Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013

OR

 

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

For the transition period from                      to                     

 

Commission
File Number

 

Exact name of registrant as specified in its charter

and principal office address and telephone number

  

State of
Incorporation

  

I.R.S. Employer
ID. Number

1-14514   Consolidated Edison, Inc.    New York    13-3965100
  4 Irving Place, New York, New York 10003      
  (212) 460-4600      
1-1217   Consolidated Edison Company of New York, Inc.    New York    13-5009340
  4 Irving Place, New York, New York 10003      
  (212) 460-4600      

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

 

Consolidated Edison, Inc. (Con Edison)        Yes x           No ¨   
Consolidated Edison of New York, Inc. (CECONY)        Yes x           No ¨   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Con Edison      Yes x         No ¨   
CECONY      Yes x         No ¨   

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

 

Con Edison      
Large accelerated filer x   Accelerated filer ¨   Non-accelerated filer ¨   Smaller reporting company ¨
CECONY      
Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer x   Smaller reporting company ¨

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

 

Con Edison        Yes ¨           No x   
CECONY        Yes ¨           No x   

As of April 26, 2013, Con Edison had outstanding 292,894,443 Common Shares ($.10 par value). All of the outstanding common equity of CECONY is held by Con Edison.

Filing Format

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


Table of Contents

Glossary of Terms

 

The following is a glossary of frequently used abbreviations or acronyms that are used in the Companies’ SEC reports:

 

Con Edison Companies     
Con Edison    Consolidated Edison, Inc.
CECONY    Consolidated Edison Company of New York, Inc.
Con Edison Development    Consolidated Edison Development, Inc.
Con Edison Energy    Consolidated Edison Energy, Inc.
Con Edison Solutions    Consolidated Edison Solutions, Inc.
O&R    Orange and Rockland Utilities, Inc.
Pike    Pike County Light & Power Company
RECO    Rockland Electric Company
The Companies    Con Edison and CECONY
The Utilities    CECONY and O&R
Regulatory Agencies, Government Agencies, and Quasi-governmental Not-for-Profits
EPA    U. S. Environmental Protection Agency
FERC    Federal Energy Regulatory Commission
IRS    Internal Revenue Service
ISO-NE    ISO New England Inc.
NJBPU    New Jersey Board of Public Utilities
NJDEP    New Jersey Department of Environmental Protection
NYISO    New York Independent System Operator
NYPA    New York Power Authority
NYSAG    New York State Attorney General
NYSDEC    New York State Department of Environmental Conservation
NYSERDA    New York State Energy Research and Development Authority
NYSPSC    New York State Public Service Commission
NYSRC    New York State Reliability Council, LLC
PAPUC    Pennsylvania Public Utility Commission
PJM    PJM Interconnection LLC
SEC    U.S. Securities and Exchange Commission
Accounting     
ABO    Accumulated Benefit Obligation
ASU    Accounting Standards Update
FASB    Financial Accounting Standards Board
LILO    Lease In/Lease Out
OCI    Other Comprehensive Income
SFAS    Statement of Financial Accounting Standards
VIE    Variable interest entity
Environmental     
CO2    Carbon dioxide
GHG    Greenhouse gases
MGP Sites    Manufactured gas plant sites
PCBs    Polychlorinated biphenyls
PRP    Potentially responsible party
SO2    Sulfur dioxide
Superfund    Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes

 

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Table of Contents

 

Units of Measure     
AC    Alternating current
dths    Dekatherms
kV    Kilovolt
kWh    Kilowatt-hour
mdths    Thousand dekatherms
MMlbs    Million pounds
MVA    Megavolt ampere
MW    Megawatt or thousand kilowatts
MWH    Megawatt hour
Other     
AFDC    Allowance for funds used during construction
COSO    Committee of Sponsoring Organizations of the Treadway Commission
EMF    Electric and magnetic fields
ERRP    East River Repowering Project
Fitch    Fitch Ratings
First Quarter Form 10-Q    The Companies’ combined Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013
Form 10-K    The Companies’ combined Annual Report on Form 10-K for the year ended December 31, 2012
LTIP    Long Term Incentive Plan
Moody’s    Moody’s Investors Service
S&P    Standard & Poor’s Financial Services LLC
VaR    Value-at-Risk

 

      3   


Table of Contents

TABLE OF CONTENTS

 

          PAGE  
PART I—Financial Information  
ITEM 1  

Financial Statements (Unaudited)

 
 

Con Edison

 
 

Consolidated Income Statement

    6   
 

Consolidated Statement of Comprehensive Income

    7   
 

Consolidated Statement of Cash Flows

    8   
 

Consolidated Balance Sheet

    9   
 

Consolidated Statement of Common Shareholders’ Equity

    11   
 

CECONY

 
 

Consolidated Income Statement

    12   
 

Consolidated Statement of Comprehensive Income

    13   
 

Consolidated Statement of Cash Flows

    14   
 

Consolidated Balance Sheet

    15   
 

Consolidated Statement of Common Shareholder’s Equity

    17   
 

Notes to Financial Statements (Unaudited)

    18   
ITEM 2  

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

    38   
ITEM 3  

Quantitative and Qualitative Disclosures About Market Risk

    53   
ITEM 4  

Controls and Procedures

    53   
PART II—Other Information  
ITEM 1  

Legal Proceedings

    54   
ITEM 1A  

Risk Factors

    54   
ITEM 2  

Unregistered Sales of Equity Securities and Use of Proceeds

    54   
ITEM 6  

Exhibits

    55   
 

Signatures

    56   

 

4     


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FORWARD-LOOKING STATEMENTS

 

This report includes forward-looking statements intended to qualify for the safe-harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements of future expectation and not facts. Words such as “expects,” “estimates,” “anticipates,” “intends,” “believes,” “plans,” “will” and similar expressions identify forward-looking statements. Forward-looking statements are based on information available at the time the statements are made, and accordingly speak only as of that time. Actual results or developments might differ materially from those included in the forward-looking statements because of various risks, including:

 

   

the failure to operate energy facilities safely and reliably could adversely affect the Companies;

 

   

the failure to properly complete construction projects could adversely affect the Companies;

 

   

the failure of processes and systems and the performance of employees and contractors could adversely affect the Companies;

 

   

the Companies are extensively regulated and are subject to penalties;

 

   

the Utilities’ rate plans may not provide a reasonable return;

 

   

the Companies may be adversely affected by changes to the Utilities’ rate plans;

 

   

the Companies are exposed to risks from the environmental consequences of their operations;

 

   

a disruption in the wholesale energy markets or failure by an energy supplier could adversely affect the Companies;

 

   

the Companies have substantial unfunded pension and other postretirement benefit liabilities;

 

   

Con Edison’s ability to pay dividends or interest depends on dividends from its subsidiaries;

 

   

the Companies require access to capital markets to satisfy funding requirements;

 

   

the Internal Revenue Service has disallowed substantial tax deductions taken by the company;

 

   

a cyber attack could adversely affect the Companies; and

 

   

the Companies also face other risks that are beyond their control.

 

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Consolidated Edison, Inc.   

CONSOLIDATED INCOME STATEMENT (UNAUDITED)

 

     For the Three Months
Ended March 31,
 
     2013     2012  
    (Millions of Dollars/
Except Share Data)
 

OPERATING REVENUES

   

Electric

    $1,958        $1,862   

Gas

    742        645   

Steam

    332        263   

Non-utility

    152        308   

TOTAL OPERATING REVENUES

    3,184        3,078   

OPERATING EXPENSES

   

Purchased power

    707        781   

Fuel

    147        108   

Gas purchased for resale

    250        196   

Other operations and maintenance

    830        749   

Depreciation and amortization

    251        233   

Taxes, other than income taxes

    473        450   

TOTAL OPERATING EXPENSES

    2,658        2,517   

OPERATING INCOME

    526        561   

OTHER INCOME (DEDUCTIONS)

   

Investment and other income

    4        7   

Allowance for equity funds used during construction

    1          

Other deductions

    (3     (4

TOTAL OTHER INCOME (DEDUCTIONS)

    2        3   

INCOME BEFORE INTEREST AND INCOME TAX EXPENSE

    528        564   

INTEREST EXPENSE

   

Interest on long-term debt

    143        145   

Other interest

    136        5   

NET INTEREST EXPENSE

    279        150   

INCOME BEFORE INCOME TAX EXPENSE

    249        414   

INCOME TAX EXPENSE

    57        134   

NET INCOME

    192        280   

Preferred stock dividend requirements of subsidiary

           (3

NET INCOME FOR COMMON STOCK

    $192        $277   

Net income for common stock per common share—basic

    $0.66        $0.95   

Net income for common stock per common share—diluted

    $0.65        $0.94   

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

    $0.615        $0.605   

AVERAGE NUMBER OF SHARES OUTSTANDING—BASIC (IN MILLIONS)

    292.9        292.9   

AVERAGE NUMBER OF SHARES OUTSTANDING—DILUTED (IN MILLIONS)

    294.2        294.5   

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison, Inc.   

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 

     For the Three Months
Ended March 31,
 
     2013     2012  
    (Millions of Dollars)  

NET INCOME

    $192        $280   

OTHER COMPREHENSIVE INCOME, NET OF TAXES

   

Pension plan liability adjustments, net of $2 and $5 taxes in 2013 and 2012, respectively

    3        7   

TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAXES

    3        7   

COMPREHENSIVE INCOME

    195        287   

Preferred stock dividend requirements of subsidiary

           (3

COMPREHENSIVE INCOME FOR COMMON STOCK

    $195        $284   

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

  

 

     For the Three Months
Ended March 31,
 
       2013         2012    
    (Millions of Dollars)  

OPERATING ACTIVITIES

   

Net Income

    $    192        $    280   

PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME

   

Depreciation and amortization

    251        233   

Deferred income taxes

    (87     68   

Rate case amortization and accruals

    10        31   

Common equity component of allowance for funds used during construction

    (1       

Net derivative (gains)/losses

    (45     31   

Other non-cash items (net)

    147        64   

CHANGES IN ASSETS AND LIABILITIES

   

Accounts receivable – customers, less allowance for uncollectibles

    (135     54   

Special deposits

    (438       

Materials and supplies, including fuel oil and gas in storage

    60        31   

Other receivables and other current assets

    85        (2

Prepayments

    (263     (286

Accounts payable

    (84     (78

Pensions and retiree benefits obligations

    270        253   

Pensions and retiree benefits contributions

    (235     (184

Accrued taxes

    (18     41   

Accrued interest

    174        52   

Deferred charges, noncurrent assets and other regulatory assets

    37        (255

Deferred credits and other regulatory liabilities

    (5     117   

Other assets

    10          

Other liabilities

    (9     (48

NET CASH FLOWS (USED IN)/FROM OPERATING ACTIVITIES

    (84     402   

INVESTING ACTIVITIES

   

Utility construction expenditures

    (538     (471

Cost of removal less salvage

    (47     (43

Non-utility construction expenditures

    (91     (9

Proceeds from grants related to renewable energy investments

    13        6   

Net investment in Pilesgrove solar project and other

           27   

NET CASH FLOWS USED IN INVESTING ACTIVITIES

    (663     (490

FINANCING ACTIVITIES

   

Net proceeds of short-term debt

    482          

Issuance of long-term debt

    700        400   

Retirement of long-term debt

    (509     (1

Issuance of common shares for stock plans, net of repurchases

    (1     (8

Debt issuance costs

    (7     (4

Common stock dividends

    (180     (175

Preferred stock dividends

           (3

NET CASH FLOWS FROM FINANCING ACTIVITIES

    485        209   

CASH AND TEMPORARY CASH INVESTMENTS:

   

NET CHANGE FOR THE PERIOD

    (262     121   

BALANCE AT BEGINNING OF PERIOD

    394        648   

BALANCE AT END OF PERIOD

    $    132        $    769   

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

   

Cash paid during the period for:

   

Interest

    $      90        $      89   

Income taxes

    $      24          

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison, Inc.   

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

     March 31,
2013
    December 31,
2012
 
    (Millions of Dollars)  

ASSETS

   

CURRENT ASSETS

   

Cash and temporary cash investments

    $      132        $      394   

Special deposits

    508        70   

Accounts receivable – customers, less allowance for uncollectible accounts of $94 in 2013 and 2012

    1,357        1,222   

Accrued unbilled revenue

    399        516   

Other receivables, less allowance for uncollectible accounts of $10 in 2013 and 2012

    213        228   

Fuel oil, gas in storage, materials and supplies, at average cost

    270        330   

Prepayments

    422        159   

Deferred tax assets – current

    440        296   

Regulatory assets

    32        74   

Other current assets

    161        162   

TOTAL CURRENT ASSETS

    3,934        3,451   

INVESTMENTS

    351        467   

UTILITY PLANT, AT ORIGINAL COST

   

Electric

    22,547        22,376   

Gas

    5,197        5,120   

Steam

    2,068        2,049   

General

    2,291        2,302   

TOTAL

    32,103        31,847   

Less: Accumulated depreciation

    6,716        6,573   

Net

    25,387        25,274   

Construction work in progress

    1,209        1,027   

NET UTILITY PLANT

    26,596        26,301   

NON-UTILITY PLANT

   

Non-utility property, less accumulated depreciation of $73 and $68 in 2013 and 2012, respectively

    527        555   

Construction work in progress

    160        83   

NET PLANT

    27,283        26,939   

OTHER NONCURRENT ASSETS

   

Goodwill

    429        429   

Intangible assets, less accumulated amortization of $4 in 2013 and 2012

    2        2   

Regulatory assets

    9,484        9,705   

Other deferred charges and noncurrent assets

    253        216   

TOTAL OTHER NONCURRENT ASSETS

    10,168        10,352   

TOTAL ASSETS

    $41,736        $41,209   

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison, Inc.   

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

     March 31,
2013
    December 31,
2012
 
    (Millions of Dollars)  

LIABILITIES AND SHAREHOLDERS’ EQUITY

   

CURRENT LIABILITIES

   

Long-term debt due within one year

    $     405        $     706   

Notes payable

    1,021        539   

Accounts payable

    1,065        1,215   

Customer deposits

    307        304   

Accrued taxes

    144        162   

Accrued interest

    327        153   

Accrued wages

    93        94   

Fair value of derivative liabilities

    15        47   

Regulatory liabilities

    132        183   

Uncertain income tax liabilities

    251        44   

Other current liabilities

    483        498   

TOTAL CURRENT LIABILITIES

    4,243        3,945   

NONCURRENT LIABILITIES

   

Obligations under capital leases

    2        2   

Provision for injuries and damages

    152        149   

Pensions and retiree benefits

    4,438        4,678   

Superfund and other environmental costs

    536        545   

Asset retirement obligations

    160        159   

Fair value of derivative liabilities

    26        31   

Other noncurrent liabilities

    125        125   

TOTAL NONCURRENT LIABILITIES

    5,439        5,689   

DEFERRED CREDITS AND REGULATORY LIABILITIES

   

Deferred income taxes and investment tax credits

    8,316        8,372   

Regulatory liabilities

    1,234        1,202   

Other deferred credits

    61        70   

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES

    9,611        9,644   

LONG-TERM DEBT

    10,554        10,062   

COMMON SHAREHOLDERS’ EQUITY (See Statement of Common Shareholders’ Equity)

    11,889        11,869   

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

    $41,736        $41,209   

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison, Inc.   

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS’ EQUITY (UNAUDITED)

 

(Millions of Dollars/Except Share Data)

  Common Stock    

Additional
Paid-In
Capital

   

Retained

Earnings

    Treasury Stock    

Capital
Stock

Expense

   

Accumulated

Other

Comprehensive

Income/(Loss)

       
  Shares     Amount         Shares     Amount         Total  

BALANCE AS OF DECEMBER 31, 2011

    292,888,521        $32        $4,991        $7,568        23,194,075        $(1,033     $(64     $(58     $11,436   

Net income for common stock

          277                277   

Common stock dividends

          (177             (177

Issuance of common shares for stock plans, net of repurchases

    (7,225           7,225        (2         (2

Preferred stock redemption

                4          4   

Other comprehensive income

                                                            7        7   

BALANCE AS OF MARCH 31, 2012

    292,881,296        $32        $4,991        $7,668        23,201,300        $(1,035     $(60     $(51     $11,545   

BALANCE AS OF DECEMBER 31, 2012

    292,871,896        $32        $4,991        $7,997        23,210,700        $(1,037     $(61     $(53     $11,869   

Net income for common stock

          192                192   

Common stock dividends

          (180             (180

Issuance of common shares for stock plans, net of repurchases

    95,468          (2       (95,468     7            5   

Other comprehensive income

                                                            3        3   

BALANCE AS OF MARCH 31, 2013

    292,967,364        $32        $4,989        $8,009        23,115,232        $(1,030     $(61     $(50     $11,889   

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison Company of New York, Inc.   

CONSOLIDATED INCOME STATEMENT (UNAUDITED)

 

     For the Three Months
Ended March 31,
 
     2013     2012  
    (Millions of Dollars)  

OPERATING REVENUES

   

Electric

    $1,814        $1,735   

Gas

    660        563   

Steam

    332        263   

TOTAL OPERATING REVENUES

    2,806        2,561   

OPERATING EXPENSES

   

Purchased power

    455        447   

Fuel

    147        108   

Gas purchased for resale

    219        169   

Other operations and maintenance

    741        645   

Depreciation and amortization

    233        218   

Taxes, other than income taxes

    451        430   

TOTAL OPERATING EXPENSES

    2,246        2,017   

OPERATING INCOME

    560        544   

OTHER INCOME (DEDUCTIONS)

   

Investment and other income

    3        5   

Other deductions

    (2     (3

TOTAL OTHER INCOME (DEDUCTIONS)

    1        2   

INCOME BEFORE INTEREST AND INCOME TAX EXPENSE

    561        546   

INTEREST EXPENSE

   

Interest on long-term debt

    127        131   

Other interest

    5        5   

NET INTEREST EXPENSE

    132        136   

INCOME FROM CONTINUING OPERATIONS BEFORE TAXES

    429        410   

INCOME TAX EXPENSE

    152        134   

NET INCOME

    277        276   

Preferred stock dividend requirements

           (3

NET INCOME FOR COMMON STOCK

    $277        $273   

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison Company of New York, Inc.   

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 

     For the Three Month
Ended March 31,
 
     2013     2012  
    (Millions of Dollars)  

NET INCOME

    $277        $276   

OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES

   

Pension plan liability adjustments, net of $- taxes in 2013 and 2012

             

TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAXES

             

COMPREHENSIVE INCOME

    $277        $276   

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison Company of New York, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

  

 

     For the Three Months
Ended March 31,
 
     2013     2012  
    (Millions of Dollars)  

OPERATING ACTIVITIES

   

Net income

    $277        $276   

PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME

   

Depreciation and amortization

    233        218   

Deferred income taxes

    241        66   

Rate case amortization and accruals

    10        31   

Other non-cash items (net)

    (10     15   

CHANGES IN ASSETS AND LIABILITIES

   

Accounts receivable—customers, less allowance for uncollectibles

    (102     43   

Materials and supplies, including fuel oil and gas in storage

    49        22   

Other receivables and other current assets

    (15     16   

Prepayments

    (310     (287

Accounts payable

    (58     (48

Pensions and retiree benefits obligations

    250        209   

Pensions and retiree benefits contributions

    (235     (184

Superfund and environmental remediation costs (net)

           (1

Accrued taxes

    (79     57   

Accrued interest

    46        42   

Deferred charges, noncurrent assets and other regulatory assets

    28        (179

Deferred credits and other regulatory liabilities

    (14     108   

Other liabilities

    39        (36

NET CASH FLOWS FROM OPERATING ACTIVITIES

    350        368   

INVESTING ACTIVITIES

   

Utility construction expenditures

    (515     (446

Cost of removal less salvage

    (47     (41

NET CASH FLOWS USED IN INVESTING ACTIVITIES

    (562     (487

FINANCING ACTIVITIES

   

Net payments of short-term debt

    (108       

Issuance of long-term debt

    700        400   

Retirement of long-term debt

    (505       

Debt issuance costs

    (7     (4

Dividend to parent

    (182     (171

Preferred stock dividends

           (3

NET CASH FLOWS (USED IN)/FROM FINANCING ACTIVITIES

    (102     222   

CASH AND TEMPORARY CASH INVESTMENTS:

   

NET CHANGE FOR THE PERIOD

    (314     103   

BALANCE AT BEGINNING OF PERIOD

    353        372   

BALANCE AT END OF PERIOD

    $39        $475   

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

   

Cash paid/(refunded) during the period for:

   

Interest

    $84        $83   

Income taxes

    $45        $(20

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison Company of New York, Inc.   

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

     March 31,
2013
    December 31,
2012
 
    (Millions of Dollars)  

ASSETS

   

CURRENT ASSETS

   

Cash and temporary cash investments

    $       39        $     353   

Special deposits

    57        65   

Accounts receivable – customers, less allowance for uncollectible accounts of $87 in 2013 and 2012

    1,210        1,108   

Other receivables, less allowance for uncollectible accounts of $8 and $9 in 2013 and 2012, respectively

    86        106   

Accrued unbilled revenue

    304        406   

Accounts receivable from affiliated companies

    143        61   

Fuel oil, gas in storage, materials and supplies, at average cost

    236        285   

Prepayments

    391        81   

Regulatory assets

    28        60   

Deferred tax assets – current

    176        193   

Other current assets

    35        69   

TOTAL CURRENT ASSETS

    2,705        2,787   

INVESTMENTS

    215        207   

UTILITY PLANT AT ORIGINAL COST

   

Electric

    21,240        21,079   

Gas

    4,619        4,547   

Steam

    2,068        2,049   

General

    2,115        2,126   

TOTAL

    30,042        29,801   

Less: Accumulated depreciation

    6,142        6,009   

Net

    23,900        23,792   

Construction work in progress

    1,127        947   

NET UTILITY PLANT

    25,027        24,739   

NON-UTILITY PROPERTY

   

Non-utility property, less accumulated depreciation of $25 in 2013 and 2012

    5        6   

NET PLANT

    25,032        24,745   

OTHER NONCURRENT ASSETS

   

Regulatory assets

    8,774        8,972   

Other deferred charges and noncurrent assets

    188        174   

TOTAL OTHER NONCURRENT ASSETS

    8,962        9,146   

TOTAL ASSETS

    $36,914        $36,885   

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison Company of New York, Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

  

 

     March 31,
2013
    December 31,
2012
 
    (Millions of Dollars)  

LIABILITIES AND SHAREHOLDER’S EQUITY

   

CURRENT LIABILITIES

   

Long-term debt due within one year

    $400        $700   

Notes payable

    313        421   

Accounts payable

    890        989   

Accounts payable to affiliated companies

    16        22   

Customer deposits

    295        292   

Accrued taxes

    21        37   

Accrued taxes to affiliated companies

    152        215   

Accrued interest

    179        133   

Accrued wages

    84        84   

Fair value of derivative liabilities

    9        28   

Uncertain income tax liabilities

    7        36   

Regulatory liabilities

    98        145   

Other current liabilities

    421        410   

TOTAL CURRENT LIABILITIES

    2,885        3,512   

NONCURRENT LIABILITIES

   

Obligations under capital leases

    2        2   

Provision for injuries and damages

    145        141   

Pensions and retiree benefits

    3,985        4,220   

Superfund and other environmental costs

    425        433   

Asset retirement obligations

    160        158   

Fair value of derivative liabilities

    8        11   

Other noncurrent liabilities

    116        115   

TOTAL NONCURRENT LIABILITIES

    4,841        5,080   

DEFERRED CREDITS AND REGULATORY LIABILITIES

   

Deferred income taxes and investment tax credits

    7,734        7,452   

Regulatory liabilities

    1,110        1,077   

Other deferred credits

    57        67   

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES

    8,901        8,596   

LONG-TERM DEBT

    9,640        9,145   

COMMON SHAREHOLDER’S EQUITY (See Statement of Common Shareholder’s Equity)

    10,647        10,552   

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY

    $36,914        $36,885   

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Edison Company of New York, Inc.

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDER’S EQUITY (UNAUDITED)

  

 

    Common Stock     Additional
Paid-In
Capital
   

Retained

Earnings

   

Repurchased
Con Edison

Stock

   

Capital
Stock

Expense

   

Accumulated
Other

Comprehensive

Income/(Loss)

   

Total

 
(Millions of Dollars/Except Share Data)   Shares     Amount              

BALANCE AS OF DECEMBER 31, 2011

    235,488,094        $589        $4,234        $6,429        $(962)        $(64     $  (8     $10,218   

Net income

          276              276   

Common stock dividend to parent

          (171           (171

Cumulative preferred dividends

          (3           (3

Preferred stock redemption

              4          4   

Other comprehensive income

                                                             

BALANCE AS OF MARCH 31, 2012

    235,488,094        $589        $4,234        $6,531        $(962)        $(60     $  (8     $10,324   

BALANCE AS OF DECEMBER 31, 2012

    235,488,094        $589        $4,234        $6,761        $(962)        $(61     $  (9     $10,552   

Net income

          277              277   

Common stock dividend to parent

          (182           (182

Other comprehensive income

                                                             

BALANCE AS OF MARCH 31, 2013

    235,488,094        $589        $4,234        $6,856        $(962)        $(61     $  (9     $10,647   

The accompanying notes are an integral part of these financial statements.

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)

 

General

These combined notes accompany and form an integral part of the separate consolidated financial statements of each of the two separate registrants: Consolidated Edison, Inc. and its subsidiaries (Con Edison) and Consolidated Edison Company of New York, Inc. and its subsidiaries (CECONY). CECONY is a subsidiary of Con Edison and as such its financial condition and results of operations and cash flows, which are presented separately in the CECONY consolidated financial statements, are also consolidated, along with those of Con Edison’s other utility subsidiary, Orange and Rockland Utilities, Inc. (O&R), and Con Edison’s competitive energy businesses (discussed below) in Con Edison’s consolidated financial statements. The term “Utilities” is used in these notes to refer to CECONY and O&R.

As used in these notes, the term “Companies” refers to Con Edison and CECONY and, except as otherwise noted, the information in these combined notes relates to each of the Companies. However, CECONY makes no representation as to information relating to Con Edison or the subsidiaries of Con Edison other than itself.

The separate interim consolidated financial statements of each of the Companies are unaudited but, in the opinion of their respective managements, reflect all adjustments (which include only normally recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The Companies’ separate interim consolidated financial statements should be read together with their separate audited financial statements (including the combined notes thereto) included in Item 8 of their combined Annual Report on Form 10-K for the year ended December 31, 2012. Certain prior period amounts have been reclassified to conform to the current period presentation.

Con Edison has two regulated utility subsidiaries: CECONY and O&R. CECONY provides electric service and gas service in New York City and Westchester County. The company also provides steam service in parts of Manhattan. O&R, along with its regulated utility subsidiaries, provides electric service in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service in southeastern New York and adjacent areas of eastern Pennsylvania. Con Edison has the following competitive energy businesses: Consolidated Edison Solutions, Inc. (Con Edison Solutions), a retail energy services company that sells electricity and also offers energy-related services; Consolidated Edison Energy, Inc. (Con Edison Energy), a wholesale energy supply and services company; and Consolidated Edison Development, Inc. (Con Edison Development), a company that develops and participates in infrastructure projects.

 

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Note A — Summary of Significant Accounting Policies

Earnings Per Common Share

For the three months ended March 31, 2013 and 2012, basic and diluted earnings per share (EPS) for Con Edison are calculated as follows:

 

(Millions of Dollars, except per share amounts/Shares in Millions)   2013     2012  

Net income for common stock

    $  192        $ 277   

Weighted average common shares outstanding – basic

    292.9        292.9   

Add: Incremental shares attributable to effect of potentially dilutive securities

    1.3        1.6   

Adjusted weighted average common shares outstanding – diluted

    294.2        294.5   

Net Income for common stock per common share – basic

    $0.66        $0.95   

Net Income for common stock per common share – diluted

    $0.65        $0.94   

Changes in Accumulated Other Comprehensive Income by Component

For the three months ended March 31, 2013, changes to accumulated other comprehensive income (OCI) for Con Edison and CECONY are as follows:

 

(Millions of Dollars)   Con Edison     CECONY  

Accumulated OCI at December 31, 2012

    $(53     $ (9)   

OCI before reclassifications

    1          

Amounts reclassified from accumulated OCI related to pension plan liabilities, net of tax of $1 and $- for Con Edison and CECONY, respectively (a)(b)

    2          

Net OCI at March 31, 2013

    $   3        $ —   

Accumulated OCI, net of taxes, at March 31, 2013 (b)

    $(50     $ (9

 

(a) For the portion of unrecognized pension and other postretirement benefit costs relating to the regulated Utilities, costs are recorded into, and amortized out of, regulatory assets instead of OCI. The net actuarial losses and prior service costs recognized during the period are included in the computation of net periodic pension and other postretirement benefit cost. See Notes E and F.
(b) Tax reclassified from accumulated OCI is reported in the income tax expense line item of the income statement.

 

Note B — Regulatory Matters

Other Regulatory Matters

In February 2009, the New York State Public Service Commission (NYSPSC) commenced a proceeding to examine the prudence of certain CECONY expenditures following the arrests of employees for accepting illegal payments from a construction contractor. Subsequently, additional employees were arrested for accepting illegal payments from materials suppliers and an engineering firm. The arrested employees were terminated by the company and have pled guilty or been convicted. Pursuant to NYSPSC orders, a portion of the company’s revenues (currently, $249 million, $32 million and $6 million on an annual basis for electric, gas and steam service, respectively) is being collected subject to potential refund to customers. The amount of electric revenues collected subject to refund, which was established in a different proceeding, and the amount of gas and steam revenues collected subject to refund were not established as indicative of the company’s potential liability in this proceeding. At March 31, 2013, the company had collected an estimated $1,174 million from customers subject to potential refund in connection with this proceeding. In January 2013, a NYSPSC consultant reported its estimate, with which the company does not agree, of $208 million of overcharges with respect to a substantial portion of the company’s construction expenditures from January 2000 to January 2009. The company is disputing the consultant’s estimate, including its determinations as to overcharges regarding specific construction expenditures it selected to review and its methodology of extrapolating such determinations over a substantial portion of the construction expenditures during this period. The NYSPSC’s consultant has not reviewed the company’s other expenditures. The company and NYSPSC staff anticipate exploring settlement negotiations in this proceeding, the schedule for which may be coordinated with the schedule for consideration of the

 

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company’s January 2013 request for new electric, gas and steam rate plans. At March 31, 2013, the company had a $15 million regulatory liability for refund to customers of amounts recovered from vendors, arrested employees and insurers relating to this matter. The company is unable to estimate the amount, if any, by which any refund required by the NYSPSC may exceed this regulatory liability.

In late October 2012, Superstorm Sandy caused extensive damage to the Utilities’ electric distribution system and interrupted service to approximately 1.4 million customers. Superstorm Sandy also damaged CECONY’s steam system and interrupted service to many of its steam customers. As of March 31, 2013, CECONY and O&R incurred response and restoration costs for Superstorm Sandy of $431 million and $90 million, respectively (including capital expenditures of $113 million and $15 million, respectively). Most of the costs that were not capitalized were deferred for recovery as a regulatory asset under the Utilities’ electric rate plans. See “Regulatory Assets and Liabilities” below. The Utilities’ New York electric rate plans include provisions for revenue decoupling, as a result of which delivery revenues generally are not affected by changes in delivery volumes from levels assumed when rates were approved. The provisions of the Utilities’ New York electric plans that impose penalties for operating performance provide for exceptions for major storms and catastrophic events beyond the control of the companies, including natural disasters such as hurricanes and floods. The NYSPSC, the New York State Attorney General and a commission appointed by the Governor of New York are investigating the preparation and performance of the Utilities in connection with Superstorm Sandy and other major storms.

In March 2013, the New Jersey Board of Public Utilities established a proceeding to review the prudency of costs incurred by New Jersey utilities, including Rockland Electric Company (RECO, an O&R subsidiary), in response to major storm events in 2011 and 2012. At March 31, 2013, RECO had $27 million of storm costs deferred for recovery as a regulatory asset and had incurred $6 million of capital expenditures related to the storms.

 

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Table of Contents

Regulatory Assets and Liabilities

Regulatory assets and liabilities at March 31, 2013 and December 31, 2012 were comprised of the following items:

 

     Con Edison     CECONY  
(Millions of Dollars)   2013     2012     2013     2012  

Regulatory assets

       

Unrecognized pension and other postretirement costs

    $5,443        $5,677        $5,191        $5,407   

Future income tax

    1,952        1,922        1,851        1,831   

Environmental remediation costs

    721        730        607        615   

Deferred storm costs

    443        432        330        309   

Revenue taxes

    179        176        172        170   

Pension and other postretirement benefits deferrals

    161        183        131        154   

Surcharge for New York State assessment

    117        73        111        68   

Net electric deferrals

    97        102        97        102   

Unamortized loss on reacquired debt

    71        74        68        70   

O&R transition bond charges

    37        39                 

Deferred derivative losses – long-term

    32        40        14        20   

Preferred stock redemption

    29        29        29        29   

Workers’ compensation

    20        19        20        19   

Property tax reconciliation

    16        16                 

Recoverable energy costs – long-term

           23               23   

Other

    166        170        153        155   

Regulatory assets – long-term

    9,484        9,705        8,774        8,972   

Deferred derivative losses – current

    31        69        28        60   

Recoverable energy costs – current

    1        5                 

Regulatory assets – current

    32        74        28        60   

Total Regulatory Assets

    $9,516        $9,779        $8,802        $9,032   

Regulatory liabilities

       

Allowance for cost of removal less salvage

    $   508        $   503        $   424        $   420   

Property tax reconciliation

    237        187        237        187   

Long-term interest rate reconciliation

    77        62        77        62   

Net unbilled revenue deferrals

    64        136        64        136   

World Trade Center settlement proceeds

    62        62        62        62   

Carrying charges on T&D net plant – electric and steam

    25        31        10        13   

Expenditure prudence proceeding

    15        14        15        14   

Gas line losses

    14        14        14        14   

Energy efficiency programs

    6        5        6        6   

Other

    226        188        201        163   

Regulatory liabilities – long-term

    1,234        1,202        1,110        1,077   

Refundable energy costs – current

    100        82        70        48   

Revenue decoupling mechanism

    23        72        20        68   

Deferred derivative gains – current

    9               8          

Electric surcharge offset

           29               29   

Regulatory liabilities – current

    132        183        98        145   

Total Regulatory Liabilities

    $1,366        $1,385        $1,208        $1,222   

“Deferred storm costs” represent response and restoration costs, other than capital expenditures, in connection with Superstorm Sandy and other major storms that were deferred by the Utilities. See “Other Regulatory Matters,” above.

 

Note C — Capitalization

In February 2013, CECONY issued $700 million aggregate principal amount of 3.95 percent 30-year debentures and redeemed at maturity $500 million of 4.875 percent 10-year debentures. In April 2013, a Con Edison Development subsidiary issued $219 million aggregate principal amount of 4.78 percent senior notes secured by the company’s California solar projects. The notes have a weighted average life of 15 years and final maturity of 2037.

 

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The carrying amounts and fair values of long-term debt are:

 

(Millions of Dollars)   March 31, 2013     December 31, 2012  
Long-Term Debt (including current portion)  

Carrying

Amount

    Fair
Value
   

Carrying

Amount

    Fair
Value
 

Con Edison

    $10,959        $12,963        $10,768        $12,935   

CECONY

    $10,040        $11,792        $  9,845        $11,751   

 

Fair values of long-term debt have been estimated primarily using available market information. For Con Edison, $12,327 million and $636 million of the fair value of long-term debt at March 31, 2013 are classified as Level 2 and Level 3, respectively. For CECONY, $11,156 million and $636 million of the fair value of long-term debt at March 31, 2013 are classified as Level 2 and Level 3, respectively (see Note L). The $636 million of long-term debt classified as Level 3 is CECONY’s tax-exempt, auction-rate securities for which the market is highly illiquid and there is a lack of observable inputs.

Note D — Short-Term Borrowing

At March 31, 2013, Con Edison had $1,021 million of commercial paper outstanding of which $313 million was outstanding under CECONY’s program. The weighted average interest rate was 0.3 percent for both Con Edison and CECONY. At December 31, 2012, Con Edison had $539 million of commercial paper outstanding of which $421 million was outstanding under CECONY’s program. The weighted average interest rate was 0.3 percent for both Con Edison and CECONY. At March 31, 2013 and December 31, 2012, no loans were outstanding under the Companies’ credit agreement and $186 million (including $171 million for CECONY) and $131 million (including $121 million for CECONY) of letters of credit were outstanding, respectively, under the credit agreement.

 

Note E — Pension Benefits

Net Periodic Benefit Cost

The components of the Companies’ net periodic benefit costs for the three months ended March 31, 2013 and 2012 were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2013     2012     2013     2012  

Service cost – including administrative expenses

    $   67        $   59        $   62        $   55   

Interest cost on projected benefit obligation

    134        137        126        128   

Expected return on plan assets

    (187     (176     (178     (168

Recognition of net actuarial loss

    208        177        197        168   

Recognition of prior service costs

    1        2        1        2   

NET PERIODIC BENEFIT COST

    $ 223        $ 199        $ 208        $ 185   

Cost capitalized

    (82     (64     (79     (63

Reconciliation to rate level

    11        (37     13        (38

Cost charged to operating expenses

    $ 152        $   98        $ 142        $   84   

Expected Contributions

 

Based on estimates as of March 31, 2013, the Companies expect to make contributions to the pension plan during 2013 of $867 million (of which $810 million is to be contributed by CECONY). The Companies’ policy is to fund their accounting cost to the extent tax deductible. During the first quarter of 2013, CECONY contributed $235 million to the pension plan. The Companies expect to fund $11 million for the non-qualified supplemental plans in 2013.

 

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Note F — Other Postretirement Benefits

Net Periodic Benefit Cost

The components of the Companies’ net periodic postretirement benefit costs for the three months ended March 31, 2013 and 2012 were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2013     2012     2013     2012  

Service cost

    $   6        $   7        $   5        $   5   

Interest cost on accumulated other postretirement benefit obligation

    14        18        12        16   

Expected return on plan assets

    (19     (21     (17     (18

Recognition of net actuarial loss

    16        25        14        22   

Recognition of prior service cost

    (7     (5     (6     (4

NET PERIODIC POSTRETIREMENT BENEFIT COST

    $ 10        $ 24        $   8        $ 21   

Cost capitalized

    (3     (8     (2     (7

Reconciliation to rate level

    12        7        11        4   

Cost charged to operating expenses

    $ 19        $ 23        $ 17        $ 18   

 

Expected Contributions

Based on estimates as of March 31, 2013, Con Edison expects to make a contribution of $9 million, nearly all of which is for CECONY, to the other postretirement benefit plans in 2013.

Note G — Environmental Matters

Superfund Sites

Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or generated in the course of operations of the Utilities and their predecessors and are present at sites and in facilities and equipment they currently or previously owned, including sites at which gas was manufactured or stored.

The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes (Superfund) impose joint and several liability, regardless of fault, upon generators of hazardous substances for investigation and remediation costs (which include costs of demolition, removal, disposal, storage, replacement, containment, and monitoring) and natural resource damages. Liability under these laws can be material and may be imposed for contamination from past acts, even though such past acts may have been lawful at the time they occurred. The sites at which the Utilities have been asserted to have liability under these laws, including their manufactured gas plant sites and any neighboring areas to which contamination may have migrated, are referred to herein as “Superfund Sites.”

For Superfund Sites where there are other potentially responsible parties and the Utilities are not managing the site investigation and remediation, the accrued liability represents an estimate of the amount the Utilities will need to pay to investigate and, where determinable, discharge their related obligations. For Superfund Sites (including the manufactured gas plant sites) for which one of the Utilities is managing the investigation and remediation, the accrued liability represents an estimate of the company’s share of undiscounted cost to investigate the sites and, for sites that have been investigated in whole or in part, the cost to remediate the sites, if remediation is necessary and if a reasonable estimate of such cost can be made. Remediation costs are estimated in light of the information available, applicable remediation standards, and experience with similar sites.

 

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The accrued liabilities and regulatory assets related to Superfund Sites at March 31, 2013 and December 31, 2012 were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2013     2012     2013     2012  

Accrued Liabilities:

         

Manufactured gas plant sites

    $457        $462        $348        $351   

Other Superfund Sites

    79        83        77        82   

Total

    $536        $545        $425        $433   

Regulatory assets

    $721        $730        $607        $615   

Most of the accrued Superfund Site liability relates to sites that have been investigated, in whole or in part. However, for some of the sites, the extent and associated cost of the required remediation has not yet been determined. As investigations progress and information pertaining to the required remediation becomes available, the Utilities expect that additional liability may be accrued, the amount of which is not presently determinable but may be material. Under their current rate agreements, the Utilities are permitted to recover or defer as regulatory assets (for subsequent recovery through rates) certain site investigation and remediation costs.

Environmental remediation costs incurred and insurance recoveries received related to Superfund Sites for the three months ended March 31, 2013 and 2012 were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2013     2012     2013     2012  

Remediation costs incurred

    $10        $7        $7        $7   

Insurance recoveries received

                           

In 2010, CECONY estimated that for its manufactured gas plant sites, its aggregate undiscounted potential liability for the investigation and remediation of coal tar and/or other manufactured gas plant-related environmental contaminants could range up to $1.9 billion. In 2010, O&R estimated that for its manufactured gas plant sites, each of which has been investigated, the aggregate undiscounted potential liability for the remediation of such contaminants could range up to $200 million. These estimates were based on the assumption that there is contamination at all sites, including those that have not yet been fully investigated and additional assumptions about the extent of the contamination and the type and extent of the remediation that may be required. Actual experience may be materially different.

Asbestos Proceedings

Suits have been brought in New York State and federal courts against the Utilities 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 Utilities. The suits that have been resolved, which are many, have been resolved without any payment by the Utilities, or for amounts that were not, in the aggregate, material to them. The amounts specified in all the remaining thousands of suits total billions of dollars; however, the Utilities believe that these amounts are greatly exaggerated, based on the disposition of previous claims. In 2010, CECONY estimated that its aggregate undiscounted potential liability for these suits and additional suits that may be brought over the next 15 years is $10 million. The estimate was based upon a combination of modeling, historical data analysis and risk factor assessment. Actual experience may be materially different. In addition, certain current and former employees have claimed or are claiming workers’ compensation benefits based on alleged disability from exposure to asbestos. Under its current rate agreements, CECONY is permitted to defer as regulatory assets (for subsequent recovery through rates) costs incurred for its asbestos lawsuits and workers’ compensation claims. The accrued liability for asbestos suits and workers’ compensation proceedings (including those related to asbestos exposure) and the amounts deferred as regulatory assets for the Companies at March 31, 2013 and December 31, 2012 were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2013     2012     2013     2012  

Accrued liability – asbestos suits

    $10        $10        $10        $10   

Regulatory assets – asbestos suits

    $10        $10        $10        $10   

Accrued liability – workers’ compensation

    $95        $94        $90        $89   

Regulatory assets – workers’ compensation

    $20        $19        $20        $19   

 

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Note H — Other Material Contingencies

Manhattan Steam Main Rupture

In July 2007, a CECONY steam main located in midtown Manhattan ruptured. It has been reported that one person died and others were injured as a result of the incident. Several buildings in the area were damaged. Debris from the incident included dirt and mud containing asbestos. The response to the incident required the closing of several buildings and streets for various periods. Approximately 93 suits are pending against the company seeking generally unspecified compensatory and, in some cases, punitive damages, for personal injury, property damage and business interruption. The company has not accrued a liability for the suits. The company has notified its insurers of the incident and believes that the policies in force at the time of the incident will cover most of the company’s costs, which the company is unable to estimate, but which could be substantial, to satisfy its liability to others in connection with the incident.

Lease In/Lease Out Transactions

In each of 1997 and 1999, Con Edison Development entered into transactions in which it leased property and then immediately subleased the properties back to the lessor (termed “Lease In/Lease Out,” or LILO transactions). The transactions respectively involve electric generating and gas distribution facilities in the Netherlands, with a total investment of $259 million. The transactions were financed with $93 million of equity and $166 million of non-recourse, long-term debt secured by the underlying assets. In accordance with the accounting rules for leases, Con Edison is accounting for the two LILO transactions as leveraged leases. Accordingly, the company’s investment in these leases, net of non-recourse debt, is carried as a single amount in Con Edison’s consolidated balance sheet and income is recognized pursuant to a method that incorporates a level rate of return for those years when net investment in the lease is positive.

On audit of Con Edison’s tax return for 1997, the Internal Revenue Service (IRS) disallowed tax losses in connection with the 1997 LILO transaction and assessed the company a $0.3 million income tax deficiency. On audits of Con Edison’s 1998 through 2011 tax returns, the IRS disallowed $574 million of tax losses taken with respect to both LILO transactions. In December 2005, Con Edison paid the $0.3 million deficiency asserted by the IRS for the tax year 1997 with respect to the 1997 LILO transaction. In April 2006, the company paid interest of $0.2 million associated with the deficiency and commenced an action in the United States Court of Federal Claims, entitled Consolidated Edison Company of New York, Inc. v. United States, to obtain a refund of tax and interest. A trial was completed in November 2007. In October 2009, the court issued a decision in favor of the company concluding that the 1997 LILO transaction was, in substance, a true lease that possessed economic substance, the loans relating to the lease constituted bona fide indebtedness, and the deductions for the 1997 LILO transactions claimed by the company in its 1997 federal income tax return are allowable. In January 2013, the United States Court of Appeals for the Federal Circuit reversed the October 2009 trial court decision and disallowed the tax losses claimed by the company relating to the 1997 LILO transaction. In March 2013, the Court of Appeals denied the company’s request to grant rehearing en banc of the January 2013 decision. To appeal the January 2013 decision, the company would need to file a petition for a writ of certiorari with the Supreme Court of the United States by June 25, 2013.

As a result of the January 2013 Court of Appeals decision, in the three months ended March 31, 2013, Con Edison recorded an after-tax charge of $150 million to reflect, as required by the accounting rules for leveraged lease transactions, the recalculation of the accounting effect of the LILO transactions based on the revised after-tax cash flows projected from the inception of the leveraged leases as well as the interest on the potential tax liability resulting from the disallowance of federal and state income tax losses with respect to the LILO transactions (see “Uncertain Tax Positions” in Note I). The effect on Con Edison’s

 

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consolidated income statement for the three months ended March 31, 2013 is as follows:

 

(Millions of Dollars)   2013  

Reduction to non-utility operating revenues

    $121   

Increase to other interest expense

    131   

Income tax expense

    (102

Total reduction in net income

    $150   

The transactions did not impact earnings in 2012.

At March 31, 2013, the company’s net investment in these LILO transactions was $97 million, comprised of a $104 million gross investment less $7 million of deferred tax liabilities. At December 31, 2012, the company’s net investment in the LILO transactions was $(76) million, comprised of a $228 million gross investment less $304 million of deferred tax liabilities.

In January 2013, to defray interest charges, the company deposited $447 million with federal and state tax agencies relating primarily to the potential tax liability from these LILO transactions in past tax years and interest thereon. In April 2013, the company requested the IRS to return $95 million of the deposit. The company estimates that if it were to negotiate the termination of the transactions, it could receive cash proceeds of approximately $205 million (pre-tax), which amount could be higher or lower depending on the negotiations.

Other Contingencies

See “Other Regulatory Matters” in Note B and “Uncertain Tax Positions” in Note I.

Guarantees

Con Edison and its subsidiaries enter into various agreements providing financial or performance assurance primarily to third parties on behalf of their subsidiaries. Maximum amounts guaranteed by Con Edison totaled $878 million and $859 million at March 31, 2013 and December 31, 2012, respectively.

A summary, by type and term, of Con Edison’s total guarantees at March 31, 2013 is as follows:

 

Guarantee Type   0 – 3 years     4 – 10 years     > 10 years     Total  
    (Millions of Dollars)  

Energy transactions

    $763        $31        $32        $826   

Intra-company guarantees

    16                      16   

Other guarantees

    36                      36   

Total

    $815        $31        $32        $878   

 

Energy Transactions — Con Edison guarantees payments on behalf of its competitive energy businesses in order to facilitate physical and financial transactions in gas, pipeline capacity, transportation, oil, electricity, renewable energy credits and energy services. To the extent that liabilities exist under the contracts subject to these guarantees, such liabilities are included in Con Edison’s consolidated balance sheet.

Intra-company Guarantees — Con Edison guarantees electricity sales made by Con Edison Energy and Con Edison Solutions to O&R and CECONY.

Other Guarantees — Con Edison and Con Edison Development also guarantee the following:

 

   

$2 million relates to guarantees issued by Con Edison to CECONY covering a former Con Edison subsidiary’s lease payment to use CECONY’s conduit system in accordance with a tariff approved by the NYSPSC and a guarantee issued by Con Edison to a landlord to guarantee the former subsidiary’s obligations under a building lease. The former subsidiary is obligated to reimburse Con Edison for any payments made under these guarantees. This obligation is fully secured by letters of credit;

 

   

$25 million for guarantees provided by Con Edison to Travelers Insurance Company for indemnity agreements for surety bonds in connection with energy service projects performed by Con Edison Solutions;

 

   

$9 million for guarantees provided by Con Edison Development to Travelers Insurance Company for indemnity agreements for surety bonds in connection with the construction and operation of solar facilities performed by its subsidiaries; and

 

   

Con Edison, on behalf of Con Edison Solutions, as a retail electric provider, issued a guarantee to the Public Utility Commission of Texas with no specified limitation on the amount guaranteed, covering the payment of all obligations of a retail electric provider. Con Edison’s estimate of the maximum potential obligation is $5 million as of March 31, 2013.

Note I — Income Tax

In the first quarter of 2013, the IRS accepted on audit Con Edison’s claim for manufacturing tax

 

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deductions. Accordingly, this quarter, Con Edison’s effective tax rate was favorably impacted by $15 million. In addition, as a result of interest expense on the LILO disallowances and reduction to non-utility operating revenues (see “Lease In/Lease Out Transactions” in Note H), income before income tax expense for the first quarter of 2013 is significantly lower than the first quarter of 2012. Other recurring tax rate reconciling items in the first quarter of 2013 and 2012 are comparable; however, as a result of lower income before income tax expense in 2013, Con Edison’s effective tax rate was significantly lower than 2012.

Uncertain Tax Positions

During the first quarter of 2013, the IRS accepted Con Edison’s deductions for repair costs to utility plant (the “repair allowance deductions”). As a result of this settlement, Con Edison and CECONY reduced their estimated liabilities for prior year uncertain tax positions by $72 million and $66 million, respectively, with a corresponding increase to accumulated deferred income tax liabilities. In addition, as a result of the January 2013 Court of Appeals decision (see “Lease In/Lease Out Transactions” in Note H), Con Edison increased its estimated prior year liabilities for federal and state uncertain tax positions by $238 million in the first quarter of 2013, with a corresponding reduction to accumulated deferred income tax liabilities. These changes to the Companies’ estimated liabilities for uncertain tax positions had no impact on income tax expense in the first quarter of 2013. There were no material changes to the Companies’ estimated liabilities for uncertain tax positions during the first quarter of 2012. At March 31, 2013, the estimated liabilities for uncertain tax positions for Con Edison and CECONY were $251 million and $7 million, respectively.

The Companies recognize interest on liabilities for uncertain tax positions in interest expense and would recognize penalties, if any, in operating expenses in the Companies’ consolidated income statements. In the first quarter of 2013, Con Edison recognized $126 million of interest expense ($131 million related to the LILO transactions, less a reduction of $5 million in accrued interest expense primarily associated with repair allowance deductions). Con Edison’s accrued interest on uncertain tax positions at March 31, 2013 was $137 million, compared with $11 million at December 31, 2012. Accrued interest on CECONY’s consolidated balance sheet was immaterial.

The Companies reasonably expect to resolve their uncertain tax positions with the IRS within the next twelve months, and accordingly have reflected their estimated liability for uncertain tax positions as current liabilities on their respective consolidated balance sheets. At March 31, 2013, the total amount of unrecognized tax benefits that, if recognized, would affect the Companies’ effective tax rate is $6 million for Con Edison and no impact to CECONY.

Note J — Financial Information by Business Segment

The financial data for the business segments are as follows:

 

     For the Three Months Ended March 31,  
    

Operating

revenues

    Inter-segment
revenues
    Depreciation and
amortization
   

Operating

income

 
(Millions of Dollars)   2013     2012     2013     2012     2013     2012     2013     2012  

CECONY

               

Electric

    $1,814        $1,735        $ 4        $ 3        $185        $173        $189        $224   

Gas

    660        563        1        1        32        29        242        221   

Steam

    332        263        19        19        16        16        129        99   

Consolidation adjustments

                  (24     (23                            

Total CECONY

    $2,806        $2,561        $—        $—        $233        $218        $560        $544   

O&R

               

Electric

    $   145        $   128        $—        $—        $  10        $    9        $  20        $    8   

Gas

    82        82                      4        4        27        30   

Total O&R

    $   227        $   210        $—        $—        $  14        $  13        $  47        $  38   

Competitive energy businesses

    $   152        $   310        $ 2        $ 2        $    4        $    2        $ (82     $ (20

Other*

    (1     (3     (2     (2                   1        (1

Total Con Edison

    $3,184        $3,078        $—        $—        $251        $233        $526        $561   

 

* Parent company expenses, primarily interest, and consolidation adjustments. Other does not represent a business segment.

 

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Note K — Derivative Instruments and Hedging Activities

Under the accounting rules for derivatives and hedging, derivatives are recognized on the balance sheet at fair value, unless an exception is available under the accounting rules. Certain qualifying derivative contracts have been designated as normal purchases or normal sales contracts. These contracts are not reported at fair value under the accounting rules.

Energy Price Hedging

Con Edison’s subsidiaries hedge market price fluctuations associated with physical purchases and sales of electricity, natural gas, and steam by using derivative instruments including futures, forwards, basis swaps, options, transmission congestion contracts and financial transmission rights contracts.

Effective January 1, 2013, the Companies adopted Accounting Standards Updates (ASUs) No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” and No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”. The amendments require the Companies to disclose certain quantitative information concerning financial and derivative instruments that are offset in the balance sheet and a description of the rights of setoff, including the nature of such rights, associated with recognized assets and liabilities that are subject to an enforceable master netting arrangement or similar agreement.

The Companies’ enter into master agreements for their commodity derivatives. These agreements typically provide setoff in the event of contract termination. In such case, generally the non-defaulting or non-affected party’s payable will be set-off by the other party’s payable. The non-defaulting party will customarily notify the defaulting party within a specific time period and come to an agreement on the early termination amount.

 

The fair values of the Companies commodity derivatives including the offsetting of assets and liabilities at March 31, 2013 were:

 

(Millions of Dollars)  
Commodity Derivatives  

Gross

Amounts of
Recognized
Assets/(Liabilities)

    Gross
Amounts
Offset in the
Statement of
Financial
Position
    Net Amounts of
Assets/(Liabilities)
Presented in
the Statement
of Financial
Position
    Gross Amounts Not
Offset in the Statement
of Financial Position
    Net
Amount
 
                          Financial
instruments
    Cash
collateral
received
        

Con Edison

           

Derivative assets

    $ 121        $(64     $ 57 (a)      $—        $—        $57 (a) 

Derivative liabilities

    (114     78        (36                   (36

Net derivative assets/(liabilities)

    $     7        $ 14        $ 21 (a)      $—        $—        $21 (a) 

CECONY

           

Derivative assets

    $   40        $(19     $ 21 (a)      $—        $—        $21 (a) 

Derivative liabilities

    (51     34        (17                   (17

Net derivative assets/(liabilities)

    $  (11     $ 15        $   4 (a)      $—        $—        $  4 (a) 

 

(a) On March 31, 2013, Con Edison and CECONY had margin deposits of $33 million and $14 million, respectively, classified as derivative assets in the balance sheet, but not included in the table. As required by an exchange, a margin is collateral, typically cash, that the holder of a derivative instrument has to deposit in order to transact on an exchange and to cover its potential losses with its broker or the exchange.

 

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The fair values of the Companies commodity derivatives including the offsetting of assets and liabilities at December 31, 2012 were:

 

(Millions of Dollars)       
Commodity Derivatives   Gross
Amounts of
Recognized
Assets/
(Liabilities)
    Gross
Amounts
Offset in the
Statement of
Financial
Position
    Net Amounts
of Assets/
(Liabilities)
Presented in
the Statement
of Financial
Position
    Gross Amounts Not
Offset in the Statement
of Financial Position
    Net
Amount
 
                          Financial
instruments
    Cash
collateral
received
        

Con Edison

           

Derivative assets

    $  86        $  (57     $    29 (a)      $  —        $  —        $     29 (a) 

Derivative liabilities

    (176     104        (72                   (72

Net derivative assets/(liabilities)

    $ (90     $   47        $   (43 )(a)      $  —        $  —        $    (43 )(a) 

CECONY

           

Derivative assets

    $  27        $  (15     $    12 (a)      $  —        $  —        $     12 (a) 

Derivative liabilities

    (83     44        (39                   (39

Net derivative assets/(liabilities)

    $ (56     $   29        $   (27 )(a)      $  —        $  —        $    (27 )(a) 

 

(a) On December 31, 2012, Con Edison and CECONY had margin deposits of $37 million and $18 million, respectively, classified as derivative assets in the balance sheet, but not included in the table. As required by an exchange, a margin is collateral, typically cash, that the holder of a derivative instrument has to deposit in order to transact on an exchange and to cover its potential losses with its broker or the exchange.

 

Credit Exposure

The Companies are exposed to credit risk related to transactions entered into primarily for the various energy supply and hedging activities by the Utilities and the competitive energy businesses. The Companies use credit policies to manage this risk, including an established credit approval process, monitoring of counterparty limits, netting provisions within agreements, collateral or prepayment arrangements, credit insurance and credit default swaps.

At March 31, 2013, Con Edison and CECONY had $157 million and $21 million of credit exposure in connection with energy supply and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $55 million with investment-grade counterparties, $44 million with commodity exchange brokers, $55 million with independent system operators and $3 million with non-investment grade/non-rated counterparties. CECONY’s net credit exposure consisted of $6 million with investment-grade counterparties and $15 million with commodity exchange brokers.

Economic Hedges

The Companies enter into certain derivative instruments that do not qualify or are not designated as hedges under the accounting rules for derivatives and hedging. However, management believes these instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices.

 

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The fair values of the Companies’ commodity derivatives at March 31, 2013 were:

 

    
(Millions of Dollars)  

Fair Value of Commodity Derivatives(a)

Balance Sheet Location

  Con
Edison
    CECONY  
Derivative Assets  

Current

  Other current assets     $   92        $  30   

Long-term

  Other deferred charges and noncurrent assets     29        10   

Total derivative assets

    $ 121        $  40   

Impact of netting

    (31     (5

Net derivative assets

    $   90        $  35   
Derivative Liabilities  

Current

  Fair value of derivative liabilities     $   71        $  32   

Long-term

  Fair value of derivative liabilities     43        19   

Total derivative liabilities

    $ 114        $  51   

Impact of netting

    (78     (34

Net derivative liabilities

    $   36        $  17   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

The fair values of the Companies’ commodity derivatives at December 31, 2012 were:

 

(Millions of Dollars)  

Fair Value of Commodity Derivatives(a)

Balance Sheet Location

  Con
Edison
    CECONY  
Derivative Assets  

Current

  Other current assets     $  64        $  18   

Long-term

  Other deferred charges and noncurrent assets     22        9   

Total derivative assets

    $  86        $  27   

Impact of netting

    (20     3   

Net derivative assets

    $  66        $  30   
Derivative Liabilities  

Current

  Fair value of derivative liabilities     $122        $  58   

Long-term

  Fair value of derivative liabilities     54        25   

Total derivative liabilities

    $176        $  83   

Impact of netting

    (104     (44

Net derivative liabilities

    $  72        $  39   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

 

The Utilities generally recover all of their prudently incurred fuel, purchased power and gas cost, including hedging gains and losses, in accordance with rate provisions approved by the applicable state utility commissions. In accordance with the accounting rules for regulated operations, the Utilities record a regulatory asset or liability to defer recognition of unrealized gains and losses on their electric and gas derivatives. As gains and losses are realized in future periods, they will be recognized as purchased power, gas and fuel costs in the Companies’ consolidated income statements. Con Edison’s competitive energy businesses record realized and unrealized gains and losses on their derivative contracts in earnings in the reporting period in which they occur.

 

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The following table presents the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the three months ended March 31, 2013:

 

Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a)

Deferred or Recognized in Income for the Three Months Ended March 31, 2013

 
(Millions of Dollars)   Balance Sheet Location   Con
Edison
    CECONY  

Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:

  

Current

  Deferred derivative gains     $     9        $     8   

Long-term

  Regulatory liabilities     2        1   

Total deferred gains/(losses)

        $   11        $     9   

Current

  Deferred derivative losses     $   38        $   32   

Current

  Recoverable energy costs     11        10   

Long-term

  Deferred derivative losses     7        6   

Total deferred gains/(losses)

        $   56        $   48   

Net deferred gains/(losses)

        $   67        $   57   
    Income Statement Location                

Pre-tax gain/(loss) recognized in income

     
  Purchased power expense     $  67 (b)      $    —   
  Gas purchased for resale     (4       
    Non-utility revenue     (1 )(b)        

Total pre-tax gain/(loss) recognized in income

        $   62        $    —   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.
(b) For the three months ended March 31, 2013, Con Edison recorded in non-utility operating revenues and purchased power expense an unrealized pre-tax gain of $1 million and $45 million, respectively.

The following table presents the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the three months ended March 31, 2012:

 

Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a)

Deferred or Recognized in Income for the Three Months Ended March 31, 2012

 
(Millions of Dollars)   Balance Sheet Location   Con
Edison
    CECONY  

Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:

  

Current

  Deferred derivative gains     $     1        $   1   

Total deferred gains/(losses)

        $     1        $   1   

Current

  Deferred derivative losses     $  (28     $(19

Current

  Recoverable energy costs     (74     (56

Long-term

  Deferred derivative losses     (18     (17

Total deferred gains/(losses)

        $(120     $(92

Net deferred gains/(losses)

        $(119     $(91
    Income Statement Location                

Pre-tax gain/(loss) recognized in income

     
  Purchased power expense     $  (86 )(b)      $ —   
  Gas purchased for resale     (1       
    Non-utility revenue     (3 )(b)        

Total pre-tax gain/(loss) recognized in income

        $  (90     $ —   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.
(b) For the three months ended March 31, 2012, Con Edison recorded in non-utility operating revenues and purchased power expense an unrealized pre-tax loss of $(4) million and $(27) million, respectively.

 

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As of March 31, 2013, Con Edison had 1,096 contracts, including 553 CECONY contracts, which were considered to be derivatives under the accounting rules for derivatives and hedging (excluding qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts). The following table presents the number of contracts by commodity type:

 

     Electric Derivatives            Gas Derivatives  
     Number of
Energy
Contracts (a)
    MWHs (b)     Number of
Capacity
Contracts (a)
    MWs (b)     Number of
Contracts (a)
    Dths (b)     Total
Number Of
Contracts (a)
 

Con Edison

    493        15,267,685        70        10,750        533        79,064,410        1,096   

CECONY

    101        3,844,000                      452        74,340,000        553   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.
(b) Volumes are reported net of long and short positions.

 

The Companies also enter into electric congestion and gas basis swap contracts to hedge the congestion and transportation charges which are associated with electric and gas contracts and hedged volumes.

The collateral requirements associated with, and settlement of, derivative transactions are included in net cash flows from operating activities in the Companies’ consolidated statement of cash flows. Most derivative instrument contracts contain provisions that may require the Companies to provide collateral on derivative instruments in net liability positions. The amount of collateral to be provided will depend on the fair value of the derivative instruments and the Companies’ credit ratings.

 

The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position and collateral posted at March 31, 2013, and the additional collateral that would have been required to be posted had the lowest applicable credit rating been reduced one level and to below investment grade were:

 

(Millions of Dollars)   Con Edison (a)     CECONY (a)  

Aggregate fair value – net liabilities

    $19        $14   

Collateral posted

    $ —        $ —   

Additional collateral (b) (downgrade one level from current ratings)

    $ —        $ —   

Additional collateral (b) (downgrade to below investment grade from current ratings)

    $22 (c)      $15 (c) 

 

(a) Non-derivative transactions for the purchase and sale of electricity and gas and qualifying derivative instruments, which have been designated as normal purchases or normal sales, are excluded from the table. These transactions primarily include purchases of electricity from independent system operators. In the event the Utilities and Con Edison’s competitive energy businesses were no longer extended unsecured credit for such purchases, the Companies would be required to post collateral, which at March 31, 2013, would have amounted to an estimated $32 million for Con Edison, including $15 million for CECONY. For certain other such non-derivative transactions, the Companies could be required to post collateral under certain circumstances, including in the event counterparties had reasonable grounds for insecurity.
(b) The Companies measure the collateral requirements by taking into consideration the fair value amounts of derivative instruments that contain credit-risk-related contingent features that are in a net liabilities position plus amounts owed to counterparties for settled transactions and amounts required by counterparties for minimum financial security. The fair value amounts represent unrealized losses, net of any unrealized gains where the Companies have a legally enforceable right of setoff.
(c) Derivative instruments that are net assets have been excluded from the table. At March 31, 2013, if Con Edison had been downgraded to below investment grade, it would have been required to post additional collateral for such derivative instruments of $38 million, including $1 million for CECONY.

 

Interest Rate Swap

O&R has an interest rate swap pursuant to which it pays a fixed-rate of 6.09 percent and receives a LIBOR-based variable rate. The fair value of this interest rate swap at March 31, 2013 was an unrealized loss of $5 million, which has been included in Con Edison’s consolidated balance sheet as a noncurrent liability/fair value of derivative liabilities and a regulatory asset. The increase in the fair value of the swap for the three months ended March 31, 2013 was $1 million. In the event O&R’s credit rating was downgraded to BBB- or lower by S&P or Baa3 or lower by Moody’s, the swap counterparty could elect to terminate the agreement and, if it did so, the parties would then be required to settle the transaction.

 

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Note L — Fair Value Measurements

The accounting rules for fair value measurements and disclosures define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in a principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets or liabilities. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Companies often make certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, and the risks inherent in the inputs to valuation techniques. The Companies use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

The accounting rules for fair value measurements and disclosures established a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value in three broad levels. The rules require that assets and liabilities be classified in their entirety based on the level of input that is significant to the fair value measurement. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability, and may affect the valuation of the asset or liability and their placement within the fair value hierarchy. The Companies classify fair value balances based on the fair value hierarchy defined by the accounting rules for fair value measurements and disclosures as follows:

 

   

Level 1 – Consists of assets or liabilities whose value is based on unadjusted quoted prices in active markets at the measurement date. An active market is one in which transactions for assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis. This category includes contracts traded on active exchange markets valued using unadjusted prices quoted directly from the exchange.

 

   

Level 2 – Consists of assets or liabilities valued using industry standard models and based on prices, other than quoted prices within Level 1, that are either directly or indirectly observable as of the measurement date. The industry standard models consider observable assumptions including time value, volatility factors, and current market and contractual prices for the underlying commodities, in addition to other economic measures. This category includes contracts traded on active exchanges or in over-the-counter markets priced with industry standard models.

 

   

Level 3 – Consists of assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date. Unobservable inputs are developed based on the best available information and subject to cost benefit constraints. This category includes contracts priced using models that are internally developed and contracts placed in illiquid markets. It also includes contracts that expire after the period of time for which quoted prices are available and internal models are used to determine a significant portion of the value.

 

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Assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 are summarized below.

 

     Level 1     Level 2     Level 3    

Netting

Adjustments(d)

    Total(e)  
(Millions of Dollars)   Con
Edison
    CECONY     Con
Edison
    CECONY     Con
Edison
    CECONY     Con
Edison
    CECONY     Con
Edison
    CECONY  

Derivative assets:

                   

Commodity (a)(e)

    $    2        $    2        $  71        $  19        $36        $11        $(20     $   2        $  89        $  34   

Other assets (c)(e)

    109        102        112        103                                    221        205   

Total

    $111        $104        $183        $122        $36        $11        $(20     $   2        $310        $239   

Derivative liabilities:

                   

Commodity (a)(e)

    $    8        $    8        $  72        $  35        $22        $ —        $(67     $(27     $  35        $  16   

Interest rate contract (b)(e)

                  5                                           5          

Total

    $    8        $    8        $  77        $  35        $22        $ —        $(67     $(27     $  40        $  16   

 

(a) A portion of the commodity derivatives categorized in Level 3 is valued using an internally developed model with observable inputs. The models also include some less readily observable inputs resulting in the classification of the entire contract as Level 3. See Note K.
(b) See Note K.
(c) Other assets are comprised of assets such as life insurance contracts within the deferred compensation plan and non-qualified retirement plans.
(d) Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.
(e) The Companies’ policy is to recognize transfers into and transfers out of the levels at the end of the reporting period. There were no transfers between levels 1, 2, and 3 for the three months ended March 31, 2013.

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 are summarized below.

 

     Level 1     Level 2     Level 3    

Netting

Adjustments(d)

    Total(e)  
(Millions of Dollars)   Con
Edison
    CECONY     Con
Edison
    CECONY     Con
Edison
    CECONY     Con
Edison
    CECONY     Con
Edison
    CECONY  

Derivative assets:

                   

Commodity (a)(e)

    $   —        $ —        $  43        $    8        $33        $10        $(10     $ 12        $  66        $  30   

Other assets (c)(e)(f)

    106        99        107        98                                    213        197   

Total

    $106        $99        $150        $106        $33        $10        $(10     $ 12        $279        $227   

Derivative liabilities:

                   

Commodity (a)(e)(h)

    $  12        $12        $116        $  62        $38        $ —        $(94     $(35     $  72        $  39   

Interest rate contract (b)(e)(g)

                  6                                           6          

Total

    $  12        $12        $122        $  62        $38        $ —        $(94     $(35     $  78        $  39   

 

(a) A significant portion of the commodity derivative contracts categorized in Level 3 is valued using either an industry acceptable model or an internally developed model with observable inputs. The models also include some less readily observable inputs resulting in the classification of the entire contract as Level 3. See Note K.
(b) See Note K.
(c) Other assets are comprised of assets such as life insurance contracts within the deferred compensation plan and non-qualified retirement plans.
(d) Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.
(e) The Companies’ policy is to recognize transfers into and transfers out of the levels at the end of the reporting period.
(f) On March 31, 2012, other assets of $105 million for Con Edison and $95 million for CECONY were transferred from Level 3 to Level 2 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall as of March 31, 2012.
(g) On March 31, 2012, interest rate contract of $8 million was transferred from Level 3 to Level 2 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall.
(h) During 2012, Con Edison transferred commodity derivate contract liabilities of $2 million from Level 1 to Level 2, $9 million from Level 2 to Level 1, $2 million from Level 2 to Level 3, and $11 million from Level 3 to Level 2 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall.

 

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The employees in the risk management groups of the Utilities and the competitive energy businesses develop and maintain the Companies’ valuation policies and procedures for, and verify pricing and fair value valuation of, commodity derivatives. Under the Companies’ policies and procedures, multiple independent sources of information are obtained for forward price curves used to value commodity derivatives. Fair value and changes in fair value of commodity derivatives are reported on a monthly basis to the Companies’ risk committees, comprised of officers and employees of the Companies that oversee energy hedging at the Utilities and the competitive energy businesses. The managers of the risk management groups report to the Companies’ Vice President and Treasurer.

 

    

Fair Value of
Level 3 at
March 31, 2013

(Millions of Dollars)

 

Valuation

Techniques

  Unobservable Inputs   Range

Con Edison—Commodity

         

Electricity

    $ 12     Discounted Cash Flow  

Forward energy prices (a)

Forward capacity prices

  $28-$116 per MWH

$1.50-$14.20 KW- month

Electricity Wholesale Contract

      1     Discounted Cash Flow  

Forward energy prices (b)

New Jersey solar renewable energy credit (SREC) (b)

  $33-$49 per MWH

$2.50-$110 per SREC

Standard Offer Capacity Agreements

      (12 )   Discounted Cash Flow  

Forward capacity prices (a)

Forward price escalator (a)

Present value factor (a)

  $166 MW-day

0%-3%

1.66%

Transmission Congestion Contracts / Financial

      13     Discounted Cash Flow   Discount to adjust auction prices for inter-zonal forward price curves (b)   17.5%-38%

Transmission Rights

        Discount to adjust auction prices for historical monthly realized settlements (b)   8.5%-49%
                  Inter-zonal forward price curves and for historical zonal losses (b)   $0.11-$5.74

Total Con Edison—Commodity

    $ 14              

CECONY—Commodity

         

Transmission Congestion Contracts

    $ 11     Discounted Cash Flow  

Discount to adjust auction prices for inter-zonal forward price curves (b)

 

17.5%-38%

                  Discount to adjust auction prices for historical monthly realized settlements (b)   8.5%-49%

 

(a) Generally, increases/(decreases) in this input in isolation would result in a higher/(lower) fair value measurement.
(b) Generally, increases/(decreases) in this input in isolation would result in a lower/(higher) fair value measurement.

The table listed below provides a reconciliation of the beginning and ending net balances for assets and liabilities measured at fair value as of March 31, 2013 and 2012 and classified as Level 3 in the fair value hierarchy:

 

     For Three Months Ended March 31, 2013  
           

Total Gains/(Losses)—

Realized and Unrealized

                                           
(Millions of Dollars)   Beginning
Balance as of
January 1, 2013
    Included in
Earnings
    Included in
Regulatory Assets
and Liabilities
    Purchases     Issuances     Sales     Settlements     Transfer
In/Out of
Level 3
   

Ending

Balance as of
March 31,

2013

 

Con Edison

                 

Derivatives:

                 

Commodity

    $ (5     $31        $5        $4        $—        $—        $(21     $—        $14   

CECONY

                 

Derivatives:

                 

Commodity

    $10        $10        $1        $4        $—        $—        $(14     $—        $11   

 

 

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     For Three Months Ended March 31, 2012  
           

Total Gains/(Losses)—

Realized and Unrealized

                                           
(Millions of Dollars)   Beginning
Balance as of
January 1, 2012
    Included in
Earnings
    Included in
Regulatory Assets
and Liabilities
    Purchases     Issuances     Sales     Settlements     Transfer
In/Out of
Level 3
   

Ending

Balance as of
March 31,

2012

 

Con Edison

                 

Derivatives:

                 

Commodity

    $(62     $(58     $(17     $6        $—        $—        $38        $   —        $(93

Interest rate contract

    (8     (1                                 1        8          

Other assets(a)

    99        3        3                                    (105       

Total

    $  29        $(56     $(14     $6        $—        $—        $39        $(97     $(93

CECONY

                 

Derivatives:

                 

Commodity

    $  (7     $  (5     $  (7     $6        $—        $—        $ —        $   —        $(13

Other assets(a)

    90        3        2                                    (95       

Total

    $  83        $  (2     $  (5     $6        $—        $—        $ —        $(95     $(13

 

(a) Amounts included in earnings are reported in investment and other income on the consolidated income statement.

 

For the Utilities, realized gains and losses on Level 3 commodity derivative assets and liabilities are reported as part of purchased power, gas and fuel costs. The Utilities generally recover these costs in accordance with rate provisions approved by the applicable state public utilities commissions. See Note A. Unrealized gains and losses for commodity derivatives are generally deferred on the consolidated balance sheet in accordance with the accounting rules for regulated operations.

For the competitive energy businesses, realized and unrealized gains and losses on Level 3 commodity derivative assets and liabilities are reported in non-utility revenues (immaterial and $3 million loss) and purchased power costs ($19 million gain and $43 million loss) on the consolidated income statement for the three months ended March 31, 2013 and 2012, respectively. The change in fair value relating to Level 3 commodity derivative assets held at March 31, 2013 and 2012 is included in non-utility revenues (immaterial and $3 million loss), and purchased power costs ($16 million gain and $7 million loss) on the consolidated income statement for the three months ended March 31, 2013 and 2012, respectively.

The accounting rules for fair value measurements and disclosures require consideration of the impact of nonperformance risk (including credit risk) from a market participant perspective in the measurement of the fair value of assets and liabilities. At March 31, 2013, the Companies determined that nonperformance risk would have no material impact on their financial position or results of operations. To assess nonperformance risk, the Companies considered information such as collateral requirements, master netting arrangements, letters of credit and parent company guarantees, and applied a market-based method by using the counterparty (for an asset) or the Companies’ (for a liability) credit default swaps rates.

Note M — New Financial Accounting Standards

In December 2011 and January 2013, the Financial Accounting Standards Board (FASB) issued amendments to address and clarify the scope of the balance sheet off-setting disclosure guidance within Accounting Standards Codification (ASC) 210, “Balance Sheet.” ASU No. 2011-11 and ASU No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” provide guidance that requires a reporting entity to disclose certain quantitative information concerning financial and derivative instruments that are offset in the balance sheet and a description of the rights of setoff, including the nature of such rights, associated with recognized assets and liabilities that are subject to an enforceable master netting arrangement or similar agreement. ASU No. 2013-01 clarifies that financial instruments subject to the disclosure guidance are (1) derivatives accounted for in accordance with

 

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ASC 815, Derivatives and Hedging, (2) repurchase agreements and reverse purchase agreements and (3) securities borrowing and securities lending transactions that are either offset in accordance with ASC Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. A reporting entity electing gross presentation of such assets and liabilities in its balance sheet will still be subject to the same disclosure requirements. Both ASUs are applicable for fiscal years beginning on or after January 1, 2013, interim periods within those fiscal years, and retrospectively for all comparative periods presented. The application of this guidance does not have a material impact on the Companies’ financial position, results of operations and liquidity. See Note K.

In February 2013, the FASB issued amendments to improve the reporting of reclassifications out of accumulated OCI through ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments require an entity to provide information either on the face of the financial statements or in a single footnote on significant amounts reclassified out of accumulated OCI and the related income statement line items to the extent an amount is reclassified in its entirety to net income under U.S. GAAP. For significant items not reclassified to net income in their entirety, an entity is required to cross-reference to other disclosures that provide additional information. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The application of this guidance does not have a material impact on the Companies’ financial position, results of operations and liquidity. See Note A.

 

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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

This MD&A should be read in conjunction with the First Quarter Financial Statements and the notes thereto and the MD&A in Item 7 of the Companies’ combined Annual Report on Form 10-K for the year ended December 31, 2012 (File Nos. 1-14514 and

1-1217, the Form 10-K).

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

Con Edison, incorporated in New York State in 1997, is a holding company which owns all of the outstanding common stock of CECONY, Orange and Rockland Utilities, Inc. (O&R) and the competitive energy businesses. As used in this report, the term the “Utilities” refers to CECONY and O&R.

 

LOGO

 

CECONY’s principal business operations are its regulated electric, gas and steam delivery businesses. O&R’s principal business operations are its regulated electric and gas delivery businesses. The competitive energy businesses sell electricity to retail and wholesale customers, provide certain energy-related services, and participate in energy infrastructure projects. Con Edison is evaluating additional opportunities to invest in electric and gas-related businesses.

Con Edison’s strategy is to provide reliable energy services, maintain public and employee safety, promote energy efficiency, and develop cost-effective ways of performing its business. Con Edison seeks to be a responsible steward of the environment and enhance its relationships with customers, regulators and members of the communities it serves.

CECONY

Electric

CECONY provides electric service to approximately 3.3 million customers in all of New York City (except part of Queens) and most of Westchester County, an approximately 660 square mile service area with a population of more than nine million.

Gas

CECONY delivers gas to approximately 1.1 million customers in Manhattan, the Bronx and parts of Queens and Westchester County.

 

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Steam

CECONY operates the largest steam distribution system in the United States by producing and delivering approximately 20,000 MMlbs of steam annually to approximately 1,717 customers in parts of Manhattan.

O&R

Electric

O&R and its utility subsidiaries, Rockland Electric Company (RECO) and Pike County Light & Power Company (Pike) (together referred to herein as O&R) provide electric service to approximately 0.3 million customers in southeastern New York and in adjacent areas of northern New Jersey and northeastern Pennsylvania, an approximately 1,350 square mile service area.

Gas

O&R delivers gas to over 0.1 million customers in southeastern New York and adjacent areas of northeastern Pennsylvania.

Competitive Energy Businesses

Con Edison pursues competitive energy opportunities through three wholly-owned subsidiaries: Con Edison Solutions, Con Edison Energy and Con Edison Development. These businesses include the sales and related hedging of electricity to retail and wholesale customers, sales of certain energy-related products and services, and participation in energy infrastructure projects. At March 31, 2013, Con Edison’s equity investment in its competitive energy businesses was $408 million and their assets amounted to $975 million.

 

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

 

     Three months ended March 31, 2013     At March 31, 2013  
(Millions of Dollars, except percentages)   Operating Revenues     Net Income for
Common Stock
    Assets  

CECONY

    $2,806        88     $277        144     $36,914        88

O&R

    227        7     30        16     2,658        6

Total Utilities

    3,033        95     307        160     39,572        94

Con Edison Solutions (a)

    247        8     19        10     260        1

Con Edison Energy

    17            1        1     35       

Con Edison Development (b)

    (110     (3 )%      (132     (69 )%      653        2

Other (c)

    (3         (3     (2 )%      1,216        3

Total Con Edison

    $3,184        100     $192        100     $41,736        100

 

(a) Net income from the competitive energy businesses for the three months ended March 31, 2013 includes $26 million of net after-tax mark-to-market gains.
(b) Includes an after-tax charge of $150 million relating to the lease in/lease out (LILO) transactions and a tax benefit of $15 million resulting from the acceptance by the Internal Revenue Service (IRS) of the company’s claim for manufacturing tax deductions (see Notes H and I to the First Quarter Financial Statements).
(c) Represents inter-company and parent company accounting. See “Results of Operations,” below.

 

Con Edison’s net income for common stock for the three months ended March 31, 2013 was $192 million or $0.66 a share ($0.65 on a diluted basis) compared with $277 million or $0.95 a share ($0.94 on a diluted basis) for the three months ended March 31, 2012. See “Results of Operations – Summary,” below. For segment financial information, see Note J to the First Quarter Financial Statements and “Results of Operations,” below.

 

Results of Operations — Summary

Net income for common stock for the three months ended March 31, 2013 and 2012 was as follows:

 

(Millions of Dollars)   2013     2012  

CECONY

    $277        $273   

O&R

    30        20   

Competitive energy businesses (a)

    (112     (12

Other (b)

    (3     (4

Con Edison

    $192        $277   

 

(a) Includes an after-tax charge of $150 million relating to the lease in/lease out (LILO) transactions and a tax benefit of $15 million resulting from the acceptance by the IRS of the company’s claim for manufacturing tax deductions (see Notes H and I to the First Quarter Financial Statements). Also includes $26 million and $(18) million of net after-tax mark-to-market gains/ (losses) in the three months ended 2013 and 2012, respectively.
(b) Consists of inter-company and parent company accounting.

 

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The Companies’ results of operations for three months ended March 31, 2013, as compared with 2012 period, reflect changes in the rate plans of Con Edison’s utility subsidiaries and the effects of the normal winter weather compared to the milder weather in 2012 on steam revenues. The rate plans provide for additional revenues to cover expected increases in certain operations and maintenance expenses, and depreciation and property taxes. The results of operations include the operating results of the competitive energy businesses.

Operations and maintenance expenses were higher primarily due to pension costs, surcharges for assessments and fees that are collected in revenues from customers and higher operating costs attributable to winter storm related emergency response. Depreciation and property taxes were higher in 2013 period, reflecting primarily the impact from higher utility plant balances.

 

The following table presents the estimated effect on earnings per share and net income for common stock for 2013 period compared with 2012 period, resulting from these and other major factors:

 

    

Earnings

per Share
Variation

   

Net Income for Common
Stock Variation

(Millions of Dollars)

 

Consolidated Edison Company of New York, Inc. (CECONY) (a)

   

Rate plans, primarily to recover increases in certain costs

    $0.21        $61   

Weather impact on steam revenues

    0.07        22   

Operations and maintenance expense

    (0.20     (57

Depreciation and property taxes

    (0.06     (19

Other

           (3

Total CECONY

    0.02        4   

Orange and Rockland Utilities (O&R)

    0.03        10   

CEBs (b)

    (0.34     (100

Other, including parent company expenses

           1   

Total variation

    $(0.29     $(85

 

(a) Under the revenue decoupling mechanisms in CECONY’s electric and gas rate plans and the weather-normalization clause applicable to the gas business, revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved. Under CECONY’s rate plans, pension and other postretirement costs and certain other costs are reconciled to amounts reflected in rates for such costs.
(b) These variations include, in the first quarter of 2013, an after-tax charge of $150 million or $0.51 a share relating to the LILO transactions and a tax benefit of $15 million or $0.05 a share resulting from the acceptance by the IRS of the company’s claim for manufacturing tax deductions (see Notes H and I to the First Quarter Financial Statement). The variations also include after-tax net mark-to-market gains of $26 million or $0.09 a share in the first quarter of 2013 and after-tax net mark-to-market losses of $18 million or $0.06 a share in the first quarter of 2012.

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

Liquidity and Capital Resources

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

Changes in the Companies’ cash and temporary cash investments resulting from operating, investing and financing activities for the three months ended March 31, 2013 and 2012 are summarized as follows:

Con Edison

 

(Millions of Dollars)   2013     2012     Variance  

Operating activities

  $ (84   $ 402      $ (486

Investing activities

    (663     (490     (173

Financing activities

    485        209        276   

Net change

    (262     121        (383

Balance at beginning of period

    394        648        (254

Balance at end of period

  $ 132      $ 769      $ (637

 

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CECONY

 

(Millions of Dollars)   2013     2012     Variance  

Operating activities

    $ 350        $ 368        $  (18

Investing activities

    (562     (487     (75

Financing activities

    (102     222        (324

Net change

    (314     103        (417

Balance at beginning of period

    353        372        (19

Balance at end of period

    $   39        $ 475        $(436

 

Cash Flows from Operating Activities

The Utilities’ cash flows from operating activities reflect principally their energy sales and deliveries and cost of operations. The volume of energy sales and deliveries is dependent primarily on factors external to the Utilities, such as growth of customer demand, weather, market prices for energy, economic conditions and measures that promote energy efficiency. Under the revenue decoupling mechanisms in CECONY’s electric and gas rate plans and O&R’s New York electric and gas rate plans, changes in delivery volumes from levels assumed when rates were approved may affect the timing of cash flows but not net income. The prices at which the Utilities provide energy to their customers are determined in accordance with their rate agreements. In general, changes in the Utilities’ cost of purchased power, fuel and gas may affect the timing of cash flows but not net income because the costs are recovered in accordance with rate agreements.

Net income is the result of cash and non-cash (or accrual) transactions. Only cash transactions affect the Companies’ cash flows from operating activities. Principal non-cash charges include depreciation and deferred income tax expense. Principal non-cash credits include amortizations of certain net regulatory liabilities. Non-cash charges or credits may also be accrued under the revenue decoupling and cost reconciliation mechanisms in the Utilities’ electric and gas rate plans in New York.

Net cash flows from operating activities for the three months ended March 31, 2013 for Con Edison and CECONY were $486 million and $18 million lower, respectively, than in 2012. The decreases in net cash flows for Con Edison reflects a special deposit for $447 million the company made in January 2013, with federal and state tax agencies relating primarily to the potential tax liability from the LILO transactions in past tax years and interest thereon.

The change in net cash flows for CECONY primarily associated with higher pension contribution ($51 million) offset in part by lower collateral paid to brokers and counterparties in the 2013 period ($37 million). CECONY contributed $235 million and $184 million to the pension plan during the 2013 and 2012 periods, respectively.

The change in net cash flows also reflects the timing of payments for and recovery of energy costs. This timing is reflected within changes to accounts receivable – customers, recoverable energy costs and accounts payable balances.

The changes in regulatory assets principally reflect changes in deferred pension costs in accordance with the accounting rules for retirement benefits.

Cash Flows Used in Investing Activities

Net cash flows used in investing activities for Con Edison and CECONY were $173 million and $75 million higher, respectively, for the three months ended March 31, 2013 compared with the 2012 period. The changes for Con Edison and CECONY reflect primarily increased utility construction expenditures in 2013. In addition, for Con Edison, the change reflects the construction relating to solar energy projects, offset in part by the receipt of government grant proceeds for these projects.

Cash Flows from Financing Activities

Net cash flows from financing activities for Con Edison and CECONY were $276 million higher and $324 million lower, respectively, in the three months ended March 31, 2013 compared with the 2012 period.

 

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In February 2013, CECONY issued $700 million of 3.95 percent 30-year debentures, the net proceeds from the sale of which were used to repay short-term borrowings and for other general corporate purposes. In February 2013, CECONY redeemed at maturity $500 million of 4.875 percent 10-year debentures.

In March 2012, CECONY issued $400 million 4.20 percent 30-year debentures, $239 million of the net proceeds from the sale of which were used to redeem all outstanding shares of its $5 Cumulative Preferred Stock and Cumulative Preferred Stock ($100 par value).

 

Cash flows from financing activities of the Companies also reflect commercial paper issuance. The commercial paper amounts outstanding at March 31, 2013 and 2012 and the average daily balances for the three months ended March 31, 2013 and 2012 for Con Edison and CECONY were as follows:

 

     2013     2012  
(Millions of Dollars, except Weighted Average Yield)   Outstanding at
March 31
    Daily
average
    Outstanding at
March 31
    Daily
average
 

Con Edison

  $ 1,021      $ 1,042      $      $ 14   

CECONY

  $    313      $ 511      $      $ 14   

Weighted average yield

    0.3     0.3         0.3

At April 29, 2013, Con Edison had $746 million of commercial paper outstanding (including $387 million outstanding at CECONY). The decrease in Con Edison’s outstanding commercial paper from March 31, 2013 reflects, among other things, the use of proceeds from the April 2013 issuance by a Con Edison Development subsidiary of $219 million aggregate principal amount of 4.78 percent senior notes secured by the company’s California solar projects. The notes have a weighted average life of 15 years and final maturity of 2037.

Other Changes in Assets and Liabilities

The following table shows changes in certain assets and liabilities at March 31, 2013, compared with December 31, 2012.

 

     Con Edison     CECONY  
(Millions of Dollars)   2013 vs. 2012
Variance
    2013 vs. 2012
Variance
 

Assets

   

Special deposits

  $ 438      $     (8

Prepayments

    263        310   

Regulatory asset — Unrecognized pension and other postretirement costs

    (234     (216

Liabilities

   

Notes payable

  $ 482      $ (108

Uncertain income tax liabilities

    207        (29

Accrued interest

    174        46   

Pension and retiree benefits

    (240     (235

 

Special Deposits, Notes Payable, Accrued Interest and Uncertain Income Tax Liabilities

The increases in Con Edison’s special deposits, notes payable, accrued interest and uncertain income tax liabilities primarily relates to the impact of the LILO transactions. See Notes H and I to the First Quarter Financial Statements.

Prepayments

The increase in prepayments for Con Edison and CECONY reflects primarily CECONY’s January 2013 payment of its New York City semi-annual property taxes, offset by three months of amortization, while the December 2012 balance reflects the full amortization of the previous semi-annual prepayment.

 

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Regulatory Asset for Unrecognized Pension and Other Postretirement Costs and Noncurrent Liability for Pension and Retiree Benefits

The decrease in the regulatory asset for unrecognized pension and other postretirement costs and the noncurrent liability for pension and retiree benefits reflects the final actuarial valuation of the pension and other retiree benefit plans as measured at December 31, 2012, in accordance with the accounting rules for retirement benefits. The change in the regulatory asset also reflects the year’s amortization of accounting costs. The decrease in the noncurrent liability for pension and retiree benefits reflects in part contributions to the plans made by the Utilities in 2013. See Notes B, E and F to the First Quarter Financial Statements.

Capital Requirements and Resources

Con Edison has increased its estimate of capital expenditures in 2013 by its competitive energy businesses from $253 million to $375 million to reflect potential investments in renewable generation.

 

For each of the Companies, the ratio of earnings to fixed charges (Securities and Exchange Commission basis) for the three months ended March 31, 2013 and 2012 and the twelve months ended December 31, 2012 was:

 

     Ratio of Earnings to Fixed Charges  
     For the Three Months Ended
March 31, 2013
    For the Three Months Ended
March 31, 2012
    For the Twelve Months Ended
December 31, 2012
 

Con Edison

    1.9 (a)      3.5        3.7   

CECONY

    4.1        3.9        3.7   

 

(a) The decrease from prior period reflects the impact of the LILO transactions. See Note H to the First Quarter Financial Statements.

 

For each of the Companies, the common equity ratio at March 31, 2013 and December 31, 2012 was:

 

    

Common Equity Ratio

(Percent of total capitalization)

 
     March 31, 2013     December 31, 2012  

Con Edison

    53.0        54.1   

CECONY

    52.5        53.6   

Regulatory Matters

In November 2012, the Governor of New York established a commission to review actions taken by New York utilities relating to emergency weather events, including Superstorm Sandy and other major storms, and to make recommendations regarding, among other things, the oversight, management and legal framework governing power delivery services in New York. See “Other Regulatory Matters” in Note B to the financial statements in Item 8. In March 2013, following the issuance of recommendations by the commission and submission by the Governor of a bill to the State legislature, the New York Public Service Law was amended to, among other things, authorize the NYSPSC to (i) levy expanded penalties against combination gas and electric utilities; (ii) review, at least every five years, an electric utility’s capability to provide safe, adequate and reliable service, order the utility to comply with additional and more stringent terms of service than existed prior to the review, assess the continued operation of the utility as the provider of electric service in its service territory and propose, and act upon, such measures as are necessary to ensure safe and adequate service; and (iii) based on findings of repeated violations of the New York Public Service Law or rules or regulations adopted thereto that demonstrate a failure of a combination gas and electric utility to continue to provide safe and adequate service, revoke or modify an operating certificate issued to the utility by the NYSPSC (following consideration of certain factors, including public interest and standards deemed necessary by the NYSPSC to ensure continuity of service, and due process).

Financial and Commodity Market Risks

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

Interest Rate Risk

The interest rate risk relates primarily to variable rate debt and to new debt financing needed to fund capital

 

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requirements, including the construction expenditures of the Utilities and maturing debt securities. Con Edison and its businesses manage interest rate risk through the issuance of mostly fixed-rate debt with varying maturities and through opportunistic refinancing of debt. Con Edison and CECONY estimate that at March 31, 2013, a 10 percent increase in interest rates applicable to its variable rate debt would result in an increase in annual interest expense of $1 million. Under CECONY’s current gas, steam and electric rate plans, variations in actual long-term debt interest rates are reconciled to levels reflected in rates. Under O&R’s current New York rate plans, variations in actual tax-exempt (and under the gas rate plan, taxable) long-term debt interest expense are reconciled to the level set in rates.

In addition, from time to time, Con Edison and its businesses enter into derivative financial instruments to hedge interest rate risk on certain debt securities. See “Interest Rate Swap” in Note K to the First Quarter Financial Statements.

Commodity Price Risk

Con Edison’s commodity price risk relates primarily to the purchase and sale of electricity, gas and related derivative instruments. The Utilities and Con Edison’s competitive energy businesses apply risk management strategies to mitigate their related exposures. See Note K to the First Quarter Financial Statements.

Con Edison estimates that, as of March 31, 2013, a 10 percent decline in market prices would result in a decline in fair value of $56 million for the derivative instruments used by the Utilities to hedge purchases of electricity and gas, of which $47 million is for CECONY and $9 million is for O&R. Con Edison expects that any such change in fair value would be largely offset by directionally opposite changes in the cost of the electricity and gas purchased. In accordance with provisions approved by state regulators, the Utilities generally recover from customers the costs they incur for energy purchased for their customers, including gains and losses on certain derivative instruments used to hedge energy purchased and related costs.

Con Edison’s competitive energy businesses use a value-at-risk (VaR) model to assess the market risk of their electricity and gas commodity fixed-price purchase and sales commitments, physical forward contracts and commodity derivative instruments. VaR represents the potential change in fair value of instruments or the portfolio due to changes in market factors, for a specified time period and confidence level. These businesses estimate VaR across their electricity and natural gas commodity businesses using a delta-normal variance/covariance model with a 95 percent confidence level. Since the VaR calculation involves complex methodologies and estimates and assumptions that are based on past experience, it is not necessarily indicative of future results. VaR for transactions associated with hedges and commodity contracts, assuming a one-day holding period, for the three months ended March 31, 2013 and the year ended December 31, 2012, respectively, was as follows:

 

95% Confidence Level,
One-Day Holding Period
  March 31, 2013     December 31, 2012  
    (Millions of Dollars)  

Average for the period

    $ 1        $ 1   

High

    1        2   

Low

             

Credit Risk

The Companies are exposed to credit risk related to transactions entered into primarily for the various energy supply and hedging activities by the Utilities and the competitive energy businesses. Credit risk relates to the loss that may result from a counterparty’s nonperformance. The Companies use credit policies to manage this risk, including an established credit approval process, monitoring of counterparty limits, netting provisions within agreements and collateral or prepayment arrangements, credit insurance and credit default swaps. The Companies measure credit risk exposure as the replacement cost for open energy commodity and derivative positions plus amounts owed from counterparties for settled transactions. The replacement cost of open positions represents unrealized gains, net of any unrealized losses where the Companies have a legally enforceable right of setoff. See “Credit Exposure” in Note K to the First Quarter Financial Statements.

 

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The Utilities had $25 million of credit exposure in connection with energy supply and hedging activities, net of collateral, at March 31, 2013, of which $17 million was with commodity exchange brokers and $8 million was with investment grade counterparties.

Con Edison’s competitive energy businesses had $133 million of credit exposure in connection with energy supply and hedging activities, net of collateral, at March 31, 2013, of which $48 million was with investment grade counterparties, $27 million was with commodity exchange brokers, $55 million was with independent system operators and $3 million was with non-investment grade or not rated counterparties.

Investment Risk

The Companies’ investment risk relates to the investment of plan assets for their pension and other postretirement benefit plans. The Companies’ current investment policy for pension plan assets includes investment targets of 60 percent equities and 40 percent fixed income and other securities. At March 31, 2013, the pension plan investments consisted of 61 percent equity and 39 percent fixed income and other securities.

Material Contingencies

For information concerning potential liabilities arising from the Companies’ material contingencies, see Notes B, G, and H to the First Quarter Financial Statements.

Results of Operations

See “Results of Operations – Summary,” above.

Results of operations reflect, among other things, the Companies’ accounting policies and rate plans that limit the rates the Utilities can charge their customers. Under the revenue decoupling mechanisms currently applicable to CECONY’s electric and gas businesses and O&R’s electric and gas businesses in New York, the Utilities’ delivery revenues generally will not be affected by changes in delivery volumes from levels assumed when rates were approved. Revenues for CECONY’s steam business and O&R’s businesses in New Jersey and Pennsylvania are affected by changes in delivery volumes resulting from weather, economic conditions and other factors.

In general, the Utilities recover on a current basis the fuel, gas purchased for resale and purchased power costs they incur in supplying energy to their full-service customers. Accordingly, such costs do not generally affect the Companies’ results of operations. Management uses the term “net revenues” (operating revenues less such costs) to identify changes in operating revenues that may affect the Companies’ results of operations. Management believes that, although “net revenues” may not be a measure determined in accordance with accounting principles generally accepted in the United States of America, the measure facilitates the analysis by management and investors of the Companies’ results of operations.

Con Edison’s principal business segments are CECONY’s regulated utility activities, O&R’s regulated utility activities and Con Edison’s competitive energy businesses. CECONY’s principal business segments are its regulated electric, gas and steam utility activities. A discussion of the results of operations by principal business segment for the three months ended March 31, 2013 and 2012 follows. For additional business segment financial information, see Note J to the First Quarter Financial Statements.

 

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Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012

The Companies’ results of operations (which were discussed above under “Results of Operations – Summary”) in 2013 compared with 2012 were:

 

     CECONY     O&R    

Competitive Energy
Businesses and Other (a)

    Con Edison (b)  
(Millions of Dollars)   Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
 

Operating revenues

  $ 245        9.6   $ 17        8.1   $ (156     (50.8 )%    $ 106        3.4

Purchased power

    8        1.8        10        25.0        (92     (31.3     (74     (9.5

Fuel

    39        36.1                                    39        36.1   

Gas purchased for resale

    50        29.6        2        7.7        2        Large        54        27.6   

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

    148        8.1        5        3.5        (66     Large        87        4.4   

Other operations and maintenance

    96        14.9        (7     (9.1     (8     (29.6     81        10.8   

Depreciation and amortization

    15        6.9        1        7.7        2        Large        18        7.7   

Taxes, other than income taxes

    21        4.9        2        12.5                      23        5.1   

Operating income

    16        2.9        9        23.7        (60     Large        (35     (6.2

Other income less deductions

    (1     (50.0                                 (1     (33.3

Net interest expense

    (4     (2.9     3        37.5        130        Large        129        86.0   

Income before income tax expense

    19        4.6        6        20.0        (190     Large        (165     (39.9

Income tax expense

    18        13.4        (4     (40.0     (91     Large        (77     (57.5

Net income

    1        0.4        10        50.0        (99     Large        (88     (31.4

Preferred stock dividend requirements

    (3     Large                                    (3     Large   

Net income for common stock

  $ 4        1.5   $ 10        50.0   $ (99     Large      $ (85     (30.7 )% 

 

(a) Includes inter-company and parent company accounting.
(b) Represents the consolidated financial results of Con Edison and its businesses.

CECONY

 

     Three Months Ended
March 31, 2013
           Three Months Ended
March 31, 2012
               
(Millions of Dollars)   Electric     Gas     Steam     2013
Total
    Electric     Gas     Steam     2012
Total
    2013-2012
Variation
 

Operating revenues

    $1,814        $660        $332        $2,806        $1,735        $563        $263        $2,561        $245   

Purchased power

    441               14        455        432               15        447        8   

Fuel

    65               82        147        50               58        108        39   

Gas purchased for resale

           219               219               169               169        50   

Net revenues

    1,308        441        236        1,985        1,253        394        190        1,837        148   

Operations and maintenance

    579        100        62        741        517        82        46        645        96   

Depreciation and amortization

    185        32        16        233        173        29        16        218        15   

Taxes, other than income taxes

    355        67        29        451        339        62        29        430        21   

Operating income

    $    189        $ 242        129        $    560        $    224        $ 221        $  99        $    544        $  16   

 

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Electric

CECONY’s results of electric operations for the three months ended March 31, 2013 compared with the 2012 period is as follows:

 

     Three Months Ended         
(Millions of Dollars)   March 31,
2013
    March 31,
2012
    Variation  

Operating revenues

    $1,814        $1,735        $ 79   

Purchased power

    441        432        9   

Fuel

    65        50        15   

Net revenues

    1,308        1,253        55   

Operations and maintenance

    579        517        62   

Depreciation and amortization

    185        173        12   

Taxes, other than income taxes

    355        339        16   

Electric operating income

    $    189        $    224        $  (35

CECONY’s electric sales and deliveries, excluding off-system sales, for the three months ended March 31, 2013 compared with the 2012 period were:

 

     Millions of kWhs Delivered     Revenues in Millions  
     Three Months Ended            Three Months Ended         
Description   March 31,
2013
    March 31,
2012
    Variation     Percent
Variation
    March 31,
2013
    March 31,
2012
    Variation     Percent
Variation
 

Residential/Religious(a)

    2,382        2,411        (29     (1.2 )%    $ 647      $ 588      $ 59        10.0

Commercial/Industrial

    2,394        2,384        10        0.4        479        440        39        8.9   

Retail access customers

    6,223        5,903        320        5.4        577        591        (14     (2.4

NYPA, Municipal Agency and other sales

    2,561        2,690        (129     (4.8     131        125        6        4.8   

Other operating revenues

                                (20     (9     (11     Large   

Total

    13,560        13,388        172        1.3   $ 1,814      $ 1,735      $ 79        4.6

 

(a) “Residential/Religious” generally includes single-family dwellings, individual apartments in multi-family dwellings, religious organizations and certain other not-for-profit organizations.

 

CECONY’s electric operating revenues increased $79 million in the three months ended March 31, 2013 compared with the 2012 period due primarily to higher revenues from the electric rate plan ($59 million), higher purchased power ($9 million) and fuel costs ($15 million). CECONY’s revenues from electric sales are subject to a revenue decoupling mechanism, as a result of which delivery revenues generally are not affected by changes in delivery volumes from levels assumed when rates were approved. Other electric operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the revenue decoupling mechanism and other provisions of the company’s rate plans.

Electric delivery volumes in CECONY’s service area increased 1.3 percent in the three months ended March 31, 2013 compared with the 2012 period. After adjusting for variations, principally weather and billing days, electric delivery volumes in CECONY’s service area decreased 0.8 percent in the three months ended March 31, 2013 compared with the 2012 period.

CECONY’s electric purchased power costs increased $9 million in the three months ended March 31, 2013 compared with the 2012 period due to an increase in unit costs ($19 million), offset by a decrease in purchased volumes ($10 million). Electric fuel costs increased $15 million in the three months ended March 31, 2013 compared with the 2012 period due to higher unit costs ($12 million) and higher sendout volumes from the company’s electric generating facilities ($3 million).

CECONY’s electric operating income decreased $35 million in the three months ended March 31, 2013 compared with the 2012 period. The decrease reflects primarily higher operations and maintenance costs ($62 million, due primarily to higher pension expense ($38 million), operating costs attributable to winter storm

 

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related emergency response ($13 million) and an increase in surcharges that are collected in revenues from customers ($8 million)), higher taxes other than income taxes ($16 million, principally property taxes) and higher depreciation and amortization ($12 million), offset in part by higher net revenues ($55 million, due primarily to the electric rate plan).

Gas

CECONY’s results of gas operations for the three months ended March 31, 2013 compared with the 2012 period is as follows:

 

     Three Months Ended         
(Millions of Dollars)   March 31,
2013
    March 31,
2012
    Variation  

Operating revenues

  $ 660      $ 563      $ 97   

Gas purchased for resale

    219        169        50   

Net revenues

    441        394        47   

Operations and maintenance

    100        82        18   

Depreciation and amortization

    32        29        3   

Taxes, other than income taxes

    67        62        5   

Gas operating income

  $ 242      $ 221      $ 21   

 

CECONY’s gas sales and deliveries, excluding off-system sales, for the three months ended March 31, 2013 compared with the 2012 period were:

 

     Thousands of dths Delivered     Revenues in Millions  
     Three Months Ended            Three Months Ended         
Description   March 31,
2013
    March 31,
2012
    Variation     Percent
Variation
    March 31,
2013
    March 31,
2012
    Variation     Percent
Variation
 

Residential

    19,055        14,608        4,447        30.4   $ 302      $ 260      $ 42        16.2

General

    11,188        11,136        52        0.5        135        120        15        12.5   

Firm transportation

    25,694        21,759        3,935        18.1        167        159        8        5.0   

Total firm sales and transportation

    55,937        47,503        8,434        17.8        604        539        65        12.1   

Interruptible sales (a)

    2,897        2,142        755        35.2        23        18        5        27.8   

NYPA

    9,633        9,549        84        0.9        1        1                 

Generation plants

    13,678        14,299        (621     (4.3     6        7        (1     (14.3

Other

    7,609        7,498        111        1.5        19        12        7        58.3   

Other operating revenues

                                7        (14     21        Large   

Total

    89,754        80,991        8,763        10.8   $ 660      $ 563      $ 97        17.2

 

(a) 

Includes 936 and 171 thousands of dths for the 2013 and 2012 period, respectively, which are also reflected in firm transportation and other.

 

CECONY’s gas operating revenues increased $97 million in the three months ended March 31, 2013 compared with the 2012 period due primarily to an increase in gas purchased for resale costs ($50 million) and higher revenues from the gas rate plan ($35 million). CECONY’s revenues from gas sales are subject to a weather normalization clause and a revenue decoupling mechanism as a result of which delivery revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved. Other gas operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plans.

CECONY’s sales and transportation volumes for firm customers increased 17.8 percent in the three months ended March 31, 2013 compared with the 2012 period. After adjusting for variations, principally weather and billing days, firm gas sales and transportation volumes in the company’s service area increased 1.2 percent in the three months ended March 31, 2013.

CECONY’s purchased gas cost increased $50 million in the three months ended March 31, 2013 compared with the 2012 period due to higher sendout volumes ($67 million), offset by lower unit costs ($17 million).

CECONY’s gas operating income increased $21 million in the three months ended March 31, 2013 compared with the 2012 period. The increase reflects primarily higher net revenue ($47 million), offset by higher operations and maintenance expense ($18 million, due primarily to an increase in the surcharges that are collected in revenues from customers ($11 million)), higher taxes other than income taxes

 

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($5 million, principally property taxes) and higher depreciation and amortization ($3 million).

Steam

CECONY’s results of steam operations for the three months ended March 31, 2013 compared with the 2012 period is as follows:

 

     Three Months Ended         
(Millions of Dollars)   March 31,
2013
    March 31,
2012
    Variation  

Operating revenues

  $ 332      $ 263      $ 69   

Purchased power

    14        15        (1

Fuel

    82        58        24   

Net revenues

    236        190        46   

Operations and maintenance

    62        46        16   

Depreciation and amortization

    16        16          

Taxes, other than income taxes

    29        29          

Steam operating income

  $ 129      $ 99      $ 30   

 

CECONY’s steam sales and deliveries for the three months ended March 31, 2013 compared with the 2012 period were:

 

     Millions of Pounds Delivered     Revenues in Millions  
     Three Months Ended            Three Months Ended         
Description   March 31,
2013
    March 31,
2012
    Variation     Percent
Variation
    March 31,
2013
    March 31,
2012
    Variation     Percent
Variation
 

General

    309        245        64        26.1   $ 16      $ 12      $ 4        33.3

Apartment house

    2,541        2,072        469        22.6        89        71        18        25.4   

Annual power

    5,852        4,935        917        18.6        238        193        45        23.3   

Other operating revenues

                                (11     (13     2        15.4   

Total

    8,702        7,252        1,450        20.0   $ 332      $ 263      $ 69        26.2

 

CECONY’s steam operating revenues increased $69 million in the three months ended March 31, 2013 compared with the 2012 period due primarily to the higher fuel costs ($24 million), the net change in rates under the steam rate plans ($9 million) and normal winter weather in 2013 compared to the milder weather in 2012 period ($36 million). Other steam operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plans.

Steam sales and delivery volumes increased 20.0 percent in the three months ended March 31, 2013 compared with the 2012 period. After adjusting for variations, principally weather and billing days, steam sales and deliveries decreased 3.1 percent in the three months ended March 31, 2013, reflecting lower average normalized use per customer.

CECONY’s steam fuel costs increased $24 million in the three months ended March 31, 2013 compared with the 2012 period due to higher unit costs ($10 million) and sendout volumes ($14 million). Steam purchased power costs decreased $1 million in the three months ended March 31, 2013 compared with the 2012 period due to a decrease in unit costs ($2 million), offset by higher purchased volumes ($1 million).

Steam operating income increased $30 million in the three months ended March 31, 2013 compared with the 2012 period. The increase reflects primarily higher net revenues ($46 million), offset in part by higher operations and maintenance expense ($16 million, due primarily to higher pension expense ($10 million) and higher surcharges that are collected in revenues from customers ($3 million)).

 

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Income Taxes

Income taxes increased $18 million in the three months ended March 31, 2013 compared with the 2012 period due to lower deductions for injuries and damages payments in 2013 ($9 million) and higher taxable income.

O&R

 

     Three Months Ended
March 31, 2013
           Three Months Ended
March 31, 2012
               
(Millions of Dollars)   Electric     Gas    

2013

Total

    Electric     Gas     2012
Total
    2013-2012
Variation
 

Operating revenues

  $ 145      $ 82      $ 227      $ 128      $ 82      $ 210      $ 17   

Purchased power

    50               50        40               40        10   

Gas purchased for resale

           28        28               26        26        2   

Net revenues

    95        54        149        88        56        144        5   

Operations and maintenance

    53        17        70        59        18        77        (7

Depreciation and amortization

    10        4        14        9        4        13        1   

Taxes, other than income taxes

    12        6        18        12        4        16        2   

Operating income

  $ 20      $ 27      $ 47      $ 8      $ 30      $ 38      $ 9   

Electric

O&R’s results of electric operations for the three months ended March 31, 2013 compared with the 2012 period is as follows:

 

     Three Months Ended         
(Millions of Dollars)   March 31,
2013
    March 31,
2012
    Variation  

Operating revenues

  $ 145      $ 128      $ 17   

Purchased power

    50        40        10   

Net revenues

    95        88        7   

Operations and maintenance

    53        59        (6

Depreciation and amortization

    10        9        1   

Taxes, other than income taxes

    12        12          

Electric operating income

  $ 20      $ 8      $ 12   

O&R’s electric sales and deliveries, excluding off-system sales, for the three months ended March 31, 2013 compared with the 2012 period were:

 

     Millions of kWhs Delivered     Revenues in Millions  
     Three Months Ended            Three Months Ended         
Description   March 31,
2013
    March 31,
2012
    Variation     Percent
Variation
    March 31,
2013
    March 31,
2012
    Variation     Percent
Variation
 

Residential/Religious(a)

    368        375        (7     (1.9 )%      65      $ 58      $ 7        12.1

Commercial/Industrial

    208        243        (35     (14.4     30        28        2        7.1   

Retail access customers

    733        689        44        6.4        41        37        4        10.8   

Public authorities

    26        28        (2     (7.1     3        2        1        50.0   

Other operating revenues

                                6        3        3        Large   

Total

    1,335        1,335                    $ 145      $ 128      $ 17        13.3

 

(a) “Residential/Religious” generally includes single-family dwellings, individual apartments in multi-family dwellings, religious organizations and certain other not-for-profit organizations.

O&R’s electric operating revenues increased $17 million in the three months ended March 31, 2013 compared with the 2012 period due primarily to higher purchased power costs ($10 million), and higher revenues from the New York electric rate plan ($3 million). O&R’s New York electric delivery revenues are subject to a revenue decoupling mechanism, as a result of which delivery revenues are generally not

 

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affected by changes in delivery volumes from levels assumed when rates were approved. O&R’s electric sales in New Jersey and Pennsylvania are not subject to a decoupling mechanism, and as a result, changes in such volumes do impact revenues. Other electric operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s electric rate plan.

Electric delivery volumes in O&R’s service area were the same as the 2012 period. After adjusting for weather and other variations, electric delivery volumes in O&R’s service area decreased 2.1 percent in the three months ended March 31, 2013 compared with the 2012 period.

Electric operating income increased $12 million in the three months ended March 31, 2013 compared with the 2012 period. The increase reflects primarily higher net revenues ($7 million) and lower operations and maintenance expense ($6 million, due primarily to lower pension expense), offset by higher depreciation and amortization expenses ($1 million).

 

Gas

O&R’s results of gas operations for the three months ended March 31, 2013 compared with the 2012 period is as follows:

 

     Three Months Ended         
(Millions of Dollars)   March 31,
2013
    March 31,
2012
    Variation  

Operating revenues

  $ 82      $ 82      $   

Gas purchased for resale

    28        26        2   

Net revenues

    54        56        (2

Operations and maintenance

    17        18        (1

Depreciation and amortization

    4        4          

Taxes, other than income taxes

    6        4        2   

Gas operating income

  $ 27      $ 30      $ (3

O&R’s gas sales and deliveries, excluding off-system sales, for the three months ended March 31, 2013 compared with the 2012 period were:

 

     Thousands of dths Delivered     Revenues in Millions  
     Three Months Ended            Three Months Ended         
Description   March 31,
2013
    March 31,
2012
    Variation     Percent
Variation
    March 31,
2013
    March 31,
2012
    Variation     Percent
Variation
 

Residential

    3,448        2,856        592        20.7     $42        $39        $3        7.7

General

    745        561        184        32.8        8        7        1        14.3   

Firm transportation

    5,425        4,368        1,057        24.2        33        31        2        6.5   

Total firm sales and transportation

    9,618        7,785        1,833        23.5        83        77        6        7.8   

Interruptible sales

    1,124        1,309        (185     (14.1     1        1                 

Generation plants

    239               239        Large                               

Other

    422        339        83        24.5                               

Other gas revenues

                                (2     4        (6     Large   

Total

    11,403        9,433        1,970        20.9     $82        $82                 

 

O&R’s gas operating revenues were the same as the 2012 period.

Sales and transportation volumes for firm customers increased 23.5 percent in the three months ended March 31, 2013 compared with the 2012 period. After adjusting for weather and other variations, total firm sales and transportation volumes increased 1.1 percent in the three months ended March 31, 2013 compared with the 2012 period.

 

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Gas operating income decreased $3 million in the three months ended March 31, 2013 compared with the 2012 period. The decrease reflects primarily lower net revenues ($2 million) and higher taxes other than income taxes ($2 million), offset by lower operating and maintenance expenses ($1 million).

 

Income Taxes

Income taxes decreased $4 million in the three months ended March 31, 2013 compared with the 2012 period due primarily to changes in estimates relating to accumulated deferred income taxes.

 

Competitive Energy Businesses

The competitive energy businesses’ results of operations for the three months ended March 31, 2013 compared with the 2012 period is as follows:

 

     Three Months Ended         
(Millions of Dollars)   March 31,
2013
    March 31,
2012
    Variation  

Operating revenues

  $ 152      $ 310      $ (158

Purchased power

    202        295        (93

Gas purchased for resale

    3        1        2   

Net revenues

    (53     14        (67

Operations and maintenance

    20        27        (7

Depreciation and amortization

    4        2        2   

Taxes, other than income taxes

    5        5          

Operating income

  $ (82   $ (20   $ (62

 

The competitive energy businesses’ operating revenues decreased $158 million in the three months ended March 31, 2013 compared with the 2012 period, due primarily to the impact of the LILO transactions ($121 million, see Note H to the First Quarter Financial Statements) and lower electric retail and wholesale revenues. Electric retail revenues decreased $23 million, due to lower sales volume ($36 million), offset by higher unit prices ($13 million). Electric wholesale revenues decreased $17 million in the three months ended March 31, 2013 as compared with the 2012 period, due to lower sales volumes ($13 million) and unit prices ($4 million). Net mark-to-market values increased $77 million in the three months ended March 31, 2013 as compared with the 2012 period, of which $72 million in gains are reflected in purchased power costs and $5 million in gains are reflected in revenues. Other revenues decreased $2 million in the three months ended March 31, 2013 as compared with the 2012 period.

Purchased power costs decreased $93 million in the three months ended March 31, 2013 compared with the 2012 period, due primarily to changes in mark-to-market values ($72 million) and lower volumes ($51 million), offset by higher unit prices ($30 million). Operating income decreased $62 million in 2013 compared with 2012 due primarily to the impact of the LILO transactions ($121 million) and lower margins ($13 million), offset by net mark-to-market effects ($77 million).

Net Interest Expense

Net interest expense increased $128 million in the three months ended March 31, 2013 compared with the 2012 period, due primarily to the impact of the LILO transactions. See Note H to the First Quarter Financial Statements.

Income Taxes

Income taxes decreased $91 million in the three months ended March 31, 2013 compared with the 2012 period, due primarily to the impact of the LILO transactions and a tax benefit resulting from the acceptance by the IRS of the company’s claim for manufacturing tax deductions (see Notes H and I to the First Quarter Financial Statements).

 

Other

For Con Edison, “Other” also includes inter-company eliminations relating to operating revenues and operating expenses.

 

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Item 3: Quantitative and Qualitative Disclosures About Market Risk

For information about the Companies’ primary market risks associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments, see “Financial and Commodity Market Risks,” in Part I, Item 2 of this report, which information is incorporated herein by reference.

Item 4: Controls and Procedures

The Companies maintain disclosure controls and procedures designed to provide reasonable assurance that the information required to be disclosed in the reports that they submit to the Securities and Exchange Commission (SEC) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. For each of the Companies, its management, with the participation of its principal executive officer and principal financial officer, has evaluated its disclosure controls and procedures as of the end of the period covered by this report and, based on such evaluation, has concluded that the controls and procedures are effective to provide such reasonable assurance. Reasonable assurance is not absolute assurance, however, and there can be no assurance that any design of controls or procedures would be effective under all potential future conditions, regardless of how remote.

There was no change in the Companies’ internal control over financial reporting that occurred during the Companies’ most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companies’ internal control over financial reporting.

 

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Part II Other Information

 

Item 1: Legal Proceedings

For information about certain legal proceedings affecting the Companies, see Notes B, G and H to the financial statements in Part I, Item 1 of this report, which information is incorporated herein by reference.

Item 1A: Risk Factors

There were no material changes in the Companies’ risk factors compared to those disclosed in Item 1A of the Form 10-K.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period   Total
Number of
Shares (or
Units)
Purchased*
    Average
Price
Paid
per
Share
(or
Unit)
    Total
Number of
Shares (or
Units)
Purchased
as Part of
Publicly
Announced
Plans or
Programs
    Maximum
Number (or
Appropriate
Dollar
Value) of
Shares (or
Units) that
May Yet Be
Purchased
Under the
Plans or
Programs
 

January 1, 2013 to January 31, 2013

    94,542        $56.06                 

February 1, 2013 to February 28, 2013

    59,246        57.34                 

March 1, 2013 to March 31, 2013

    87,725        58.93                 

Total

    241,513        $57.44                 

 

* Represents Con Edison common shares purchased in open-market transactions. The number of shares purchased approximated the number of treasury shares used for the company’s employee stock plans.

 

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Item 6: Exhibits

CON EDISON

Exhibit 12.1    Statement of computation of Con Edison’s ratio of earnings to fixed charges for the three-month periods ended March 31, 2013 and 2012, and the 12-month period ended December 31, 2012.
Exhibit 31.1.1    Rule 13a-14(a)/15d-14(a) Certifications – Chief Executive Officer.
Exhibit 31.1.2    Rule 13a-14(a)/15d-14(a) Certifications – Chief Financial Officer.
Exhibit 32.1.1    Section 1350 Certifications – Chief Executive Officer.
Exhibit 32.1.2    Section 1350 Certifications – Chief Financial Officer.
Exhibit 101.INS    XBRL Instance Document.
Exhibit 101.SCH    XBRL Taxonomy Extension Schema.
Exhibit 101.CAL    XBRL Taxonomy Extension Calculation Linkbase.
Exhibit 101.DEF    XBRL Taxonomy Extension Definition Linkbase.
Exhibit 101.LAB    XBRL Taxonomy Extension Label Linkbase.
Exhibit 101.PRE    XBRL Taxonomy Extension Presentation Linkbase.

CECONY

 

Exhibit 4.2    Form of CECONY’s 3.95% Debentures, Series 2013 A (incorporated by reference to Exhibit 4 to CECONY’s Current Report on Form 8-K, dated February 25, 2013—File No. 1-1217).
Exhibit 12.2    Statement of computation of CECONY’s ratio of earnings to fixed charges for the three-month periods ended March 31, 2013 and 2012, and the 12-month period ended December 31, 2012.
Exhibit 31.2.1    Rule 13a-14(a)/15d-14(a) Certifications – Chief Executive Officer.
Exhibit 31.2.2    Rule 13a-14(a)/15d-14(a) Certifications – Chief Financial Officer.
Exhibit 32.2.1    Section 1350 Certifications – Chief Executive Officer.
Exhibit 32.2.2    Section 1350 Certifications – Chief Financial Officer.
Exhibit 101.INS    XBRL Instance Document.
Exhibit 101.SCH    XBRL Taxonomy Extension Schema.
Exhibit 101.CAL    XBRL Taxonomy Extension Calculation Linkbase.
Exhibit 101.DEF    XBRL Taxonomy Extension Definition Linkbase.
Exhibit 101.LAB    XBRL Taxonomy Extension Label Linkbase.
Exhibit 101.PRE    XBRL Taxonomy Extension Presentation Linkbase.

Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, instruments defining the rights of holders of long-term debt of Con Edison’s subsidiaries other than CECONY, the total amount of which does not exceed ten percent of the total assets of Con Edison and its subsidiaries on a consolidated basis, are not filed as exhibits to Con Edison’s Form 10-K or Form 10-Q. Con Edison agrees to furnish to the SEC upon request a copy of any such instrument.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    CONSOLIDATED EDISON, INC.
    CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
DATE: May 2, 2013     By    /s/ Robert Hoglund
     

Robert Hoglund

Senior Vice President, Chief

Financial Officer and Duly

Authorized Officer

 

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