8-KOther Events

CONSOLIDATED EDISON INC 8-K Report, Corporate Update (Jun 8, 2006)

Filed June 8, 2006For Securities:ED

Summary

This Form 8-K filed by Consolidated Edison, Inc. (Con Edison) on June 8, 2006, primarily details two significant events impacting the company's financial outlook and operational agreements. Firstly, on June 6, 2006, Standard & Poor’s revised its outlook for Con Edison and its subsidiary, Consolidated Edison Company of New York, Inc. (Con Edison of New York), to negative from stable, while also lowering their commercial paper rating to 'A-2' from 'A-1'. This outlook revision suggests increased financial risk, which could impact borrowing costs and investor confidence. Secondly, Con Edison of New York entered into a Joint Proposal on June 2, 2006, with various parties, including the New York State Public Service Commission (PSC) staff, regarding steam service rates for the period October 2006 through September 2008. This proposal aims to adjust the recovery mechanisms for certain costs, such as pension, environmental remediation, and property taxes, moving some costs from the fuel adjustment clause to base rates. It also establishes a framework for earnings sharing between the company and its customers based on performance above a certain return on equity, with provisions for potential penalties.

Key Highlights

  • 1Standard & Poor’s revised its outlook for Con Edison and Con Edison of New York to 'negative' from 'stable'.
  • 2Commercial paper rating for Con Edison and Con Edison of New York was lowered by S&P to 'A-2' from 'A-1'.
  • 3Con Edison's unsecured debt is rated 'A2' (Moody's), 'A-' (S&P), and 'A' (Fitch).
  • 4Con Edison of New York's unsecured debt is rated 'A1' (Moody's), 'A' (S&P), and 'A+' (Fitch).
  • 5A Joint Proposal was submitted for steam rate adjustments for the period October 2006 - September 2008.
  • 6The Joint Proposal modifies cost recovery for steam service, including a shift for the East River Repowering Project carrying costs and new accrual mechanisms for pension, environmental, and property tax costs.
  • 7An earnings sharing mechanism is introduced, allowing Con Edison to retain a portion of 'Adjusted Earnings' above certain return thresholds, with the remainder benefiting customers and potentially offsetting regulatory assets.

Frequently Asked Questions

A 'negative' outlook from S&P indicates that while the current credit rating is maintained, there is a higher probability of a downgrade in the future. This could lead to increased borrowing costs for Con Edison and potentially signal increased financial risk to investors, impacting stock valuation and investment decisions.

The Joint Proposal introduces changes to how certain costs are recovered in the steam business. While base rates for fuel and purchased steam costs remain largely unchanged, there will be a shift in recovering carrying costs for the East River Repowering Project from the fuel adjustment clause to base rates starting in October 2007. Additionally, the proposal establishes a regulatory asset/liability mechanism for variances in pension, environmental remediation, property taxes, and interference costs, and introduces an earnings-sharing plan that can benefit both the company and its customers.

'Adjusted Earnings' for the steam business are defined as earnings excluding the net revenue effect of steam sales related to colder-than-normal weather and certain other items. The sharing mechanism allows Con Edison to retain 100% of Adjusted Earnings up to an 11% return on equity. Between 11% and 12% (or slightly lower thresholds if certain requirements are not met), the company retains 50% of earnings above a certain level, with the remainder offsetting regulatory assets. Above 12% return, the company retains 25% of excess earnings, with the rest benefiting customers and offsetting regulatory assets. This structure incentivizes performance while ensuring customers benefit from high earnings and offsetting cost variances.

Yes, the Joint Proposal includes provisions for up to approximately $4 million in potential penalties if Con Edison fails to comply with specific requirements related to steam business development and other stipulated matters.