at September 1996 levels through September 2000; Con Edison of New York will
share in net revenue from interruptible gas sales (previously used only to
reduce firm customer gas costs) by retaining in each rate year the first $7.0
million of net revenue from such sales above 8.5 million dekatherms and 50
percent of additional net revenues; and 86 percent of any increase in property
taxes above levels implicit in rates will be recovered by offsetting amounts, if
any, that would otherwise be returned to customers. Con Edison of New York will
share with customers 50 percent of earnings above a 13 percent rate of return on
gas common equity. No amounts were deferred for earnings sharing in 1999, 1998
or 1997.
In December 1999, O&R filed with the PSC a request to increase gas rates by $12
million over a four-year period.
STEAM
In a December 1999 order, the PSC concurred with Con Edison of New York that a
competitive steam market is not currently feasible.
A-7
<PAGE> 32
In 1999, Con Edison of New York began a project to repower its East River
steam-electric generating plant (see "Capital Requirements," above). The
repowering of the East River plant will provide enhanced reliability and lower
costs to steam customers and permit the company to sell its Waterside generating
station as part of a nine-acre development site in midtown Manhattan along the
East River. The sale of the nine-acre site and the disposition of the expected
net after-tax gain from the sale will be subject to PSC approval.
In November 1999 Con Edison of New York filed a steam rate plan with the PSC
requesting a cumulative rate increase of $33.1 million over a four-year period
ending September 2004. The current three-year steam rate agreement between Con
Edison of New York and the PSC staff, which expires in October 2000, provided
for a $16 million rate increase.
FINANCIAL MARKET RISKS
Con Edison's primary market risks associated with activities in derivative
financial instruments, other financial instruments and derivative commodity
instruments, are interest rate risk and commodity price risk.
The interest rate risk relates primarily to new debt financing needed to fund
capital requirements, including utility construction expenditures, maturing debt
securities and the pending Northeast acquisition, and to variable rate debt. See
"Capital Requirements" and "Northeast Utilities Merger," above.
In general, the rates Con Edison's utility subsidiaries charge customers for
electric, gas and steam service are not subject to change for fluctuations in
the cost of capital during the respective terms of the current rate agreements.
The utility subsidiaries manage interest rate risk through the issuance of
mostly fixed-rate debt with varying maturities and through opportunistic
refundings of debt through optional redemptions and tender offers. In addition,
Con Edison of New York, has from time to time, entered into derivative financial
instruments to hedge interest rate risk.
At December 31, 1999, neither Con Edison nor any of its subsidiaries had
derivative or other financial instruments outstanding for purposes of hedging
its interest rate risk.
Derivative instruments are used by Con Edison to hedge flowing gas and gas in
storage. In addition, Con Edison Solutions and Con Edison Energy use derivatives
to hedge its gas purchases to meet future load requirements. The utility
subsidiaries do not generally use derivatives to hedge purchases of electricity
and fuel because the related commodity price risks are mitigated by the fuel
adjustment provisions of their current rate agreements (see Note A to the
financial statements). At December 31, 1999 neither the fair value of the hedged
positions outstanding nor potential, near-term derivative losses from reasonably
possible near-term changes in market prices were material to the financial
position, results of operations or liquidity of Con Edison.
NUCLEAR GENERATION
Con Edison of New York, which has operated its approximately 1,000 MW Indian
Point 2 nuclear generating unit since 1973, is exploring alternatives to its
continued ownership and operation of Indian Point 2. 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. The company has reserved the right
to reject any and all proposals, to terminate the auction process, and/or to
decline to sell all or any part of the assets being auctioned. Any sale would be
subject to the approval of the PSC and the NRC.
In February 2000, Con Edison of New York shut down Indian Point 2 following a
leak in one of its steam generators. NRC approval will be required to restart
the plant. Certain organizations have asked the NRC to require the company to
replace the steam generators prior to restart. The company is not currently able
to determine if or when replacement of the steam generators will be required.
Various parties have initiated or threatened legal or legislative action to
prevent the company from recovering replacement power costs
A-8
<PAGE> 33
related to the current outage and the PSC is expected to initiate a proceeding
to examine the prudency of related company actions. The company believes that
its actions in this regard have been prudent, but it is unable to predict
whether or not any related proceedings, lawsuits or other actions will have a
material adverse effect on the company's financial position, results of
operations or liquidity.
For information about the recovery of Con Edison of New York's investment in
Indian Point 2, decommissioning Indian Point 2 and additional information about
nuclear generation, see Note G to the financial statements.
ENVIRONMENTAL MATTERS
For information concerning potential liabilities arising from laws and
regulations protecting the environment, including the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (Superfund), and
from claims relating to alleged exposure to asbestos, see Note F to the
financial statements.
IMPACT OF INFLATION
Con Edison is affected by the decline in the purchasing power of the dollar
caused by inflation. Regulation permits Con Edison's utility subsidiaries to
recover through depreciation only the historical cost of their plant assets even
though in an inflationary economy the cost to replace the assets upon their
retirement will substantially exceed historical costs. The impact is, however,
partially offset by the repayment of the utility subsidiaries' long-term debt in
dollars of lesser value than the dollars originally borrowed.
FORWARD-LOOKING STATEMENTS
This discussion and analysis includes forward-looking statements, which are
statements of future expectation and not facts. Words such as "estimates,"
"expects," "anticipates," "intends," "plans" and similar expressions identify
forward-looking statements. Actual results or developments might differ
materially from those included in the forward-looking statements because of
factors such as competition and industry restructuring, the Northeast merger,
technological developments, changes in economic conditions, changes in
historical weather patterns, changes in laws, regulations or regulatory
policies, developments in legal or public policy doctrines, and other presently
unknown or unforeseen factors.
RESULTS OF OPERATIONS
Con Edison's earnings per share in 1999 were $3.14 ($3.13 on a diluted basis).
Earnings per share in 1998 and 1997 were $3.04 and $2.95, respectively, on both
basic and diluted bases. See "Liquidity and Capital Resources - Stock
Repurchases."
Earnings for the years ended December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
(Millions of Dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Con Edison of New York $ 698.3 $ 728.1 $ 704.0
O&R* 22.2 -- --
Unregulated subsidiaries (10.9) (18.4) (9.5)
Other** (9.0) 3.0 --
- --------------------------------------------------------------------------------
Con Edison $ 700.6 $ 712.7 $ 694.5
- --------------------------------------------------------------------------------
</TABLE>
* O&R earnings are for the period subsequent to its acquisition in July 1999.
** Includes parent company expenses and inter-company eliminations.
Con Edison's earnings for 1999, compared to 1998, decreased $12.1 million. The
principal components of the decrease were: $42.3 million of electric rate
reductions; $41.9 million of lost equity return on generating assets that were
divested; and $8.5 million of higher distribution expenses relating to Hurricane
Floyd and a July 1999 heat wave, offset by $22.2 million of O&R earnings
reflecting the acquisition of O&R in July 1999 and approximately $65.7 million
of lower nuclear and pension expenses. Earnings also reflect the levels of
electric, gas and steam sales discussed below.
Con Edison's earnings for 1998, compared to 1997, increased $18.2 million as the
result of higher electric revenues of $36.5 million from warmer
A-9
<PAGE> 34
than normal summer weather and an improving New York City economy, net of rate
reductions, offset, in part, by expenses of $19.3 million from an extended
Indian Point 2 maintenance outage.
Con Edison's operating revenues in 1999, compared to 1998, increased by $398.3
million, and its operating income decreased by $33.5 million. Operating revenues
in 1998, compared to 1997, decreased from the prior year by $103.1 million, and
operating income increased by $18.0 million.
A discussion of Con Edison's operating revenues and operating income by business
segment follows. Con Edison's principal business segments are its electric, gas
and steam utility businesses. For additional information about Con Edison's
business segments, see Note N to the financial statements.
ELECTRIC
Con Edison's electric operating revenues in 1999 increased $118.2 million, from
1998 and in 1998 increased $38.9 million from 1997. The increases reflect
increased sales volumes, offset by electric rate reductions of approximately $65
million in 1999 and $102 million in 1998. The 1999 increase also reflects $258.1
million of O&R electric operating revenues.
Electricity sales volume in Con Edison of New York's service territory increased
3.9 percent in 1999 and 3.1 percent in 1998.
The increases in sales volume reflect both the continued strength of the New
York City economy and warmer than normal summer weather. Con Edison's electric
sales vary seasonally in response to weather, and peak in the summer.
After adjusting for variations, principally weather and billing days, in each
period, electricity sales volume in Con Edison of New York's service territory
increased 2.7 percent in 1999 and 2.5 percent in 1998. Weather-adjusted sales
represent an estimate of the sales that would have been made if historical
average weather conditions had prevailed.
Con Edison's electric operating income decreased $47.3 million in 1999 compared
to 1998. The principal components of the decrease were: $41.9 million of lost
equity return on generating assets that were divested; approximately $8.5
million of increased distribution expenses relating to Hurricane Floyd and a
July 1999 heat wave; and $42.3 million of electric rate reductions, offset, in
part, by approximately $65 million of reduced expenses at Indian Point 2 (which
had an extended maintenance outage in 1998) and decreased pension costs; and
$28.4 million of electric operating income attributable to O&R.
Con Edison's 1998 electric operating income increased $50.9 million compared to
1997 primarily as a result of increased electric revenues of $36.5 million and
decreased pension expenses of $28.6 million, partly offset by increased expenses
of $19.3 million at Indian Point 2.
GAS
Con Edison's gas operating revenues and gas operating income increased $40.5
million and $10.5 million, respectively, in 1999 and decreased $134.3 million
and $12.6 million, respectively, in 1998. These changes reflect gas sales and
transportation volumes. The 1999 increases also reflect O&R gas operating
revenues of approximately $56.4 million and O&R gas operating income of
approximately $0.3 million.
Gas sales and transportation volume to firm customers of Con Edison of New York
increased 5.8 percent in 1999 compared to 1998 and decreased 9.7 percent in 1998
compared to 1997. Con Edison's gas sales and transportation vary seasonally in
response to weather, and peak in the winter. The increase in volumes from 1998
reflects the colder 1999 winter compared to 1998. The decrease in 1998 compared
to 1997 reflects the relatively warm 1998 winter.
After adjusting for variations, principally weather and billing days, in each
period, gas sales and transportation volume to firm customers increased 1.3
percent in 1999 and decreased 0.1 percent in 1998.
A-10
<PAGE> 35
A weather-normalization provision that applies to the gas businesses of Con
Edison's utility subsidiaries operating in New York moderates, but does not
eliminate, the effect of weather-related changes on gas operating income.
STEAM
Con Edison's steam operating revenues and steam operating income increased $18.1
million and $0.1 million, respectively, in 1999, but decreased $69.9 million and
$16.7 million, respectively in 1998, primarily because of changes in steam sales
volume.
Steam sales volume increased 6.1 percent in 1999 and decreased 8.8 percent in
1998.
Con Edison's steam sales vary seasonally in response to weather, and peak in the
winter. The increase in volume for steam sales from 1998 reflects the colder
1999 winter compared to 1998. The decrease in 1998 compared to 1997 reflects the
relatively warm 1998 winter.
After adjusting for variations, principally weather and billing days, in each
period, steam sales volume decreased 1.4 percent in 1999 and decreased 1.7
percent in 1998.
TAXES, OTHER THAN FEDERAL INCOME TAX
At $1.2 billion, taxes other than federal income tax remain one of Con Edison's
utility subsidiaries' largest operating expenses.
The principal components of and variations in operating taxes were:
<TABLE>
<CAPTION>
Increase/ (Decrease)
- --------------------------------------------------------------------------------
1999 1998
(Millions of Dollars) 1999 Amount over 1998 over 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Property taxes $ 606.2 $ (12.2) $ 27.7
State and local taxes
on revenues 470.7 4.9 (9.0)
Payroll taxes 59.6 2.9 (2.6)
Other taxes 43.3 (23.9) 10.9
- --------------------------------------------------------------------------------
Total $1,179.8* $ (28.3) $ 27.0
- --------------------------------------------------------------------------------
</TABLE>
* Including sales taxes on customers' bills, total taxes, other than federal
income taxes, billed to customers in 1999 were $1,458.2 million.
OTHER INCOME
Other income increased $29.7 million in 1999 due principally to deferred federal
income tax credits realized as a result of the generation divestiture. See Note
L to the financial statements. Other income decreased $8.3 million in 1998 due
principally to the write-off of a $10 million investment made by an unregulated
subsidiary.
NET INTEREST CHARGES
Net interest charges increased $11.7 million in 1999, compared to 1998,
reflecting the addition of $15.4 million of O&R debt expense and $3.4 million of
increased interest on short-term borrowing, partially offset by refunding of
long-term debt and favorable tax audit adjustments. Net interest charges
decreased $7.2 million in 1998, reflecting the interest savings from the
refunding of long-term debt in 1998.
FEDERAL INCOME TAX
Federal income tax decreased $32.6 million in 1999 and increased $25.7 million
in 1998, reflecting the changes each year in income before tax and in tax
credits. See Note L to the financial statements.
A-11
<PAGE> 36
[PRICEWATERHOUSECOOPERS LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Consolidated Edison, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of retained earnings, of capitalization, and
of cash flows present fairly, in all material respects, the financial position
of Consolidated Edison, Inc. and its subsidiaries (the "Company") at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
February 17, 2000
A-12
<PAGE> 37
Consolidated Balance Sheet Consolidated Edison, Inc.
ASSETS
<TABLE>
<CAPTION>
AT DECEMBER 31 (THOUSANDS OF DOLLARS) 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
</TABLE>
A-13
<PAGE> 38
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
AT DECEMBER 31 (THOUSANDS OF DOLLARS) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-14
<PAGE> 39
Consolidated Income Statement Consolidated Edison, Inc.
<TABLE>
<CAPTION>
Year Ended December 31 (Thousands of Dollars) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Consolidated Statement of Retained Earnings Consolidated Edison, Inc.
<TABLE>
<CAPTION>
Year Ended December 31 (Thousands of Dollars) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-15
<PAGE> 40
Consolidated Statement of Cash Flows Consolidated Edison, Inc.
<TABLE>
<CAPTION>
Year Ended December 31 (Thousands of Dollars) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-16
<PAGE> 41
Consolidated Statement of Capitalization Consolidated Edison, Inc.
<TABLE>
<CAPTION>
Year Ended December 31 (Thousands of Dollars) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Shares outstanding
-------------------------------------
December 31, 1999 December 31, 1998
-------------------------------------
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Represents total authorized shares of cumulative preferred stock, $100 par
value, including preferred stock subject to mandatory redemption.
A-17
<PAGE> 42
<TABLE>
<CAPTION>
At December 31 (Thousands of Dollars) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt (Note B)
Maturity Interest Rate Series
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Tax-exempt debt - notes issued to New York State Energy Research and Development Authority for Facilities Revenue Bonds:
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Subordinated deferrable interest debentures:
<S> <C> <C> <C> <C>
2031 7-3/4 1996A 275,000 275,000
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Rates reset quarterly; December 31, 1999 rate shown.
** Rate 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.
A-18
<PAGE> 43
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 unregulated 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
A-19
<PAGE> 44
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.
A-20
<PAGE> 45
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
A-21
<PAGE> 46
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:
<TABLE>
<CAPTION>
(Thousands of Dollars) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
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
A-22
<PAGE> 47
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 was 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
A-23
<PAGE> 48
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 was 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:
<TABLE>
<CAPTION>
(Millions of Dollars)
- --------------------------------------------------------------------------------
<S> <C>
2000 $ 395
2001 300
2002 300
2003 185
2004 150
- --------------------------------------------------------------------------------
</TABLE>
Long-term debt of Con Edison's utility subsidiaries is stated at cost which, as
of December 31, 1999 and 1998, 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.
A-24
<PAGE> 49
At December 31, 1999 this ratio was 0.49 to 1 for Con Edison, 0.52 to 1 for Con
Edison of New York and 0.55 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:
<TABLE>
<CAPTION>
(Millions of Dollars) 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------
</TABLE>
* 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:
<TABLE>
<CAPTION>
(Millions of Dollars) 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CHANGE IN BENEFIT
OBLIGATION
Benefit obligation at $ 5,384.1 $ 4,940.6 $ 4,703.0
beginning of year
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)
- --------------------------------------------------------------------------------------------
</TABLE>
* Being amortized over approximately 15 years.
The actuarial assumptions at December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
A-25
<PAGE> 50
PENSION BENEFITS
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:
(Thousands of Dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
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:
(Thousands of Dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
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.
A-26
<PAGE> 51
The actuarial assumptions at December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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:
(Millions of Dollars) 1999 1998 1997
- ----------------------------------------------------------------------------
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:
(Millions of Dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
1- Percentage- 1-Percentage-
(Millions of Dollars) Point Increase Point Decrease
- --------------------------------------------------------------------------------
<S> <C> <C>
Effect on accumulated
postretirement benefit
obligation $113.4 $99.3
Effect on service cost and
interest cost components $12.7 $10.8
</TABLE>
A-27
<PAGE> 52
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (OPEB)
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:
(Thousands of Dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
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:
(Thousands of Dollars) 1999 1998 1997
- --------------------------------------------------------------------------------
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
A-28
<PAGE> 53
The actuarial assumptions at December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
(Thousands of Dollars) Point Increase Point Decrease
- --------------------------------------------------------------------------------
<S> <C> <C>
Effect on accumulated
postretirement benefit
obligation $9,431 $7,930
Effect on service cost
and interest cost
components $ 940 $ 770
</TABLE>
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 at 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
A-29
<PAGE> 54
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:
<TABLE>
<CAPTION>
Amounts Included in
Accumulated Depreciation
- --------------------------------------------------------------------------------
(Millions of Dollars) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Nuclear $305.7 $265.1
Non-nuclear 55.4 56.7
- --------------------------------------------------------------------------------
Total $361.1 $321.8
- --------------------------------------------------------------------------------
</TABLE>
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.
A-30
<PAGE> 55
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
A-31
<PAGE> 56
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
A-32
<PAGE> 57
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:
<TABLE>
<CAPTION>
(Thousands of Dollars) 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------------
</TABLE>
* 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.
<TABLE>
<CAPTION>
(Thousands of Dollars) 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
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 666,217 705,579
Average shares outstanding (000) 223,442 234,308
Earnings per share $ 2.98 $ 3.01
- ------------------------------------------------------------------------------------
</TABLE>
A-33
<PAGE> 58
NOTE L FEDERAL INCOME TAX Consolidated Edison, Inc.
The components of federal income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31 (Thousands of Dollars) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effect of temporary differences which gave rise to deferred tax assets
and liabilities is as follows:
<TABLE>
<CAPTION>
As of December 31 (Millions of Dollars) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------
(% of Pre-tax income)
<S> <C> <C> <C>
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%
- -------------------------------------------------------------------------------------------------
</TABLE>
A-34
<PAGE> 59
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 regard 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:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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%
- --------------------------------------------------------------------------------
</TABLE>
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):
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
Weighted
Average
Shares Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at 12/31/96 697,200 $ 27.875
Granted 834,600 31.500
Exercised -- --
Forfeited (14,100) 29.620
- --------------------------------------------------------------------------------
Outstanding at 12/31/97 1,517,700 29.850
Granted 901,650 42.605
Exercised -- --
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
- --------------------------------------------------------------------------------
</TABLE>
The following summarizes the Plan's stock options outstanding:
<TABLE>
<CAPTION>
Weighted
Average Shares
Plan Exercise Outstanding Remaining
Year Price At 12/31/99 Contractual Life
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
A-35
<PAGE> 60
NOTE N FINANCIAL INFORMATION BY BUSINESS SEGMENT(a) Consolidated Edison, Inc.
<TABLE>
<CAPTION>
ELECTRIC STEAM
- --------------------------------------------------------------------------------- ---------------------------------------
(Thousands of Dollars) 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
GAS UNREGULATED AND OTHER
- --------------------------------------------------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 - - -
</TABLE>
<TABLE>
<CAPTION>
TOTAL
- ---------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
(a) For a description of Con Edison, see "Con Edison" appearing before Note A.
A-36
<PAGE> 61
[CON EDISON LOGO] Consolidated Edison Inc.
4 Irving Place, New York, N.Y. 10003
24 HOURS A DAY, 7 DAYS A WEEK
TELEPHONE
800-526-6707
Use any touch-tone telephone to vote your proxy. Have your proxy card in hand
when you call. You will be prompted to enter your control number, located in
the box below, and then follow the simple directions.
INTERNET
https://proxy.shareholder.com/cel
Use the Internet to vote your proxy. Have your proxy card in hand when you
access the website. You will be prompted to enter your control number, located
in the box below, to create an electronic ballot.
MAIL
Mark, sign and date your proxy card and return it in the postage-paid envelope
we have provided.
Your telephone or Internet vote authorizes the named proxies to vote your
shares in the same manner as if you marked, signed and returned the proxy
card.
CALL TOLL-FREE TO VOTE - IT'S FAST AND CONVENIENT
CONTROL NUMBER FOR
TELEPHONE OR INTERNET VOTING
DETACH PROXY CARD HERE IF YOU ARE NOT
- VOTING BY TELEPHONE OR INTERNET THANK YOU FOR VOTING -
The Board of Directors Recommends a Vote FOR Proposals 1 and 2.
(1) ELECTION OF DIRECTORS
FOR all nominees listed on the reverse side
(except as marked to the contrary below) [X]
WITHHELD Authority to vote for
all nominees on the reverse side [ ]
*EXCEPTIONS [ ]
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK
THE "EXCEPTIONS" BOX AND WRITE THAT NOMINEE'S NAME IN THE SPACE PROVIDED
BELOW.)
*Exceptions
---------------------------------------------------------------------
(2) Ratification of appointment of independent
accountants. FOR [ ] AGAINST [ ] ABSTAIN [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THE FOLLOWING STOCKHOLDER
PROPOSAL (NO. 3):
(3) Additional Compensation Information. FOR [ ] AGAINST [ ] ABSTAIN [ ]
Address Change and/or
Comments Mark Here [ ]
If you plan to attend the
meeting and want an
admission ticket, check here. [ ]
Dated: , 2000
---------------------------
- ---------------------------------------
SIGNATURE(S)
- ---------------------------------------
SIGNATURE(S)
VOTES MUST BE INDICATED
(X) IN BLACK OR BLUE INK. [X]
PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY.
<PAGE> 62
CONSOLIDATED EDISON, INC. THIS PROXY IS SOLICITED ON BEHALF
COMMON STOCK OF THE BOARD OF DIRECTORS
- -------------------------------------------------------------------------------
PLEASE DATE AND SIGN ON REVERSE SIDE. TO VOTE IN ACCORDANCE WITH THE
RECOMMENDATIONS OF THE BOARD OF DIRECTORS NO BOXES NEED BE CHECKED.
The undersigned hereby appoints E. Virgil Conway, Peter W. Likins and Joan S.
Freilich and each or any of them with power of substitution, proxies to vote all
stock of the undersigned (including any shares held through the Company's
Automatic Dividend Reinvestment and Cash Payment Plan) at the Annual Meeting of
Stockholders on May 15, 2000 at 10:00 a.m. at the Company's Headquarters, 4
Irving Place, New York, N.Y. or at any adjournments thereof, as specified on
the reverse side in the election of Directors and on the proposals, all as more
fully set forth in the proxy statement, and in their discretion on any matters
that may come before the meeting.
Your vote for the election of Directors may be indicated on the reverse side.
Nominees are: 0-1 G. Campbell, Jr., 02 - E.V. Conway, 03 - G.J. Davis, 04 -
R.M. Davis, 05 - M.J. Del Giudice, 06 - J.S. Freilich, 07 - E.V. Futter, 08 - S.
Hernandez-Pinero, 09 - P.W. Likins, 10 - E.R. McGrath, 11 - R.A. Voell and
12 - S.R. Volk
THIS PROXY WILL BE VOTED AS DIRECTED ON THE REVERSE SIDE, BUT IF NO CHOICE IS
MADE, THIS PROXY WILL BE VOTED "FOR" THE ELECTION OF THE NOMINEES FOR DIRECTORS
LISTED ABOVE (PROPOSAL 1) AND "FOR" PROPOSAL 2; AND "AGAINST" PROPOSAL 3.
CON EDISON
P.O. BOX 11003
NEW YORK, N.Y. 10203-0003
[CON EDISON LOGO]
