Investment Risk Energy Trading Activities Impact of Inflation Material Contingencies Fair Value of Net Assets at Period End Maturity Maturity Maturity Maturity  (Millions of Dollars) less than 1 – 3 4 – 5 excess of Total fair Sour ce of Fair Value 1 year years years 5 years value Prices provided  by external sources $7 $- $- $- $7 Prices based on models  and other valuation  methods (3) - - - (3) To tal $4 $- $- $- $4 Twelve months ended December 31, (Millions of Dollars) 2003 2002 Fair value of net assets outstanding –  beginning of period $5 $11 Change in fair value during the period: Unrealized gain at inception - 11 Net premium paid/(received) 2 (2) Cumulative effect of a change in accounting principle - (3) Changes in fair value prior to settlement 25 6 Fair value realized at settlement of contracts (28) (18) Total change in fair value during the period (1) (6)  Fair value of net assets outstanding – end of period $4 $5 The Companies are affected by the decline in the purchasing power of the dollar caused by inflation. Regulation permits the Utilities to recover through depreciation only the historical cost of their plant assets even though in an inflationary economy the cost to replace the asset upon their retirement will substantially exceed historical costs. The impact is, however, partially offset by the repayment of the Companies’ long-term debt in dollars of lesser value than the dollars originally borrowed. Also, to the extent the Companies’ prices change by more or less than inflation, the real price of the Companies’ services will increase or decline. Over the past 20 years, for example, the real price of electric service has declined substantially.  For information concerning potential liabilities arising from the Companies’ material contingencies, see “Application of Critical Accounting Policies - Accounting for Contingencies,” above. As of December 31, 2003, the sources of fair value of the  energy trading net assets were as follows: The changes in fair value of energy trading net assets for the years ended December 31, 2003 and 2002 were as follows: Prior to October 2002, these contracts were accounted for under Emerging Issues Task Force (EITF) Issue No. 98-10, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities.” As of October 2002, energy and energy-related trading contracts that meet the definition of a derivative are accounted for under SFAS No. 133. Such con- tracts are marked to market with gains and losses recognized in earnings. For the years ended December 31, 2003 and 2002, Con Edison recognized in income net unrealized pre-tax losses of $3 million and $1 million, respectively, excluding the effect of a cumulative adjustment due to a change in account- ing principle. Contracts that did not fall within the scope of SFAS No. 133 were included in the cumulative effect of a change in accounting principle recognized in December 2002. See Note P to the financial statements. For information concerning potential liabilities arising from laws and regulations protecting the environment and from claims relating to alleged exposure to asbestos, see Note G to the financial statements. “Prices based on models and other valuation methods” repre- sent the fair value of positions calculated using internal models when directly and indirectly quoted external prices or prices derived from external sources are not available. Internal models incorporate the use of options pricing and estimates of the present value of cash flows based on underlying contractual terms. The models reflect management’s estimates, taking into account observable market prices, estimated market prices in the absence of quoted market prices, the risk-free market dis- count rate, volatility factors, estimated correlations of energy commodity prices and contractual volumes. Counterparty spe- cific credit quality, market price uncertainty and other risks are also factored into the models. “Prices provided by external sources” represent the fair value of exchange-traded futures and options and the fair value of posi- tions for which price quotations are available through or derived from brokers or other market sources. Unregulated subsidiaries of Con Edison engage in energy trad- ing activities that are accounted for in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. See Note P to the financial state- ments. The Companies’ investment risk relates to the investment of the assets of their pension and other post retirement benefit plans. See “Application of Critical Accounting Policies - Accounting for Pensions and Other Post-Retirement Benefits,” above. The Companies’ current investment policy for pension plan assets includes investment targets of 65 percent equities and 35 percent fixed income and other securities. At December 31, 2003, the pension plan investments consisted of 64 per- cent equity and 36 percent fixed income and other securities. See Note E to the financial statements. Environmental Matters 36 Con Edison Annual Report 2003