UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 1-14514
Consolidated Edison, Inc.
Exact name of registrant as specified in its charter
and principal office address and telephone number
I.R.S. Employer
ID. Number
4 Irving Place,
New York, New York 10003
(212) 460-4600
Commission File Number 1-1217
Consolidated Edison Company of New York, Inc.
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
on which registered
Consolidated Edison, Inc.,
Common Shares ($.10 par value)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Consolidated Edison, Inc. (Con Edison)
Consolidated Edison Company of New York, Inc. (CECONY)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Con Edison
CECONY
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.
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).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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.
Large accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
The aggregate market value of the common equity of Con Edison held by non-affiliates of Con Edison, as of June 30, 2013, was approximately $17.1 billion.
As of January 31, 2014, Con Edison had outstanding 292,902,495 Common Shares ($.10 par value).
All of the outstanding common equity of CECONY is held by Con Edison.
Documents Incorporated By Reference
Portions of Con Edison’s definitive proxy statement for its Annual Meeting of Stockholders to be held on May 19, 2014, to be filed with the Commission pursuant to Regulation 14A, not later than 120 days after December 31, 2013, is incorporated in Part III of this report.
Filing Format
This Annual Report on Form 10-K 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 wholly-owned subsidiary of Con Edison and, as such, the information in this report about CECONY also applies to Con Edison. CECONY meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format.
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.
Glossary of Terms
The following is a glossary of frequently used abbreviations or acronyms that are used in the Companies’ SEC reports:
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
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
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
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
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
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
LTIP
Long Term Incentive Plan
Moody’s
Moody’s Investors Service
S&P
Standard & Poor’s Financial Services LLC
VaR
Value-at-Risk
TABLE OF CONTENTS
Introduction
Available Information
Forward-Looking Statements
Part I
Item 1:
Business
Item 1A:
Risk Factors
Item 1B:
Unresolved Staff Comments
Item 2:
Properties
Item 3:
Legal Proceedings
Item 4:
Mine Safety Disclosures
Executive Officers of the Registrant
Part II
Item 5:
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6:
Selected Financial Data
Item 7:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A:
Quantitative and Qualitative Disclosures about Market Risk
Item 8:
Financial Statements and Supplementary Data
Item 9:
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A:
Controls and Procedures
Other Information
Part III
Item 10:
Directors, Executive Officers and Corporate Governance
Item 11:
Executive Compensation
Item 12:
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13:
Certain Relationships and Related Transactions, and Director Independence
Item 14:
Principal Accounting Fees and Services
Part IV
Item 15:
Exhibits and Financial Statement Schedules
Signatures
This introduction contains certain information about Con Edison and its subsidiaries, including CECONY, and is qualified in its entirety by reference to the more detailed information appearing elsewhere or incorporated by reference in this report.
Con Edison’s mission is to provide energy services to our customers safely, reliably, efficiently and in an environmentally sound manner; to provide a workplace that allows employees to realize their full potential; to provide a fair return to our investors; and to improve the quality of life in the communities we serve.
Con Edison is a holding company that owns:
CECONY, which delivers electricity, natural gas and steam to customers in New York City and Westchester County;
O&R (together with CECONY referred to as the Utilities), which delivers electricity and natural gas to customers primarily located in southeastern New York, and northern New Jersey and northeastern Pennsylvania; and
Competitive energy businesses, which sell to retail customers electricity purchased in wholesale markets and enter into related hedging transactions; provide energy-related products and services to wholesale and retail customers and participate in energy infrastructure projects.
Con Edison anticipates that the Utilities, which are subject to extensive regulation, will continue to provide substantially all of its earnings over the next few years. The Utilities have approved rate plans that are generally designed to cover each company’s cost of service, including the capital and other costs of the company’s energy delivery systems. The Utilities recover from their full-service customers (generally, on a current basis) the cost the Utilities pay for the energy and charge all of their customers the cost of delivery service.
Operating revenues
Energy costs
Operating income
Net income
Total assets
Long-term debt
Shareholders’ equity
Basic earnings per share
Diluted earnings per share
Cash dividends per common share
Book value per share
Average common shares outstanding (millions)
Stock price low
Stock price high
Net income for common stock
Shareholder’s equity
Significant 2013 Developments
CECONY delivered 56,918 million kWhs of electricity (0.5 percent decrease from prior year), 139,046 mdths of gas (19.4 percent increase from prior year) and 21,923 MMlbs of steam to its customers (11.1 percent increase from prior year). The company’s electric and gas rate plans include revenue decoupling mechanisms pursuant to which delivery revenues are not generally affected by changes in delivery volumes from levels assumed in the rate plans. See “Results of Operations” in Item 7.
CECONY invested $2,135 million to upgrade and reinforce its energy delivery systems. O&R invested $135 million in its energy delivery systems. The competitive energy businesses invested $378 million primarily in solar projects. See “Capital Requirements and Resources” in Item 1.
In December 2013, CECONY entered into a Joint Proposal with New York State Public Service Commission staff and other parties with respect to its rates for electric, gas and steam delivery service in 2014 and 2015 (and, for gas and steam delivery service, 2016). See “Rate Plans” in Note B to the financial statements in Item 8.
A commission established by the Governor of New York issued its report on actions taken by New York utilities relating to emergency weather events, including Superstorm Sandy, and the New York Public Service Law was amended to provide additional authority to the NYSPSC. Subsequently, the NYSPSC approved emergency response plans submitted by the utilities, adopted statewide policies that will require credits to customers who are without electric service for more than three days and approved a scorecard that will be used to assess electric utility performance. In addition, the NYSPSC directed its staff to recommend a process for decisions regarding the broad restructuring of distribution utility regulation. See “Utility Regulation” in Item 1.
A court disallowed tax losses claimed by Con Edison relating to Con Edison Development’s lease in/lease out (LILO) transactions and the company subsequently terminated the transactions, resulting in a charge to earnings of $95 million (after taxes of $63 million). See Note J to the financial statements in Item 8.
Con Edison and CECONY file annual, quarterly and current reports and other information, and Con Edison files proxy statements, with the Securities and Exchange Commission (SEC). The public may read and copy any materials that the Companies file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580 Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy statements, and other information regarding issuers (including Con Edison and CECONY) that file electronically with the SEC. The address of that site is www.sec.gov.
This information the Companies file with the SEC is also available free of charge on or through the Investor Information section of their websites as soon as reasonably practicable after the reports are electronically filed with, or furnished to, the SEC. Con Edison’s internet website is at: www.conedison.com; and CECONY’s is at: www.coned.com.
The Investor Information section of Con Edison’s website also includes the company’s Standards of Business Conduct (its code of ethics) and amendments or waivers of the standards for executive officers or directors, corporate governance guidelines and the charters of the following committees of the company’s Board of Directors: Audit Committee, Management Development and Compensation Committee, and Corporate Governance and Nominating Committee. This information is available in print to any shareholder who requests it. Requests should be directed to: Corporate Secretary, Consolidated Edison, Inc., 4 Irving Place, New York, NY 10003.
Information on the Companies’ websites is not incorporated herein.
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 factors including, but not limited to, those discussed under “Risk Factors,” in Item 1A.
Overview
Electric
Gas
Steam
Competitive Energy Businesses
Utility Regulation
State Utility Regulation
Regulators
Utility Industry Restructuring in New York
Rate Plans
Liability for Service Interruptions and Other Non-rate Conditions of Service
Generic Proceedings
Federal Utility Regulation
New York Independent System Operator (NYISO)
New York Energy Highway
Competition
Electric Operations
Electric Facilities
Electric Sales and Deliveries
Electric Peak Demand
Electric Supply
Gas Operations
Gas Facilities
Gas Sales and Deliveries
Gas Peak Demand
Gas Supply
Steam Operations
Steam Facilities
Steam Sales and Deliveries
Steam Peak Demand and Capacity
Steam Supply
Capital Requirements and Resources
Environmental Matters
Climate Change
Environmental Sustainability
Other Federal, State and Local Environmental Provisions
State Anti-Takeover Law
Employees
Incorporation By Reference
Information in any item of this report as to which reference is made in this Item 1 is hereby incorporated by reference in this Item 1. The use of terms such as “see” or “refer to” shall be deemed to incorporate into Item 1 at the place such term is used the information to which such reference is made.
PART I
Consolidated Edison, Inc. (Con Edison), incorporated in New York State in 1997, is a holding company which owns all of the outstanding common stock of Consolidated Edison Company of New York, Inc. (CECONY), Orange and Rockland Utilities, Inc. (O&R) and the competitive energy businesses. As used in this report, the term the “Companies” refers to Con Edison and CECONY.
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 customers, provide energy-related products and services, and participate in energy infrastructure projects.
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 provides electric service to approximately 3.4 million customers in all of New York City (except a part of Queens) and most of Westchester County, an approximately 660 square mile service area with a population of more than nine million.
CECONY delivers gas to approximately 1.1 million customers in Manhattan, the Bronx and parts of Queens and Westchester County.
CECONY operates the largest steam distribution system in the United States by producing and delivering approximately 22,000 MMlbs of steam annually to 1,703 customers in parts of Manhattan.
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.
O&R delivers gas to over 0.1 million customers in southeastern New York and adjacent areas of northeastern Pennsylvania.
Con Edison pursues competitive energy opportunities through three wholly-owned subsidiaries: Con Edison Solutions, Con Edison Energy and Con Edison Development. These businesses sell to retail customers electricity purchased in wholesale markets and enter into related hedging transactions, provide energy-related products and services to wholesale and retail customers, and participate in energy infrastructure projects. At December 31, 2013, Con Edison’s equity investment in its competitive energy businesses was $488 million and their assets amounted to $1,314 million.
The Utilities are subject to regulation by the New York State Public Service Commission (NYSPSC), which under the New York Public Service Law, is authorized to set the terms of service and the rates the Utilities charge for providing service in New York. It also approves the issuance of the Utilities’ securities. It exercises jurisdiction over the siting of the Utilities’ electric transmission lines and approves mergers or other business combinations involving New York utilities. In addition, it has the authority to impose penalties on utilities, which could be substantial, for violating state utility laws and regulations and its orders. O&R’s New Jersey subsidiary, RECO, is subject to similar regulation by the New Jersey Board of Public Utilities (NJBPU). O&R’s Pennsylvania subsidiary, Pike, is subject to similar regulation by the Pennsylvania Public Utility Commission (PAPUC). The NYSPSC, together with the NJBPU and the PAPUC, are referred to herein as state utility regulators.
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).
Utility Industry Restructuring In New York
In the 1990s, the NYSPSC restructured the electric utility industry in the state. In accordance with NYSPSC orders, the Utilities sold all of their electric generating facilities other than those that also produce steam for CECONY’s steam business (see Electric Operations – Electric Facilities below) and provided all of their customers the choice to buy electricity or gas from the Utilities or other suppliers (see Electric Operations – Electric Sales and Deliveries and Gas Operations – Gas Sales and Deliveries below).
Following adoption of NYSPSC industry restructuring, there were several utility mergers as a result of which substantially all of the electric and gas delivery service in New York State is now provided by one of four investor-owned utility companies – Con Edison, National Grid plc, Iberdrola, S.A. and Fortis Inc. – or one of two state authorities – New York Power Authority (NYPA) or Long Island Power Authority.
Investor-owned utilities in the United States provide service to customers according to the terms of tariffs approved by the appropriate state utility regulator. The tariffs include schedules of rates for service that are designed to permit the utilities to recover from their customers the approved anticipated costs, including capital costs, of providing service to customers as defined by the tariff. The tariffs implement rate plans adopted by state utility regulators in rate orders issued at the conclusion of rate proceedings. The utilities’ earnings depend on the rate levels authorized in their rate plans and their ability to operate their businesses in a manner consistent with such rate plans.
The utilities’ rate plans each cover specified periods, but rates determined pursuant to a plan generally continue in effect until a new rate plan is approved by the state utility regulator. In New York, either the utility or the NYSPSC can commence a proceeding for a new rate plan, and a new rate plan filed by the utility will generally take effect automatically in 11 months unless prior to such time the NYSPSC approves a rate plan.
In each rate proceeding, rates are determined by the state utility regulator following the submission by the utility of testimony and supporting information, which are subject to review by the staff of the regulator. Other parties with an interest in the proceeding can also review the utility’s proposal and become involved in the rate proceeding. The review process is overseen by an Administrative Law Judge. After an Administrative Law Judge issues a recommended decision, that generally considers the interests of the utility, the regulatory staff, other parties, and legal requisites, the regulator will issue a rate order. The utility and the regulator’s staff and interested parties may enter into a settlement agreement or joint proposal prior to the completion of this administrative process, in which case the agreement would be subject to approval of the regulator.
For each rate plan, the revenues needed to provide the utility a return on invested capital is determined by multiplying the utilities’ forecasted rate base by the utility’s pre-tax weighted average cost of capital. In general, rate base is the amount of the utility’s net plant, deferred taxes and working capital. The NYSPSC uses a forecast of the average rate base for the year
that new rates would be in effect (“rate year”). The NJBPU and the PAPUC use the rate base balances that would exist at the beginning of the rate year. The capital structure used in the weighted average cost of capital is determined utilizing actual and forecast data for the same time periods as rate base. The cost of long-term debt, customer deposits and the allowed return on common equity represents a combination of actual and forecast financing information. The allowed return on common equity is determined by each state’s respective utility regulator. The NYSPSC’s current methodology for determining the allowed return on common equity assigns a one-third weight to an estimate determined from a capital asset pricing model applied to a peer group of utility companies and a two-thirds weight to an estimate determined from a dividend discount model using stock prices and dividend forecasts for a peer group of utility companies.
Pursuant to the Utilities’ rate plans, there generally can be no change to the charges to customers during the respective terms of the rate plans other than for recovery of the costs incurred for energy supply and specified adjustments provided for in the rate plans.
Common provisions of the Utilities’ rate plans may include:
“Recoverable energy cost clauses” that allow the Utilities to recover on a current basis the costs for the energy they supply with no mark-up to their full-service customers.
“Other cost reconciliations” that reconcile pension and other postretirement benefit costs, environmental remediation costs, and certain other costs to amounts reflected in delivery rates for such costs. Utilities generally retain the right to petition for recovery or accounting deferral of extraordinary and material cost increases for items such as major storm events and provision is sometimes made for the utility to retain a share of cost reductions, for example, property tax refunds.
“Revenue decoupling mechanisms” under which actual energy delivery revenues will be compared with the authorized delivery revenues. The difference is accrued with interest for refund to, or recovery from customers, as applicable.
“Earnings sharing provisions” that require the Utilities to defer for customer benefit earnings over specified rates of return on common equity. There is no symmetric mechanism for earnings below specified rates of return on common equity.
“Negative earnings adjustments” for failure to meet certain performance standards relating to service, reliability, safety and other matters.
The following table includes information about the Utilities’ current rate plans and should be read in conjunction with, and is subject to, the more detailed discussion of the Utilities’ rate plans in Note B to the financial statements in Item 8 (which information is incorporated by reference herein).
Effective
Period
Rate
Base
CECONY – Electric(b)
January 2014 –
December 2015
Yr. 2 –$124.0
Yr. 2 – $18,113
CECONY – Gas(b)
December 2016
Yr. 2 – $38.6
Yr. 3 – $56.8
Yr. 2 – $3,863
Yr. 3 – $4,236
CECONY – Steam(b)
Yr. 2 – $19.8
Yr. 3 – $20.3
Yr. 2 – $1,547
Yr. 3 – $1,604
O&R – Electric (NY)
July 2012 –
June 2015
Yr. 2 – $8.8
Yr. 3 – $15.2
Yr. 2 – $708
Yr. 3 – $759
Yr. 2 – 9.5
Yr. 3 – 9.6
%
O&R – Gas (NY)
November 2009 –
October 2012
Yr. 2 – $9.0
Yr. 3 – $4.6
(c)
Yr. 2 – $296
Yr. 3 – $309
The tariff provisions under which CECONY provides electric, gas and steam service limit the company’s liability to pay for damages resulting from service interruptions to circumstances resulting from its gross negligence or willful misconduct.
CECONY’s tariff for electric service provides for reimbursement to electric customers for spoilage losses resulting from service interruptions in certain circumstances. In general, the company is obligated to reimburse affected residential and commercial customers for food spoilage of up to $450 and $9,000, respectively, and reimburse affected residential customers for prescription medicine spoilage losses without limitation on amount per claim. The company’s maximum aggregate liability for such reimbursement for an incident is $15 million. The company is not required to provide reimbursement to electric customers for outages attributable to generation or transmission system facilities or events beyond its control, such as storms, provided the company makes reasonable efforts to restore service as soon as practicable.
In June 2013, a commission established by the Governor of New York issued its final report on utility storm preparation and response. The commission made recommendations regarding, among other things, preparation and response to flooding; estimation of customer restoration times; reliability of website outage maps; coordination with local governments and providers of other utility services; availability and allocation of staffing and other resources (including the utility industry’s mutual aid process); and communications with affected communities and local officials. The commission’s report also addressed the Long Island Power Authority, energy efficiency programs, utility infrastructure investment and regulatory deficiencies.
In August 2013, the NYSPSC approved emergency response plans submitted by the Utilities, subject to certain modifications. Pursuant to the New York Public Service Law, as amended in 2013 (see “Regulators,” above), each electric utility is required to submit to the NYSPSC annually a plan for the reasonably prompt restoration of service in the case of widespread outages in the utility’s service territory due to storms or other events beyond the control of the utility. If, after evidentiary hearings or other investigatory proceedings, the NYSPSC finds that the utility failed to implement its plan reasonably, the NYSPSC may deny recovery of any part of the service restoration costs caused by such failure.
In November 2013, the NYSPSC adopted statewide policies pursuant to which the Utilities are required to provide credits to customers who are without electric service for more than three days; adjust rate plan revenue targets so the credits would not be recovered pursuant to revenue decoupling mechanisms; and temporarily suspend collection-related activities and service terminations for such customers (or, if the NYSPSC determines, to all residential customers in a designated area and certain other customers). The credit to a customer would equal the portion of the monthly customer charge attributable to the period the customer was without service. If an extraordinary event occurs, the NYSPSC may direct New York gas utilities to implement the same policies.
In December 2013, the NYSPSC approved a scorecard for use as a guide in assessing electric utility performance in restoring electric service during outages that result from a major storm event, to assist in holding the utilities accountable to certain performance levels, and to guide utilities as to the NYSPSC’s expectations for their restoration efforts. The order indicated that the scorecard, which could also be applied by the NYSPSC for other outages or actions, was developed to work with the penalty and emergency response plan provisions of the New York Public Service Law, as amended in 2013 (see “Regulators,” above). The scorecard includes performance metrics in categories for preparation, operational response and communications. Within 30 days of the completion of customer restoration, electric utilities are required to provide data for the scorecard. The NYSPSC staff would use the data to assess performance against the metrics and determine a score for each such event for each electric utility.
The NYSPSC from time to time conducts “generic” proceedings to consider issues relating to all electric and gas utilities operating in New York State. Pending proceedings include those relating to utilities exiting the service of selling electric energy and gas at retail (including an examination of utilities’ provider of last resort responsibility); the utilities’ vision for the “smart grid”; utility staffing levels; and the implementation of energy efficiency and renewable energy programs and consumer protections. The Utilities are typically active participants in such proceedings. The Utilities do not expect that these pending generic proceedings will have a material adverse effect on their financial positions, results of operation or liquidity.
In February 2011, the NYSPSC initiated a proceeding to examine the existing mechanisms pursuant to which utilities recover site investigation and remediation costs and possible alternatives. In November 2012, the NYSPSC adopted an order in which it, among other things, declined to adopt a generic policy requiring sharing such costs between utilities and their customers and indicated that sharing may be appropriate in specific company and rate case circumstances (for example, to serve as an incentive to a utility that has failed to adequately constrain such costs or, in the context of a multi-year rate plan, where some allocation of earnings in excess of the allowed rate of return could be used toward payment of such costs). See
“Environmental Matters – CECONY” and “Environmental Matters – O&R,” below, and Note G to the financial statements in Item 8.
In December 2013, the NYSPSC directed the NYSPSC staff “to recommend, for commencement in the first quarter of 2014, a process that will result in timely decisions regarding the broad restructuring of distribution utility regulation, such that the post-2015 course of energy efficiency and other clean energy programs can be determined in the context of these more sweeping changes.” The NYSPSC articulated five core policy outcomes intended to better align the role and operations of utilities to enable market and customer-driven change: empowering customers; leveraging customer contributions; system-wide efficiency; fuel and resource diversity; and system reliability and resiliency. The NYSPSC requested that the scope of the proceeding be sufficiently broad to address the role of distribution utilities in enabling system-wide efficiency and market-based deployment of distributed energy resources and load management; changes that can and should be made in the current regulatory, tariff, and market design and incentive structure in New York to better align utility interest with achieving the NYSPSC’s energy policy objectives; and further changes that need to be made to energy efficiency delivery including better alignment and definition of the roles and responsibilities of New York State Energy Research and Development Authority (NYSERDA) and utilities. For information about the Utilities’ participation in New York State’s clean energy programs, see “Environmental Matters – Climate Change,” below.
The Federal Energy Regulatory Commission (FERC), among other things, regulates the transmission and wholesale sales of electricity in interstate commerce and the transmission and sale of natural gas for resale in interstate commerce. In addition, the FERC has the authority to impose penalties, which could be substantial, including penalties for the violation of reliability and cyber security rules. Certain activities of the Utilities and the competitive energy businesses are subject to the jurisdiction of the FERC. The Utilities are subject to regulation by the FERC with respect to electric transmission rates and to regulation by the NYSPSC with respect to electric and gas retail commodity sales and local delivery service. As a matter of practice, the NYSPSC has approved delivery service rates that include both distribution and transmission costs. In 2013, the NYSPSC approved certain transmission projects for which it endorsed a different method. See “CECONY – Electric Operations – Electric Supply,” below.
The NYISO is a not-for-profit organization that controls and operates most of the electric transmission facilities in New York State, including those of the Utilities, as an integrated system and administers wholesale markets for electricity in New York State. In addition to operating the state’s high voltage grid, the NYISO administers the energy, ancillary services and capacity markets. The New York State Reliability Council (NYSRC) promulgates reliability standards subject to FERC oversight. Pursuant to a requirement that is set annually by the NYSRC, the NYISO requires that entities supplying electricity to customers in New York State have generating capacity (owned, procured through the NYISO capacity markets or contracted for) in an amount equal to the peak demand of their customers plus the applicable reserve margin. In addition, the NYISO has determined that entities that serve customers in New York City must have enough capacity that is electrically located in New York City to cover a substantial percentage (currently 86 percent; 85 percent effective May 2014) of the peak demands of their New York City customers. These requirements apply both to regulated utilities such as CECONY and O&R for the customers they supply under regulated tariffs and to companies such as Con Edison Solutions that supply customers on market terms. RECO, O&R’s New Jersey subsidiary, provides electric service in an area that has a different independent system operator – PJM Interconnection LLC (PJM). See “CECONY – Electric Operations – Electric Supply” and “O&R – Electric Operations – Electric Supply,” below.
In October 2012, the Energy Highway Task Force appointed by the Governor of New York issued its Blueprint containing recommendations to modernize New York’s energy systems. The recommended actions included electric transmission construction and upgrades to electric and natural gas infrastructure.
In November 2012, the NYSPSC established a proceeding to review specific proposals from utilities and private developers for new electric transmission lines and upgrades to existing facilities that will address transmission congestion between upstate and downstate. In January 2013, the owners of transmission facilities in New York (including the Utilities), on behalf of the proposed New York transmission company (New York Transco) that is to be owned by their affiliates, submitted a statement of intent to construct five transmission projects, with an aggregate estimated cost of $1,300 million. The projects, which could be completed in the 2016 to 2019 timeframe, will require authorizations from the NYSPSC (including its determination that the projects meet public policy goals), the FERC, as well as other federal, state and local agencies. In October 2013, two of these projects, with an aggregate estimated cost of approximately $200 million, were approved by the NYSPSC in a separate proceeding. See “CECONY – Electric Operations – Electric Supply,” below.
Competition from suppliers of oil and other sources of energy, including distributed generation (such as solar, fuel cells and micro-turbines), may provide alternatives for the Utilities’ delivery customers. See “Rate Plans” in Note B and “Recoverable Energy Costs” in Note A to the financial statements in Item 8.
The Utilities do not consider it reasonably likely that another company would be authorized to provide utility delivery service of electricity, natural gas or steam where the company already provides service. Any such other company would need to obtain NYSPSC consent, satisfy applicable local requirements, install facilities to provide the service, meet applicable services standards, and charge customers comparable taxes and other fees and costs imposed on the service. A new delivery company would also be subject to extensive ongoing regulation by the NYSPSC. See “Utility Regulation – State Utility Regulation – Regulators”.
The competitive energy businesses participate in competitive energy supply and services businesses and energy infrastructure projects that are subject to different risks than those found in the businesses of the Utilities.
CECONY, incorporated in New York State in 1884, is a subsidiary of Con Edison and has no significant subsidiaries of its own. Its principal business segments are its regulated electric, gas and steam businesses.
For a discussion of the company’s operating revenues and operating income for each segment, see “Results of Operations” in Item 7. For additional information about the segments, see Note N to the financial statements in Item 8.
CECONY’s capitalized costs for utility plant, net of accumulated depreciation, for distribution facilities were $14,496 million and $13,930 million at December 31, 2013 and 2012, respectively. For its transmission facilities, the costs for utility plant, net of accumulated depreciation, were $2,597 million and $2,518 million at December 31, 2013 and 2012, respectively, and for its generation facilities, the costs for utility plant, net of accumulated depreciation, were $452 million and $434 million, at December 31, 2013 and 2012, respectively.
Distribution Facilities. CECONY owns 62 area distribution substations and various distribution facilities located throughout New York City and Westchester County. At December 31, 2013, the company’s distribution system had a transformer capacity of 29,125 MVA, with 36,782 miles of overhead distribution lines and 97,120 miles of underground distribution lines. The underground distribution lines represent the single longest underground electric delivery system in the United States.
Transmission Facilities. The company’s transmission facilities are located in New York City and Westchester, Orange, Rockland, Putnam and Dutchess counties in New York State. At December 31, 2013, CECONY owned or jointly owned 438 miles of overhead circuits operating at 138, 230, 345 and 500 kV and 749 miles of underground circuits operating at 69, 138 and 345 kV. The company’s 39 transmission substations and 62 area stations are supplied by circuits operated at 69 kV and above. In 2013, the NYSPSC approved transmission projects to address, among other things, reliability concerns associated with the potential closure of the Indian Point Energy Center (which is owned by Entergy Corporation subsidiaries). See “CECONY – Electric Operations – Electric Supply,” below.
CECONY’s transmission facilities interconnect with those of National Grid, Central Hudson Gas & Electric Corporation, O&R, New York State Electric & Gas (NYSEG), Connecticut Light & Power Company, Long Island Power Authority, NYPA and Public Service Electric and Gas Company.
Generating Facilities. CECONY’s electric generating facilities consist of plants located in Manhattan with an aggregate capacity of 702 MW. The company expects to have sufficient amounts of gas and fuel oil available in 2014 for use in these facilities.
CECONY delivers electricity to its full-service customers who purchase electricity from the company. The company also delivers electricity to its customers who purchase electricity from other suppliers through the company’s retail access plan. In addition, the company delivers electricity to state and municipal customers of NYPA and economic development customers of municipal electric agencies.
The company charges all customers in its service area for the delivery of electricity. The company generally recovers, on a current basis, the cost of the electricity that it buys and then sells to its full-service customers. It does not make any margin or profit on the electricity it sells. CECONY’s electric revenues are subject to a revenue decoupling mechanism. As a result, its electric delivery revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved. CECONY’s electric sales and deliveries, excluding off-system sales, for the last five years were:
Electric Energy Delivered (millions of kWhs)
CECONY full service customers
Delivery service for retail access customers
Delivery service to NYPA customers and others
Delivery service for municipal agencies
Total Deliveries in Franchise Area
Electric Energy Delivered ($ in millions)
Other operating revenues
Average Revenue per kWh Sold (Cents)(a)
Residential
Commercial and Industrial
For further discussion of the company’s electric operating revenues and its electric results, see “Results of Operations” in Item 7. For additional segment information, see Note N to the financial statements in Item 8.
The electric peak demand in CECONY’s service area occurs during the summer air conditioning season. CECONY’s 2013 service area peak demand was 13,322 MW, which occurred on July 19, 2013. The 2013 peak demand was also the highest in the company’s history. The 2013 peak demand included an estimated 5,161 MW for CECONY’s full-service customers, 6,168 MW for customers participating in its electric retail access program and 1,993 MW for NYPA’s customers and municipal electric agency customers. The NYISO invoked demand reduction programs on July 15, 2013 through July 19, 2013, as it had on peak demand days in some previous years (most recently 2012). “Design weather” for the electric system is a standard to which the actual peak demand is adjusted for evaluation and planning purposes. Since the majority of demand reduction programs are invoked only in specific circumstances, design conditions do not include these programs’ potential impact. However, the CECONY forecasted peak demand at design conditions does include the impact of mandatory demand reduction programs. The company estimates that, under design weather conditions, the 2014 service area peak demand will be 13,675 MW, including an estimated 5,280 MW for its full-service customers, 6,345 MW for its electric retail access customers and 2,050 MW for NYPA’s customers and municipal electric agency customers. The company forecasts average annual growth of the peak electric demand in the company’s service area over the next five years at design conditions to be approximately 1.4 percent per year.
Most of the electricity sold by CECONY to its customers in 2013 was purchased under firm power contracts or through the wholesale electricity market administered by the NYISO. Con Edison expects that these resources will again be adequate to meet the requirements of its customers in 2014. The company plans to meet its continuing obligation to supply electricity to its customers through a combination of electricity purchased under contracts, purchased through the NYISO’s wholesale electricity market, or generated from its electricity generating facilities. For information about the company’s contracts for approximately 2,849 MW of electric generating capacity, see Notes I and O to the financial statements in Item 8. To reduce the volatility of its customers’ electric energy costs, the company has contracts to purchase electric energy and enters into derivative transactions to hedge the costs of a portion of its expected purchases under these contracts and through the NYISO’s wholesale electricity market.
CECONY owns generating stations in New York City associated primarily with its steam system. As of December 31, 2013, the generating stations had a combined electric capacity of approximately 702 MW, based on 2013 summer test ratings. For information about electric generating capacity owned by the company, see “Electric Operations – Electric Facilities – Generating Facilities”, above.
In general, the Utilities recover their purchased power costs, including the cost of hedging purchase prices, pursuant to rate provisions approved by the state public utility regulatory authority having jurisdiction. See “Financial and Commodity Market Risks – Commodity Price Risk,” in Item 7 and “Recoverable Energy Costs” in Note A to the financial statements in Item 8. From time to time, certain parties have petitioned the NYSPSC to review these provisions, the elimination of which could have a material adverse effect on the Companies’ financial position, results of operations or liquidity.
In a July 1998 order, the NYSPSC indicated that it “agree(s) generally that CECONY need not plan on constructing new generation as the competitive market develops,” but considers “overly broad” and did not adopt CECONY’s request for a declaration that, solely with respect to providing generating capacity, it will no longer be required to engage in long-range planning to meet potential demand and, in particular, that it will no longer have the obligation to construct new generating facilities, regardless of the market price of capacity. CECONY monitors the adequacy of the electric capacity resources and related developments in its service area, and works with other parties on long-term resource adequacy issues within the framework of the NYISO. In addition, the NYISO has adopted reliability rules that include obligations on transmission owners (such as CECONY) to construct facilities that may be needed for system reliability if the market does not solve a reliability need identified by the NYISO. See “NYISO” above.
In November 2012, the NYSPSC directed CECONY to work with NYPA to develop a contingency plan to address reliability concerns associated with the potential closure by the end of 2015 of the nuclear power plants at the Indian Point Energy Center (which is owned by Entergy Corporation subsidiaries). In February 2013, CECONY and NYPA submitted their plan, and, in October 2013, the NYSPSC approved three transmission projects and several energy efficiency, demand reduction and combined heat and power programs to address concerns associated with the potential closure. The transmission projects, which also address transmission congestion between upstate and downstate and make available more generation from Staten Island, are scheduled to be placed into service by 2016. CECONY is to develop two of the transmission projects, and NYPA and NYSEG are to develop the other project. The aggregate estimated cost of the CECONY projects is $371 million. One of these CECONY projects, with an estimated cost of $123 million, and the NYPA/NYSEG project were among the projects proposed in a separate proceeding on behalf of the New York Transco. See “New York Energy Highway” above. The two CECONY projects and the NYPA/NYSEG project are expected to be transferred to the proposed New York Transco. The NYSPSC also endorsed the method by which the costs associated with the projects will be allocated among load serving entities and a cost recovery mechanism will be filed for approval with the FERC. Additional authorizations will be required from the NYSPSC, FERC and other Federal, state and local agencies. In February 2014, CECONY submitted to the NYSPSC the implementation plan for the energy efficiency, demand reduction and combined heat and power programs, which are estimated to cost up to $285 million. CECONY is to fund the program costs, the majority of which are expected to be incurred from 2014 through 2016, and recover its costs over a ten-year period through a surcharge billed to customers.
In 2009, the then Governor of New York announced a new goal of meeting 45 percent of the State’s electricity needs with energy efficiency or renewable resources by 2015. The goal is to be achieved by reducing electricity consumption by 15 percent, and having 30 percent of the electricity used in New York provided by renewable resources. For information about the Utilities’ participation in New York State’s clean energy programs, see “Environmental Matters – Climate Change,” below.
CECONY’s capitalized costs for utility plant, net of accumulated depreciation, for gas facilities, which are primarily distribution facilities, were $4,013 million and $3,735 million at December 31, 2013 and 2012, respectively.
Natural gas is delivered by pipeline to CECONY at various points in its service territory and is distributed to customers by the company through an estimated 4,307 miles of mains and 367,555 service lines. The company owns a natural gas liquefaction facility and storage tank at its Astoria property in Queens, New York. The plant can store approximately 1,000 mdths of which a maximum of about 250 mdths can be withdrawn per day. The company has about 1,226 mdths of additional natural gas storage capacity at a field in upstate New York, owned and operated by Honeoye Storage Corporation, a corporation 28.8 percent owned by CECONY and 71.2 percent owned by Con Edison Development.
The company generally recovers the cost of the gas that it buys and then sells to its firm sales customers. It does not make any margin or profit on the gas it sells. CECONY’s gas revenues are subject to a weather normalization clause and a revenue decoupling mechanism. As a result, its gas delivery revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved.
CECONY’s gas sales and deliveries for the last five years were:
Gas Delivered (mdth)
Firm Sales
Full service
Firm transportation
Total Firm Sales and Transportation
Interruptible Sales(a)
Total Gas Sold to CECONY Customers
Transportation of customer-owned gas
Other (mainly generating plants)
Off-System Sales
Total Sales and Transportation
(a) Includes 5,362, 563, 3,801, 3,385 and 2,851 mdths for 2013, 2012, 2011, 2010 and 2009, respectively, which are also reflected in firm transportation and other.
Gas Delivered ($ in millions)
Interruptible Sales
Other (mainly generating plants and interruptible transportation)
Other operating revenues (mainly regulatory amortizations)
Average Revenue per dth Sold
General
For further discussion of the company’s gas operating revenues and its gas results, see “Results of Operations” in Item 7. For additional segment information, see Note N to the financial statements in Item 8.
The gas peak demand for firm service customers in CECONY’s service area occurs during the winter heating season. The daily peak day demand during the winter 2013/2014 (through January 31, 2014) occurred on January 7, 2014 when the demand reached 1,104 mdths. The 2013/2014 peak demand included 574 mdths for CECONY’s full-service customers and 530 mdths for customers participating in its gas retail access program. “Design weather” for the gas system is a standard to which the actual peak demand is adjusted for evaluation and planning purposes. The company estimates that, under design weather conditions, the 2014/2015 service area peak demand will be 1,340 mdths, including an estimated 699 mdths for its full-service customers and 641 mdths for its retail access customers. The company forecasts average annual growth of the peak gas demand over the next five years at design conditions to be approximately 3.8 percent in its service area. The forecasted peak demand at design conditions does not include gas used by interruptible gas customers or in generating stations (electricity and steam).
CECONY and O&R have combined their gas requirements, and contracts to meet those requirements, into a single portfolio.
The combined portfolio is administered by, and related management services are provided by, CECONY (for itself and as agent for O&R) and costs are allocated between the Utilities in accordance with provisions approved by the NYSPSC. See Note S to the financial statements in Item 8.
Charges from suppliers for the firm purchase of gas, which are based on formulas or indexes or are subject to negotiation, are generally designed to approximate market prices. The gas supply contracts are for various terms extending to 2015. The Utilities have contracts with interstate pipeline companies for the purchase of firm transportation from upstream points where gas has been purchased to the Utilities’ distribution systems, and for upstream storage services. Charges under these transportation and storage contracts are approved by the FERC. Such contracts are for various terms extending to 2027. The Utilities are required to pay certain fixed charges under the supply, transportation and storage contracts whether or not the contracted capacity is actually used. These fixed charges amounted to approximately $270 million in 2013, including $230 million for CECONY. See “Contractual Obligations” below. In addition, the Utilities purchase gas on the spot market and contract for interruptible gas transportation. See “Recoverable Energy Costs” in Note A to the financial statements in Item 8.
CECONY’s capitalized costs for utility plant, net of accumulated depreciation for steam facilities were $1,790 million and $1,674 million at December 31, 2013 and 2012, respectively.
CECONY generates steam at one steam-electric generating station and five steam-only generating stations and distributes steam to its customers through approximately 105 miles of transmission, distribution, and service piping.
CECONY’s steam sales and deliveries for the last five years were:
Steam Sold (MMlbs)
Apartment house
Annual power
Total Steam Delivered to CECONY Customers
Steam Sold ($ in millions)
Average Revenue per Mlb Sold
For further discussion of the company’s steam operating revenues and its steam results, see “Results of Operations” in Item 7. For additional segment information, see Note N to the financial statements in Item 8.
Demand for steam in CECONY’s service area peaks during the winter heating season. The one-hour peak demand during the winter of 2013/2014 (through January 31, 2014) occurred on January 23, 2014 when the demand reached 8.9 MMlbs per hour. The company’s estimate for the winter of 2014/2015 peak demand of its steam customers is 9.3 MMlbs per hour under design criteria, which assumes severe weather.
On December 31, 2013, the steam system had the capability of delivering approximately 11.7 MMlbs of steam per hour, and CECONY estimates that the system will have the capability to deliver 11.7 MMlbs of steam per hour in the 2014/2015 winter.
Thirty-six percent of the steam produced by CECONY in 2013 was supplied by the company’s steam-only generating assets; 47 percent was produced by the company’s steam-electric generating assets, where steam and electricity are primarily cogenerated; and 17 percent was purchased under an agreement with Brooklyn Navy Yard Cogeneration Partners L.P.
O&R’s capitalized costs for utility plant, net of accumulated depreciation, for distribution facilities were $781 million and
$728 million at December 31, 2013 and 2012, respectively. For its transmission facilities, the costs for utility plant, net of accumulated depreciation, were $179 million and $180 million at December 31, 2013 and 2012, respectively.
O&R, RECO and Pike, own, in whole or in part, transmission and distribution facilities which include 557 circuit miles of transmission lines, 14 transmission substations, 61 distribution substations, 85,986 in-service line transformers, 3,828 pole miles of overhead distribution lines and 1,827 miles of underground distribution lines. O&R’s transmission system is part of the NYISO system except that portions of RECO’s system are located within the transmission area controlled by PJM.
O&R generally recovers, on a current basis, the cost of the electricity that it buys and then sells to its full-service customers. It does not make any margin or profit on the electricity it sells. O&R’s New York electric revenues (which accounted for 74.3 percent of O&R’s electric revenues in 2013) are subject to a revenue decoupling mechanism. As a result, O&R’s New York electric delivery revenues are generally not 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. O&R’s electric sales and deliveries, excluding off-system sales for the last five years were:
Total deliveries to O&R full service customers
Total Deliveries In Franchise Area
Average Revenue Per kWh Sold (Cents)
The electric peak demand in O&R’s service area occurs during the summer air conditioning season. O&R’s highest service area peak demand, which occurred in 2006, was 1,617 MW. The 2013 service area peak demand, which occurred on July 18, 2013, was 1,561 MW. The 2013 peak demand included an estimated 702 MW for O&R’s full-service customers and 859 MW for customers participating in its electric retail access program. The NYISO invoked demand reduction programs on July 18, 2013, as it had on peak demand days in some previous years. “Design weather” for the electric system is a standard to which the actual peak demand is adjusted for evaluation and planning purposes. Since the majority of demand reduction programs are invoked only in specific circumstances, design conditions do not include these programs’ potential impact. However, the O&R forecasted peak demand at design conditions does include the impact of permanent demand reduction programs. The company estimates that, under design weather conditions, the 2014 service area peak demand will be 1,630 MW, including an estimated 701 MW for its full-service customers and 929 MW for its electric retail access customers. The company forecasts average annual growth of the peak electric demand in the company’s service area over the next five years at design conditions to be approximately 0.9 percent per year.
The electricity O&R sold to its customers in 2013 was purchased under firm power contracts or through the wholesale electricity markets administered by the NYISO and PJM. The company expects that these resources will again be adequate to meet the requirements of its customers in 2014. O&R does not own any electric generating capacity.
O&R’s capitalized costs for utility plant, net of accumulated depreciation for gas facilities, which are primarily distribution
facilities, were $456 million and $435 million at December 31, 2013 and 2012, respectively. O&R and Pike own their gas distribution systems and O&R owns a gas transmission system, which together include 1,862 miles of mains. Natural gas is delivered to customers by the company through an estimated 104,713 service lines.
O&R generally recovers the cost of the gas that it buys and then sells to its firm sales customers. It does not make any margin or profit on the gas it sells. O&R’s gas revenues are subject to a weather normalization clause. Effective November 2009, O&R’s New York gas revenues (which accounted for substantially all of O&R’s gas revenues in 2013) became subject to a revenue decoupling mechanism. As a result, its gas delivery revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved. O&R’s gas deliveries and sales for the last five years were:
Gas delivered (mdth)
Total Gas Sold To O&R Customers
Interruptible transportation
Sales for resale
Sales to electric generating stations
Gas delivered ($ in millions)
Average Revenue Per dth Sold
The gas peak demand for firm service customers in O&R’s service area occurs during the winter heating season. The daily peak day demand during the winter 2013/2014 (through January 31, 2014) occurred on January 7, 2014 when the demand reached 202 mdths. The 2013/2014 peak demand included an estimated 92 mdths for O&R’s full-service customers and 110 mdths for customers participating in its gas retail access program. “Design weather” for the gas system is a standard to which the actual peak demand is adjusted for evaluation and planning purposes. The company estimates that, under design weather conditions, the 2014/2015 service area peak demand will be 218 mdths, including an estimated 100 mdths for its full-service customers and 118 mdths for its retail access customers. The company forecasts average annual growth of the peak gas demand over the next five years at design conditions to be approximately 0.7 percent in the
company’s service area. The forecasted peak demand at design conditions does not include gas used by interruptible gas customers or in generating stations.
O&R and CECONY have combined their gas requirements and purchase contracts to meet those requirements into a single portfolio. See “CECONY – Gas Operations – Gas Supply” above.
Con Edison Solutions primarily sells electricity to industrial, commercial and governmental customers in the northeastern United States and Texas. It also sells electricity to residential and small commercial customers in the northeastern United States. Con Edison Solutions does not sell electricity to the Utilities. Con Edison Solutions sells electricity to customers who are provided delivery service by the Utilities. It also provides energy efficiency services, procurement and management services to companies and governmental entities throughout most of the United States.
Con Edison Solutions was reported by KEMA, Inc. in September 2013 to be the 10th largest non-residential retail electricity provider in the United States. The company sells to retail aggregation entities in Massachusetts, Illinois, and New Jersey as well as to individual residential and small commercial (mass market) customers in the northeastern United States. At December 31, 2013, it served approximately 159,000 customers, not including approximately 148,000 served under the four aggregation agreements. Con Edison Solutions’ electricity sales for the last five years were:
Retail electric volumes sold (millions of kWhs)
Number of retail customers accounts:(a)
Industrial and large commercial
Mass market
Con Edison Solutions seeks to serve customers in utility service territories that encourage retail competition through transparent pricing, purchase of receivables programs or utility-sponsored customer acquisition programs. The company currently sells electricity in the service territories of 50 utilities in the states of New York, Massachusetts, Connecticut, New Hampshire, Maine, New Jersey, Delaware, Maryland, Illinois, Pennsylvania, Rhode Island, Ohio and Texas, as well as the District of Columbia. Approximately 28 percent of the sales volumes were in New York, 28 percent in New England, 35 percent in the District of Columbia, Maryland, New Jersey and Pennsylvania and 9 percent in Texas.
The electricity Con Edison Solutions sold to its customers in 2013 was purchased primarily through wholesale electricity markets administered by the NYISO, PJM, Independent System Operator New England and Electric Reliability Council of Texas. The company expects that these resources will again be adequate to meet the requirements of its customers in 2014. Con Edison Energy provides hedging and risk management services to Con Edison Solutions.
Con Edison Solutions also provides energy-efficiency services to government and commercial customers. The services include the design and installation of lighting retrofits, high-efficiency heating, ventilating and air conditioning equipment and other energy saving technologies. The company is compensated for its services based primarily on the increased energy efficiency of the installed equipment over a multi-year period. Con Edison Solutions has won competitive solicitations for energy savings contracts with the Department of Energy and the Department of Defense, and a shared energy savings contract with the United States Postal Service. The company owns renewable energy projects predominately in Massachusetts and California with an aggregate capacity of 18 MW (AC).
Con Edison Energy provides services to manage the output, fuel requirements and risk management activities for 12,153 MW of generating plants in the northeastern United States owned by unrelated parties. Among other things, the company also provides wholesale hedging and risk management services to Con Edison Solutions and Con Edison Development. The company, beginning during 2013, no longer engages in the sale of electricity to utilities. The company had sold electricity that it had purchased in wholesale markets to utilities in the northeastern United States, primarily under fixed and indexed price contracts, which they used to supply their full-service customers.
Wholesale electricity sales (millions of kWh)
Con Edison Development participates in energy infrastructure projects. The company’s investments, at December 31, 2013, include ownership interests in solar energy projects in Arizona, California, Massachusetts, Nevada, New Jersey, Pennsylvania and Rhode Island. The company’s interests in these projects amount to 292 MW (see table below). The company has additional solar energy projects under construction with an aggregate capacity of 20 MW. The company’s investments also include a gas storage corporation (see “CECONY – Gas Operations – Gas Facilities,” above) and an investment in an affordable housing partnership.
Solar Energy Projects (in MW (AC))
Arizona
California
Massachusetts
Nevada
New Jersey
Pennsylvania
Rhode Island
Total
Capital Requirements
The following table contains the Companies’ capital requirements for the years 2011 through 2013 and their current estimate of amounts for 2014 through 2016.
Regulated utility construction expenditures(a)
CECONY(b)(c)
Total regulated utility construction expenditures
Competitive energy businesses capital expenditures
Sub-total
Retirement of long-term securities
Con Edison – parent company
CECONY(d)
Competitive energy businesses
Total retirement of long-term securities
The Utilities have an ongoing need for substantial capital investment in order to meet the growth in demand for electricity and gas, and for electric, gas and steam reliability needs, including programs to strengthen the storm resiliency of their infrastructure. The estimated capital expenditures for the competitive energy businesses reflect potential investments in renewable generation and energy infrastructure projects and could significantly increase or decrease from the amounts estimated depending on market conditions and opportunities.
Contractual Obligations
The following table summarizes the Companies’ material obligations at December 31, 2013 to make payments pursuant to contracts. Long-term debt, capital lease obligations and other long-term liabilities are included on their balance sheets. Operating leases and electricity purchase agreements (for which undiscounted future annual payments are shown) are described in the notes to the financial statements.
Long-term debt (Statement of Capitalization)
Competitive energy businesses and parent
Interest on long-term debt(a)
Total long-term debt, including interest
Capital lease obligations (Note J)
Total capital lease obligations
Operating leases (Notes J and Q)
Total operating leases
Purchase obligations
Electricity purchase power agreements – Utilities (Note I)
Energy(b)
Capacity
Total CECONY
Energy and Capacity(b)
Total electricity and purchase power agreements – Utilities
Natural gas supply, transportation, and storage contracts – Utilities(c)
Natural gas supply
Transportation and storage
Total O&R
Total natural gas supply, transportation and storage contracts
Other purchase obligations(d)
Total other purchase obligations
Competitive energy businesses commodity and service agreements(e)
The Companies’ commitments to make payments in addition to these contractual commitments include their other liabilities reflected in their balance sheets, any funding obligations for their pension and other postretirement benefit plans, financial hedging activities, their collective bargaining agreements and Con Edison’s guarantees of certain obligations of its competitive energy businesses. See Notes E, F, O and “Guarantees” in Note H to the financial statements in Item 8.
Capital Resources
Con Edison is a holding company that operates only through its subsidiaries and has no material assets other than its interests in its subsidiaries. Con Edison expects to finance its capital requirements primarily through internally-generated funds and the sale of its securities. The company does not expect to need to issue common equity in 2014. Con Edison’s ability to make payments on external borrowings and dividends on its common shares depends on receipt of dividends from its subsidiaries or proceeds from the sale of Con Edison’s securities or its interests in its subsidiaries.
For information about restrictions on the payment of dividends by the Utilities and significant debt covenants, see Note C to the financial statements in Item 8.
For information on the Companies’ commercial paper program and revolving credit agreements with banks, see Note D to the financial statements in Item 8.
The Utilities finance their operations, capital requirements and payment of dividends to Con Edison from internally-generated funds (see “Liquidity and Capital Resources – Cash Flows from Operating Activities” in Item 7), contributions of equity capital from Con Edison, if any, and external borrowings.
The Companies expect to meet their 2014 capital requirements, including for maturing securities, through internally-generated funds and the issuance of between $1,500 million and $2,000 million of long-term debt.
The Companies require access to the capital markets to fund capital requirements that are substantially in excess of available internally-generated funds. See “Capital Requirements,” above. Each of the Companies believes that it will continue to be able to access capital, although capital market conditions may affect the timing and cost of the Companies’ financing activities. The Companies monitor the availability and costs of various forms of capital, and will seek to issue Con Edison common stock and other securities when it is necessary or advantageous to do so. For information about the Companies’ long-term debt and short-term borrowing, see Notes C and D to the financial statements in Item 8.
In 2012, the NYSPSC authorized CECONY, through 2016, to issue up to $3,500 million of debt securities ($700 million of which the company had issued as of December 31, 2013). In 2013, the NYSPSC authorized O&R, through 2017, to issue up to $305 million of debt securities (none of which the company had issued as of December 31, 2013). The NYSPSC also authorized CECONY and O&R for such periods to issue up to $2,500 million and $125 million, respectively, of debt securities to refund existing debt securities. At December 31, 2013, the Utilities had not refunded any securities pursuant to this authorization.
Con Edison’s competitive energy businesses have financed their operations and capital requirements primarily with capital contributions and borrowings from Con Edison, internally-generated funds and external borrowings. 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.
For each of the Companies, the ratio of earnings to fixed charges (SEC basis) for the last five years was:
For each of the Companies, the common equity ratio for the last five years was:
The commercial paper of Con Edison and O&R is rated P-2, A-2 and F2, respectively, by Moody’s, S&P and Fitch. The commercial paper of CECONY is rated P-1, A-2 and F2, respectively, by Moody’s, S&P and Fitch. Con Edison’s long-term credit rating is A3, BBB+ and BBB+, respectively, by Moody’s, S&P and Fitch. The unsecured debt of CECONY is
rated A2, A- and A-, respectively, by Moody’s, S&P and Fitch. The unsecured debt of O&R is rated A3, A- and A-, respectively, by Moody’s, S&P and Fitch. Securities ratings assigned by rating organizations are expressions of opinion and are not recommendations to buy, sell or hold securities. A securities rating is subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.
CECONY has $636 million of tax-exempt debt for which the interest rates are to be determined pursuant to periodic auctions. Of this amount, $391 million is insured by Ambac Assurance Corporation and $245 million is insured by Syncora Guarantee Inc. (formerly XL Capital Assurance Inc.). Credit rating agencies have withdrawn the ratings of these insurers. Subsequently, there have not been sufficient bids to determine the interest rates pursuant to auctions, and interest rates have been determined by reference to a variable rate index. The weighted average annual interest rate on this tax-exempt debt was 0.10 percent on December 31, 2013. The weighted average interest rate was 0.17 percent, 0.29 percent and 0.34 percent for the years 2013, 2012 and 2011, respectively. Under CECONY’s current electric, gas and steam rate plans, variations in auction rate debt interest expense are reconciled to the levels set in rates.
As indicated by the Intergovernmental Panel on Climate Change, emissions of greenhouse gases, including carbon dioxide, are very likely changing the world’s climate.
Climate change could affect customer demand for the Companies’ energy services. The effects of climate change might also include physical damage to the Companies’ facilities and disruption of their operations due to the impact of more frequent and more extreme weather-related events. In late October 2012, Superstorm Sandy caused extensive damage to the Utilities’ electric distribution system. Superstorm Sandy interrupted service to approximately 1.4 million of the Utilities’ customers – more than four times the number of customers impacted by the Utilities’ previous worst storm event (Hurricane Irene in 2011). See “Other Regulatory Matters” in Note B to the financial statements in Item 8.
Based on the most recent data (2013) published by the U.S. Environmental Protection Agency (EPA), Con Edison estimates that its direct greenhouse gas emissions constitute less than 0.1 percent of the nation’s greenhouse gas emissions. Con Edison’s estimated emissions of greenhouse gases during the past five years were:
CO2 equivalent emissions
Con Edison’s 44 percent decrease in direct greenhouse gas emissions since 2005 (6.0 million metric tons) reflects the emission reductions resulting from equipment and repair projects, including projects to reduce sulfur hexafluoride emissions, and increased use of natural gas at CECONY’s steam production facilities.
CECONY has participated for several years in voluntary initiatives with the EPA to reduce its methane and sulfur hexafluoride emissions. The Utilities reduce methane emissions from the operation of their gas distribution systems through pipe maintenance and replacement programs, by operating system components at lower pressure, and by introducing new technologies. The Utilities reduce emissions of sulfur hexafluoride, which is used for arc suppression in substation circuit breakers and switches, by using improved technologies to locate and repair leaks, and by replacing older equipment. The Utilities also actively promote the use of energy efficiency and renewable generation to further reduce their customers’ greenhouse gas emissions.
NYSERDA and New York utilities are responsible for implementing the Energy Efficiency Portfolio Standard (EEPS) established by the NYSPSC through energy efficiency, targeted demand-side management and demand-response programs. The Utilities billed customers EEPS surcharges of approximately $100 million and $90 million in 2013 and 2012, respectively, to fund these programs. Through the Utilities’ energy-efficiency programs, end-use customers reduced their annual energy use by approximately 585,000 MWh and 750,000 dths from the programs’ inception in 2009 through 2013, resulting in their avoiding their release of approximately 247,000 tons of greenhouse gases into the atmosphere every year. CECONY’s targeted demand-side management programs assisted customers in reducing their annual energy use by approximately 281,000 MWh from the programs’ inception in 2004 through 2013, resulting in their avoiding their release of approximately 99,000 tons of greenhouse gases into the atmosphere every year.
Emissions are also avoided through the development of renewable generation. NYSERDA is responsible for implementing the renewable portfolio standard (RPS) established by the NYSPSC. For large renewable resources, NYSERDA enters into long-term agreements with developers, and pays the developers renewable premiums based on the facilities’ energy output. Large renewable resources are grid-connected and sell their energy output in the wholesale energy market administered by the NYISO. As a result of the Utilities’ participation in the NYISO wholesale markets, a portion of the Utilities’ NYISO energy purchases are sourced from renewable resources. For customer-sited resources, NYSERDA provides rebates when customers install eligible renewable technologies. The energy produced by customer-sited renewables offsets the energy which the Utilities would otherwise have procured, thereby reducing the overall level of non-renewable energy consumed.
The Utilities billed customers RPS surcharges of $109 million and $92 million in 2013 and 2012, respectively, (and approximately $365 million cumulatively from 2006) to fund these NYSERDA programs. In 2013, NYSERDA reported that the environmental benefits of having electricity generated by renewable generation from 2006 through 2012, as opposed to the State’s “system-mix,” amounts to approximately 4,028 tons of nitrogen oxides, 8,853 tons of sulfur dioxides, and 4.1 million tons of carbon dioxide in reduced emissions over this time period.
Beginning in 2009, CECONY is subject to carbon dioxide emissions regulations established by New York State under the Regional Greenhouse Gas Initiative (RGGI). The Initiative, a cooperative effort by Northeastern and Mid-Atlantic states, established a decreasing cap on carbon dioxide emissions resulting from the generation of electricity to a level fifteen percent below the Initiative’s baseline by 2020. Under the Initiative, affected electric generators are required to obtain emission allowances to cover their carbon dioxide emissions, available primarily through auctions administered by participating states or a secondary market. CECONY met its requirement of 6.3 million allowances for the first RGGI compliance period (2009—2011) and is managing auction purchases in preparation for complying with the second compliance period (2012—2014). In February 2013, RGGI released a model rule for adoption by the participating states that includes a 45 percent reduction in the emissions cap for 2014 and further reductions of 2.5 percent each year from 2015 to 2020. New York State adopted the model rule, and the lower, 91-million ton cap is effective as of January 1, 2014.
The EPA has started regulating greenhouse gas emissions from major sources, requiring existing sources to report emissions and subjecting certain new sources to emissions limitations. Also, New York State has announced a goal to reduce greenhouse gas emissions 80 percent below 1990 levels by 2050, and New York City plans to reduce greenhouse gas emissions within the City 30 percent below 2005 levels by 2030. The cost to comply with legislation, regulations or initiatives limiting the Companies’ greenhouse gas emissions could be substantial.
Con Edison’s sustainability strategy, as it relates to environmental sustainability, provides that the company seeks to reduce its environmental footprint by making effective use of natural resources and to address the challenges of climate change and its impact on the company’s business. As part of its strategy, the company seeks, among other things, to reduce direct and indirect emissions; enhance the efficiency of its water use; minimize its impact to natural ecosystems; focus on reducing, reusing, and recycling to minimize consumption; and design its work in consideration of climate forecasts.
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 costs, remediation costs and environmental damages. The sites as to which CECONY has been asserted to have liability under Superfund include its and its predecessor companies’ former manufactured gas sites, its multi-purpose Astoria site, its former Flushing Service Center site, the Gowanus Canal site, and other Superfund sites discussed below. There may be additional sites as to which assertions will be made that the Company has liability. For a further discussion of claims and possible claims against the Company under Superfund, estimated liability accrued for Superfund claims and recovery from customers of site investigation and remediation costs, see Note G to the financial statements in Item 8 (which information is incorporated herein by reference).
Manufactured Gas Sites
CECONY and its predecessors formerly manufactured gas and maintained storage holders for gas manufactured at sites in New York City and Westchester County (MGP Sites). Many of these sites have been subdivided and are now owned by parties other than CECONY and have been redeveloped by them for other uses, including schools, residential and commercial developments and hospitals. The New York State Department of Environmental Conservation (NYSDEC) requires the company to investigate, and if necessary, develop and implement remediation programs for the sites, which include 34 manufactured gas plant sites and 17 storage holder sites and any neighboring areas to which contamination may have migrated.
The information available to CECONY for many of the MGP Sites is incomplete as to the extent of contamination and scope of the remediation likely to be required. Through the end of 2013, investigations have been started for all 51 MGP Sites, and have been completed at all or portions of 32 of the sites. Coal tar and/or other manufactured gas production/storage-related environmental contaminants have been detected at 35 sites including locations within Manhattan and other parts of New York City, and in Westchester County. Remediation has been completed at six sites and portions of nine other sites.
Astoria Site
CECONY is permitted by the NYSDEC to operate a hazardous waste storage facility on property the company owns in the Astoria section of Queens, New York. Portions of the property were formerly the location of a manufactured gas plant and also have been used or are being used for, among other things, electric generation operations, electric substation operations, the storage of fuel oil and liquefied natural gas, and the maintenance and storage of electric equipment. As a condition of its NYSDEC
permit, the company is required to investigate the property and, where environmental contamination is found and action is necessary, to conduct corrective action to remediate the contamination. The company has investigated various sections of the property and is performing additional investigations. The company has submitted to the NYSDEC and the New York State Department of Health reports and in the future will be submitting additional reports identifying the known areas of contamination. The company estimates that its undiscounted potential liability for the completion of the site investigation and cleanup of the known contamination on the property could range from $152 million to $451 million.
Flushing Service Center Site
The owner of a former CECONY service center facility in Flushing, New York, informed the company that PCB contamination had been detected on a substantial portion of the property, which the owner remediated pursuant to the New York State Brownfield Cleanup Program administered by the NYSDEC and has redeveloped for residential and commercial use. The property owner’s claim against the company for its environmental response costs for the site has been resolved. In September 2007, the NYSDEC demanded that the company investigate and remediate PCB contamination that may have migrated into the adjacent Flushing River from the site. In April 2008, the company and NYSDEC entered into a consent order under which the company has agreed to implement a NYSDEC-approved investigation program for the Flushing River and, if deemed necessary by the NYSDEC to protect human health and the environment from such contamination, to implement a NYSDEC-approved remediation program for any PCB contamination in the river attributable to the site. In March 2011, the company submitted to NYSDEC a report indicating that PCBs had migrated from the site to sediment in a portion of the river. In August 2013, the NYSDEC selected a remedy that requires the company to submit a remedial design report, remove contaminated sediment, restore the river bed with clean material, prepare a site management plan and implement institutional controls. The company estimates that its undiscounted potential liability for the completion of the cleanup in Flushing River will be at least $5.4 million.
Gowanus Canal
In August 2009, CECONY received a notice of potential liability and request for information from the EPA about the operations of the company and its predecessors at sites adjacent or near the 1.8 mile Gowanus Canal in Brooklyn, New York. In March 2010, the EPA added the Gowanus Canal to its National Priorities List of Superfund sites. The canal’s adjacent waterfront is primarily commercial and industrial, currently consisting of concrete plants, warehouses, and parking lots, and the canal is near several residential neighborhoods. In September 2013, the EPA issued its record of decision for the site. The EPA concluded that there was significant contamination at the site, including polycyclic aromatic hydrocarbons, polychlorinated biphenyls (PCBs), pesticides, metals, and volatile organic compounds. The EPA selected a remedy for the site that includes dredging and disposal of some contaminated sediments and stabilization and capping of contamination that will not be removed. The EPA estimated the cost of the selected remedy to be $506.1 million (and indicated the actual cost could be significantly higher or lower). The EPA has identified 35 potentially responsible parties (PRPs) with respect to the site, including CECONY (which the EPA indicated has facilities that may be a source of PCBs at the site). The EPA is expected to order certain of the PRPs, including CECONY, to coordinate and cooperate with each other to perform and/or fund the remedial design for the selected remedy. CECONY is unable to predict its exposure to liability with respect to the Gowanus Canal site.
Other Superfund Sites
CECONY is a potentially responsible party (PRP) with respect to other Superfund sites where there are other PRPs and where it is generally not responsible for managing the site investigation and remediation. Work at these sites is in various stages, with the company participating in PRP groups at some of the sites. Investigation, remediation and monitoring at some of these sites have been, and are expected to continue to be, conducted over extended periods of time. The company does not believe that it is reasonably likely that monetary sanctions, such as penalties, will be imposed upon it by any governmental authority with respect to these sites.
The following table lists each of CECONY’s other Superfund sites for which the company anticipates it may have a liability. The table also shows for each such site, its location, the year in which the company was designated or alleged to be a PRP or to otherwise have responsibilities with respect to the site (shown in the table under “Start”), the name of the court or agency in which proceedings with respect to the site are pending and CECONY’s estimated percentage of total liability for each site. The company currently estimates that its potential liability for investigation, remediation, monitoring and environmental damages at each site is $0.2 million or less, with the exception of the Cortese Landfill site for which the estimate is $1 million. Superfund liability is joint and several. The company’s estimate of its liability for each site was determined pursuant to consent decrees, settlement agreements or otherwise and in light of the financial condition of other PRPs. The company’s actual liability could differ substantially from amounts estimated.
Maxey Flats Nuclear
Curcio Scrap Metal
Metal Bank of America
Cortese Landfill
Global Landfill
Borne Chemical
The sites at which O&R has been asserted to have liability under Superfund include its manufactured gas sites and the Superfund sites discussed below. There may be additional sites as to which assertions will be made that O&R has liability. For a further discussion of claims and possible claims against O&R under Superfund, see Note G to the financial statements in Item 8 (which information is incorporated herein by reference).
O&R and its predecessors formerly owned and operated manufactured gas plants at seven sites (O&R MGP Sites) in Orange County and Rockland County, New York. Three of these sites are now owned by parties other than O&R, and have been redeveloped by them for residential, commercial or industrial uses. The NYSDEC is requiring O&R to develop and implement remediation programs for the O&R MGP Sites including any neighboring areas to which contamination may have migrated.
O&R has completed remedial investigations at all seven O&R MGP Sites and has received NYSDEC’s decision regarding the remedial work to be performed at five of the sites. Of the five sites, O&R has completed remediation at one site, remediation work is in process at two sites and remedial design is ongoing for the remaining two sites.
Superfund Sites
O&R is a PRP with respect to Superfund sites where there are other PRPs and it is not managing the site investigation and remediation. Work at these sites is in various stages, with the company participating in PRP groups at some of the sites. Investigation, remediation and monitoring at some of these sites have been, and are expected to continue to be, conducted over extended periods of time. The company does not believe that it is reasonably likely that monetary sanctions, such as penalties, will be imposed upon it by any governmental authority with respect to these sites.
The following table lists each of these Superfund sites for which the company anticipates it may have liability. The table also shows for each such site, its location, the year in which the company was designated or alleged to be a PRP or to otherwise have responsibilities with respect to the site (shown in the table under “Start”), the name of the court or agency in which proceedings with respect to the site are pending and O&R’s estimated percentage of total liability for each site. The company currently estimates that its potential liability for investigation, remediation, monitoring and environmental damages at each site is less than $0.3 million. Superfund liability is joint and several. The company’s estimate of its anticipated share of the total liability for each site was determined pursuant to consent decrees, settlement agreements or otherwise and in light of the financial condition of other PRPs. The company’s actual liability could differ substantially from amounts estimated.
Ellis Road
Toxic Substances Control Act
Virtually all electric utilities, including CECONY, own equipment containing PCBs. PCBs are regulated under the Federal Toxic Substances Control Act of 1976.
Water Quality
Under NYSDEC regulations, the operation of the CECONY generating facilities require permits for water discharges. Regulations that became effective in 2013 require permits for water withdrawals. Conditions to the renewal of such permits may include limitations on the operations of the permitted facility or requirements to install certain equipment, the cost of which could be substantial. For information about the company’s generating facilities, see “CECONY – Electric Operations – Electric Facilities” and “Steam Operations – Steam Facilities” above in this Item 1.
Certain governmental authorities are investigating contamination in the Hudson River and the New York Harbor. These waters run through portions of CECONY’s service area. Governmental authorities could require entities that released hazardous substances that contaminated these waters to bear the cost of investigation and remediation, which could be substantial.
Air Quality
Under new source review regulations, an owner of a large generating facility, including CECONY’s steam and steam-electric generating facilities, is required to obtain a permit before making modifications to the facility, other than routine maintenance, repair, or replacement, that increase emissions of pollutants from the facility above specified thresholds. To obtain a permit, the facility owner could be required to install additional pollution controls or otherwise limit emissions from the facility. The company reviews on an on-going basis its planned modifications to its generating facilities to determine the potential applicability of new source review and similar regulations. In December 2011, the company filed its proposed plan to comply with revised New York State nitrogen oxides reasonably available control technology regulations (NOx RACT) and is incorporating the plan provisions into its existing air quality permits as they are renewed. In 2011, the EPA adopted regulations establishing maximum achievable control technology standards for utility and industrial boilers. The regulations apply to major air emissions sources, including CECONY’s generating facilities. In 2013, CECONY complied with these regulations and the regulations
known as the Clean Air Interstate Rule (CAIR) largely through the modification of certain of its generating facilities which enables the facilities to increase the use of natural gas, decreasing the use of fuel oil. In 2011, the EPA also adopted additional regulations known as the Cross State Air Pollution Rule (CSAPR), which established a new cap and trade program requiring further reductions in air emissions than CAIR (which CSAPR was to have replaced). In August 2012, CSAPR was overturned by an appellate court. The EPA subsequently appealed to the U.S. Supreme Court, which heard oral arguments in the case in December 2013. CAIR will remain in effect pending further action by the EPA and the U.S. Supreme Court. For information about the company’s generating facilities, see “CECONY– Electric Operations – Electric Facilities” and “Steam Operations – Steam Facilities” above in this Item 1. The company is unable to predict the impact on its operations of any regulations that may be adopted to replace CSAPR or the additional costs, which could be substantial, it could incur to comply with any such regulations.
New York State law provides that a “domestic corporation,” such as Con Edison, may not consummate a merger, consolidation or similar transaction with the beneficial owner of a 20 percent or greater voting stock interest in the corporation, or with an affiliate of the owner, for five years after the acquisition of the voting stock interest, unless the transaction or the acquisition of the voting stock interest was approved by the corporation’s board of directors prior to the acquisition of the voting stock interest. After the expiration of the five-year period, the transaction may be consummated only pursuant to a stringent “fair price” formula or with the approval of a majority of the disinterested stockholders.
Con Edison has no employees other than those of CECONY, O&R and Con Edison’s competitive energy businesses (which at December 31, 2013 had 13,235, 1,114 and 299 employees, respectively). Of the 13,235 CECONY employees and 1,114 O&R employees, 8,200 and 618 were represented by a collective bargaining unit, respectively. The collective bargaining agreement covering most of these CECONY employees expires in June 2016. Agreements covering other CECONY employees and O&R employees expire in June 2017 and June 2014, respectively.
For the sources of information about the Companies, see “Available Information” in the “Introduction” appearing before this Item 1.
Information in any item of this report as to which reference is made in this Item 1A is incorporated by reference herein. The use of such terms as “see” or “refer to” shall be deemed to incorporate at the place such term is used the information to which such reference is made.
The Companies’ businesses are influenced by many factors that are difficult to predict, and that involve uncertainties that may materially affect actual operating results, cash flows and financial condition.
The Companies have established an enterprise risk management program to identify, assess, manage and monitor its major business risks based on established criteria for the severity of an event, the likelihood of its occurrence, and the programs in place to control the event or reduce the impact. The Companies also have financial and commodity market risks. See “Financial and Commodity Market Risks” in Item 7.
The Companies’ major risks include:
The Failure to Operate Energy Facilities Safely and Reliably Could Adversely Affect The Companies. The Utilities provide electricity, gas and steam service using energy facilities, many of which are located either in, or close to, densely populated public places. See the description of the Utilities’ facilities in Item 1. A failure of, or damage to, these facilities, or an error in the operation or maintenance of these facilities, could result in bodily injury or death, property damage, the release of hazardous substances or extended service interruptions. In such event, the Utilities could be required to pay substantial amounts, which may not be covered by the Utilities’ insurance policies, to repair or replace their facilities, compensate others for injury or death or other damage, and settle any proceedings initiated by state utility regulators or other regulatory agencies. In late October 2012, Superstorm Sandy caused extensive damage to the Utilities’ electric distribution system and interrupted service to approximately 1.4 million of the Utilities’ customers. See “Other Regulatory Matters” in Note B and “Manhattan Steam Main Rupture” in Note H to the financial statements in Item 8. The occurrence of such an event could also adversely affect the cost and availability of insurance. Changes to laws, regulations or judicial doctrines could further expand the Utilities’ liability for service interruptions. See “Utility Regulation – State Utility Regulation” in Item 1.
The Failure To Properly Complete Construction Projects Could Adversely Affect The Companies. The Utilities’ ongoing construction program includes large energy transmission, substation and distribution system projects. The failure to properly complete these projects timely and effectively could adversely affect the Utilities’ ability to meet their customers’ growing energy needs with the high level of safety and reliability
that they currently provide, which would adversely affect the Companies. See “Capital Requirements”, “New York Energy Highway” and “CECONY – Electric Operations – Electric Supply” in Item 1.
The Failure of Processes and Systems and the Performance of Employees and Contractors Could Adversely Affect the Companies. The Companies have developed business processes for operations, customer service, legal compliance, personnel, accounting, planning and other matters. Some of the Companies’ information systems and communications systems have been operating for many years, and may become obsolete. The failure of the Companies’ business processes or information or communication systems could adversely affect the Companies’ operations and liquidity and result in substantial liability, higher costs and increased regulatory requirements. The failure by the Companies’ employees or contractors to follow procedures, or their unsafe actions, errors or intentional misconduct, or work stoppages could also adversely affect the Companies. See “Employees” in Item 1 and “Other Regulatory Matters” in Note B to the financial statements in Item 8.
The Companies Are Extensively Regulated And Are Subject To Penalties. The Companies’ operations require numerous permits, approvals and certificates from various federal, state and local governmental agencies. State utility regulators may seek to impose substantial penalties on the Utilities for violations of state utility laws, regulations or orders. In addition, the Utilities rate plans usually include penalties for failing to meet certain operating standards. See Note B to the financial statements in Item 8. FERC has the authority to impose penalties on the Utilities and the competitive energy businesses, which could be substantial, for violations of the Federal Power Act, the Natural Gas Act or related rules, including reliability and cyber security rules. Environmental agencies may seek penalties for failure to comply with laws, regulations or permits. The Companies may also be subject to penalties from other regulatory agencies. The Companies may be subject to new laws, regulations, accounting standards or other requirements or the revision or reinterpretation of such requirements, which could adversely affect the Companies. In December 2013, the NYSPSC directed its staff to recommend, for commencement in the first quarter of 2014, a process that will result in timely decisions regarding the broad restructuring of distribution utility regulation. See “Utility Regulation” and “Environmental Matters – Climate Change and Other Federal, State and Local Environmental Provisions” in Item 1 and “Application of Critical Accounting Policies” in Item 7.
The Utilities’ Rate Plans May Not Provide A Reasonable Return. The Utilities have rate plans approved by state utility regulators that limit the rates they can charge their customers. The rates are generally designed for, but do not guarantee, the recovery of the Utilities’ cost of service (including a return on equity). The Utilities’ rate plans can involve complex accounting and other calculations, a mistake in which could have a substantial adverse affect on the Utilities. See “Utility Regulation – State Utility Regulation, Rate Plans” in Item 1 and “Rate Plans” in Note B to the financial statements in Item 8. Rates usually may not be changed during the specified terms of the rate plans other than to recover energy costs and limited other exceptions. The Utilities’ actual costs may exceed levels provided for such costs in the rate plans. The Utilities’ rate plans usually include penalties for failing to meet certain operating standards. State utility regulators can initiate proceedings to prohibit the Utilities from recovering from their customers the cost of service (including energy costs) that the regulators determine to have been imprudently incurred (see “Other Regulatory Matters” in Note B to the financial statements in Item 8). The Utilities have from time to time entered into settlement agreements to resolve various prudence proceedings.
The Companies May Be Adversely Affected By Changes To The Utilities’ Rate Plans. The Utilities’ rate plans typically require action by regulators at their expiration dates, which may include approval of new plans with different provisions. The need to recover from customers increasing costs, taxes or state-mandated assessments or surcharges could adversely affect the Utilities’ opportunity to obtain new rate plans that provide a reasonable rate of return and continue important provisions of current rate plans. The Utilities’ current New York electric and gas rate plans include revenue decoupling mechanisms and their New York electric, gas and steam rate plans include provisions for the recovery of energy costs and reconciliation of the actual amount of pension and other postretirement, environmental and certain other costs to amounts reflected in rates. In February 2014, the NYSPSC adopted a Joint Proposal with respect to CECONY’s rates for electric, gas and steam delivery service in 2014 and 2015 (and, for gas and steam delivery service, 2016). See “Rate Plans” in Note B to the financial statements in Item 8.
The Companies Are Exposed to Risks From The Environmental Consequences Of Their Operations. The Companies are exposed to risks relating to climate change and related matters. See “Environmental Matters – Climate Change” in Item 1. CECONY may also be impacted by regulations requiring reductions in air emissions. See “Environmental Matters – Other Federal, State and Local Environmental Provisions, Air Quality” in Item 1. In addition, the Utilities are responsible for hazardous substances, such as asbestos, PCBs and coal tar, that have been used or produced in the course of the Utilities’ operations and are present on properties or in facilities and equipment currently or previously owned by them. See “Environmental Matters” in Item 1 and Note G to the financial statements in Item 8. Electric and magnetic fields are found wherever electricity is used. The Companies could be adversely affected if a causal relationship between these fields and adverse health effects were to be established. Negative perceptions about electric and magnetic fields can make it more difficult to construct facilities needed for the Companies’ operations.
A Disruption In The Wholesale Energy Markets Or Failure By An Energy Supplier Could Adversely Affect The Companies. Almost all the electricity and gas the Utilities sell to their full-service customers is purchased through the wholesale energy markets or pursuant to contracts with energy suppliers. See the description of the Utilities’ energy supply in Item 1. Con Edison’s competitive energy businesses also depend on wholesale energy markets to supply electricity to their customers. See “Competitive Energy Businesses” in Item 1. A disruption in the wholesale energy markets or a failure on the part of the Companies’ energy suppliers or operators of energy delivery systems that connect to the Utilities’ energy facilities could adversely affect the Companies’ ability to meet their customers’ energy needs and adversely affect the Companies.
The Companies Have Substantial Unfunded Pension And Other Postretirement Benefit Liabilities. The Utilities have substantial unfunded pension and other postretirement benefit liabilities. The Utilities expect to make substantial contributions to their pension and other postretirement benefit plans. Significant declines in the market values of the investments held to fund pension and other postretirement benefits could trigger substantial funding requirements under governmental regulations. See “Application of Critical Accounting Policies – Accounting for Pensions and Other Postretirement Benefits” and “Financial and Commodity Market Risks,” in Item 7 and Notes E and F to the financial statements in Item 8.
Con Edison’s Ability To Pay Dividends Or Interest Depends On Dividends From Its Subsidiaries. Con Edison’s ability to pay dividends on its common stock or interest on its external borrowings depends primarily on the dividends and other distributions it receives from its subsidiaries. The dividends that the Utilities may pay to Con Edison are limited by the NYSPSC to not more than 100 percent of their respective income available for dividends calculated on a two-year rolling average basis, with certain exceptions. See “Dividends” in Note C to the financial statements in Item 8.
The Companies Require Access To Capital Markets To Satisfy Funding Requirements. The Utilities estimate that their construction expenditures will exceed $7 billion over the next three years. The Utilities use internally-generated funds, equity contributions from Con Edison, if any, and external borrowings to fund the construction expenditures. The competitive energy businesses are evaluating opportunities to invest in renewable generation and energy-related infrastructure projects that would require funds in excess of those produced in the businesses. Con Edison expects to finance its capital requirements primarily through internally generated funds and the sale of its securities. The company does not expect to need to issue common equity in 2014. Changes in financial market conditions or in the Companies’ credit ratings could adversely affect their ability to raise new capital and the cost thereof. See “Capital Requirements and Resources” in Item 1.
A Cyber Attack Could Adversely Affect the Companies. The Utilities and other operators of critical energy infrastructure may face a heightened risk of cyber attack. The Companies have experienced cyber attacks, although none of the attacks had a material impact on the Companies. In the event of a cyber attack that the Companies were unable to defend against or mitigate, the Utilities and the competitive energy businesses could have their operations disrupted, financial and other information systems impaired, property damaged and customer information stolen; experience substantial loss of revenues, response costs and other financial loss; and be subject to increased regulation, litigation and damage to their reputation.
The Companies Also Face Other Risks That Are Beyond Their Control. The Companies’ results of operations can be affected by circumstances or events that are beyond their control. Weather directly influences the demand for electricity, gas and steam service, and can affect the price of energy commodities. Natural disasters, such as a major storm, heat wave or hurricane (see “Environmental Matters – Climate Change” in Item 1 and “Other Regulatory Matters” in Note B to the financial statements in Item 8) or terrorist or other physical attacks or acts of war could damage Company facilities. As a provider of essential utility services, the Utilities may experience more severe consequences from attempting to operate during and after such events. In addition, pandemic illness could potentially disrupt the Utilities’ employees and contractors from providing essential utility services. Economic conditions can affect customers’ demand and ability to pay for service, which could adversely affect the Companies.
Con Edison has no unresolved comments from the SEC staff.
CECONY has no unresolved comments from the SEC staff.
Con Edison has no significant properties other than those of the Utilities and its competitive energy businesses.
For information about the capitalized cost of the Companies’ utility plant, net of accumulated depreciation, see “Plant and Depreciation” in Note A to the financial statements in Item 8 (which information is incorporated herein by reference).
For a discussion of CECONY’s electric, gas and steam facilities, see “CECONY- Electric Operations – Electric Facilities”, “CECONY- Gas Operations – Gas Facilities”, and “CECONY – Steam Operations – Steam Facilities” in Item 1 (which information is incorporated herein by reference).
For a discussion of O&R’s electric and gas facilities, see “O&R – Electric Operations – Electric Facilities” and “O&R – Gas Operations – Gas Facilities” in Item 1 (which information is incorporated herein by reference).
For a discussion of the competitive energy businesses’ facilities, see “Competitive Energy Businesses” in Item 1 (which information is incorporated herein by reference).
Manhattan Steam Main Rupture
For information about proceedings relating to the July 2007 rupture of a steam main located in midtown Manhattan, see “Manhattan Steam Main Rupture” in Note H to the financial statements in Item 8 (which information is incorporated herein by reference).
NYSPSC Prudence Proceeding
For information about an NYSPSC proceeding relating to unlawful conduct by certain former employees in connection with vendor payments, see “Other Regulatory Matters” in Note B to the financial statements in Item 8 (which is incorporated herein by reference).
Superstorm Sandy
For information about NYSPSC review of the company’s deferred storm costs, including for Superstorm Sandy, see “Other Regulatory Matters” in Note B to the financial statements in Item 8 (which is incorporated herein by reference).
Asbestos
For information about legal proceedings relating to exposure to asbestos, see Note G to the financial statements in Item 8 (which information is incorporated herein by reference).
For information about CECONY Superfund sites, see “Environmental Matters – CECONY—Superfund” in Item 1 (which information is incorporated herein by reference) and Note G to the financial statements in Item 8.
For information about NYSPSC and NJBPU review of the company’s deferred storm costs, including for Superstorm Sandy, see “Other Regulatory Matters” in Note B to the financial statements in Item 8 (which is incorporated herein by reference).
For information about O&R Superfund sites, see “Environmental Matters – O&R – Superfund” in Item 1 (which information is incorporated herein by reference) and Note G to the financial statements in Item 8.
Not applicable.
The following table sets forth certain information about the executive officers of Con Edison and CECONY as of February 20, 2014. As indicated, certain of the executive officers are executive officers of each of Con Edison and CECONY and others are executive officers of Con Edison or CECONY. The term of office of each officer, is until the next election of directors (trustees) of their company and until his or her successor is chosen and qualifies. Officers are subject to removal at any time by the board of directors (trustees) of their company.
Executive Officers of Con Edison and CECONY
John McAvoy
12/13 to present — President and Chief Executive Officer and Director of Con Edison and Chief Executive Officer and Trustee of CECONY
Craig S. Ivey
12/09 to present — President of CECONY
William G. Longhi
1/13 to present — President — Shared Services of CECONY
Robert Hoglund
Elizabeth D. Moore
Joseph P. Oates
Frances A. Resheske
Gurudatta Nadkarni
Scott Sanders
Robert Muccilo
Executive Officers of Con Edison but not CECONY
Timothy P. Cawley
12/12 to 10/13 — Senior Vice President — Central Operations
Executive Officers of CECONY but not Con Edison
(All offices and positions listed are with CECONY)
Milovan Blair
Marilyn Caselli
Edward Foppiano
John F. Miksad
Con Edison’s Common Shares ($.10 par value), the only class of common equity of Con Edison, are traded on the New York Stock Exchange. As of January 31, 2014, there were 53,616 holders of record of Con Edison’s Common Shares.
The market price range for Con Edison’s Common Shares during 2013 and 2012, as reported in the consolidated reporting system, and the dividends paid by Con Edison in 2013 and 2012 were as follows:
Dividends
Paid
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
On January 16, 2014, Con Edison declared a quarterly dividend of 63 cents per Common Share. The first quarter 2014 dividend will be paid on March 15, 2014.
Con Edison expects to pay dividends to its shareholders primarily from dividends and other distributions it receives from its subsidiaries. The payment of future dividends, which is subject to approval and declaration by Con Edison’s Board of Directors, will depend on a variety of factors, including business, financial and regulatory considerations. For additional information, see “Dividends” in Note C to the financial statements in Item 8 (which information is incorporated herein by reference).
During 2013, the market price of Con Edison’s Common Shares decreased by 0.47 percent (from $55.54 at year-end 2012 to $55.28 at year-end 2013). By comparison, the S&P 500 Index increased 29.60 percent and the S&P Utilities Index increased 8.75 percent. The total return to Con Edison’s common shareholders during 2013, including both price depreciation and reinvestment of dividends, was 3.79 percent. By comparison, the total returns for the S&P 500 Index and the S&P Utilities Index were 32.39 percent and 13.21 percent, respectively. For the five-year period 2009 through 2013 inclusive, Con Edison’s shareholders’ total average annual return was 12.51 percent, compared with total average annual returns for the S&P 500 Index and the S&P Utilities Index of 17.94 percent and 10.17 percent, respectively.
S&P 500 Index
S&P Utilities
The outstanding shares of CECONY’s Common Stock ($2.50 par value), the only class of common equity of CECONY, are held by Con Edison and are not traded.
The dividends declared by CECONY in 2013 and 2012 are shown in its Consolidated Statement of Common Shareholder’s Equity included in Item 8 (which information is incorporated herein by reference). For additional information about the payment of dividends by CECONY, and restrictions thereon, see “Dividends” in Note C to the financial statements in Item 8 (which information is incorporated herein by reference).
ISSUER PURCHASES OF EQUITY SECURITIES
October 1, 2013 to October 31, 2013
November 1, 2013 to November 30, 2013
December 1, 2013 to December 31, 2013
For selected financial data of Con Edison and CECONY, see “Introduction” appearing before Item 1 (which selected financial data is incorporated herein by reference).
This combined management’s discussion and analysis of financial condition and results of operations relates to the consolidated 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.
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.
Corporate Overview
Con Edison’s principal business operations are those of the Utilities. Con Edison also has competitive energy businesses. See “The Utilities” and “Competitive Energy Businesses” in Item 1. Certain financial data of Con Edison’s businesses is presented below:
Total Utilities
Con Edison Solutions(a)
Con Edison Development(b)
Other(c)
Total Con Edison
Con Edison’s net income for common stock in 2013 was $1,062 million or $3.62 a share ($3.61 on a diluted basis). Net income for common stock in 2012 and 2011 was $1,138 million or $3.88 a share (3.86 on a diluted basis) and $1,051 million or $3.59 a share ($3.57 on a diluted basis), respectively. See “Results of Operations – Summary,” below. For segment financial information, see Note N to the financial statements in Item 8 and “Results of Operations,” below.
Results of Operations—Summary
Net income for common stock for the years ended December 31, 2013, 2012 and 2011 was as follows:
Competitive energy businesses(a)
Other(b)
The Companies’ results of operations for 2013, as compared with 2012, reflect changes in the rate plans and other regulatory matters of Con Edison’s utility subsidiaries, the weather impact on steam revenues, decreases in certain operations and maintenance expenses, increases in depreciation and amortization reflecting the impact of higher utility plant balances, and the net mark-to-market effects of the competitive energy businesses.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Continued
The following table presents the estimated effect on earnings per share and net income for common stock for 2013 as compared with 2012, and 2012 as compared with 2011, resulting from these and other major factors:
Earnings per
Share
CECONY(a)
Rate plans and other regulatory matters
Weather impact on steam revenues
Operations and maintenance expenses
Depreciation and amortization
Other (includes dilutive effect of new stock issuances)
O&R(a)
Competitive energy businesses(b)
Other, including parent company expenses(c)
Total variations
See “Results of Operations” below for further discussion and analysis of results of operations.
The Companies’ businesses are influenced by many factors that are difficult to predict, and that involve uncertainties that may materially affect actual operating results, cash flows and financial condition. See “Risk Factors” in Item 1A.
Application of Critical Accounting Policies
The Companies’ financial statements reflect the application of their accounting policies, which conform to accounting principles generally accepted in the United States of America. The Companies’ critical accounting policies include industry-specific accounting applicable to regulated public utilities and accounting for pensions and other postretirement benefits, contingencies, long-lived assets, derivative instruments, goodwill and leases.
Accounting for Regulated Public Utilities
The Utilities are subject to the accounting rules for regulated operations and the accounting requirements of the FERC and the state public utility regulatory commissions having jurisdiction.
The accounting rules for regulated operations specify the economic effects that result from the causal relationship of costs and revenues in the rate-regulated environment and how these effects are to be accounted for by a regulated enterprise. Revenues intended to cover some costs may be recorded either before or after the costs are incurred. If regulation provides assurance that incurred costs will be recovered in the future, these costs would be recorded as deferred charges or “regulatory assets” under the accounting rules for regulated operations. If revenues are recorded for costs that are expected to be incurred in the future, these revenues would be recorded as deferred credits or “regulatory liabilities” under the accounting rules for regulated operations.
The Utilities’ principal regulatory assets and liabilities are listed in Note B to the financial statements in Item 8. The Utilities are each receiving or being credited with a return on all regulatory assets for which a cash outflow has been made. The Utilities are each paying or being charged with a return on all regulatory liabilities for which a cash inflow has been received. The regulatory assets and liabilities will be recovered from customers, or applied for customer benefit, in accordance with rate provisions approved by the applicable public utility regulatory commission.
In the event that regulatory assets of the Utilities were no longer probable of recovery, as required by the accounting rules for regulated operations, these regulatory assets would be charged to earnings. At December 31, 2013, the regulatory assets for Con Edison and CECONY were $7,230 million and $6,665 million, respectively.
Accounting for Pensions and Other Postretirement Benefits
The Utilities provide pensions and other postretirement benefits to substantially all of their employees and retirees. Con Edison’s competitive energy businesses also provide such benefits to certain of their employees. The Companies account for these benefits in accordance with the accounting rules for retirement benefits. In addition, the Utilities apply the accounting rules for regulated operations to account for the regulatory treatment of these obligations (which, as described in Note B to the financial statements in Item 8, reconciles the amounts reflected in rates for the costs of the benefit to the costs actually incurred). In applying these accounting policies, the Companies have made critical estimates related to actuarial assumptions, including assumptions of expected returns on plan assets, discount rates, health care cost trends and future compensation. See Notes A, E and F to the financial statements in Item 8 for information about the Companies’ pension and other postretirement benefits, the actuarial assumptions, actual performance, amortization of investment and other actuarial gains and losses and calculated plan costs for 2013, 2012 and 2011.
The discount rate for determining the present value of future period benefit payments is determined using a model to match the durations of highly-rated (Aa or higher by either Moody’s or S&P) corporate bonds with the projected stream of benefit payments.
In determining the health care cost trend rate, the Companies review actual recent cost trends and projected future trends.
The cost of pension and other postretirement benefits in future periods will depend on actual returns on plan assets, assumptions for future periods, contributions and benefit experience. Con Edison’s and CECONY’s current estimates for 2014 are decreases, compared with 2013, in their pension and other postretirement benefits costs of $300 million and $280 million, respectively.
The following table illustrates the effect on 2014 pension and other postretirement costs of changing the critical actuarial assumptions, while holding all other actuarial assumptions constant:
Actuarial
Assumption
Other
Postretirement
Benefits
Increase in accounting cost:
Discount rate
Expected return on plan assets
Health care trend rate
Increase in projected benefit obligation:
A 5.0 percentage point variation in the actual annual return in 2014, as compared with the expected annual asset return of 8.00 percent, would change pension and other postretirement benefit costs for both Con Edison and CECONY by approximately $32 million and $30 million, respectively, in 2015.
Pension benefits are provided through a pension plan maintained by Con Edison to which CECONY, O&R and the competitive energy businesses make contributions for their participating employees. Pension accounting by the Utilities includes an allocation of plan assets.
The Companies’ policy is to fund their pension and other postretirement benefit accounting costs to the extent tax deductible, and for the Utilities, to the extent these costs are recovered under their rate plans. The Companies were not required to make cash contributions to the pension plan in 2013 under funding regulations and tax laws. However, CECONY and O&R made discretionary contributions to the pension plan in 2013 of $819 million and $60 million, respectively. In 2014, CECONY and O&R expect to make contributions to the pension plan of $543 million and $39 million, respectively. See “Expected Contributions” in Notes E and F to the financial statements in Item 8.
Accounting for Contingencies
The accounting rules for contingencies apply to an existing condition, situation or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur. Known material contingencies, which are described in the notes to the financial statements, include certain regulatory matters (Note B), the Utilities’ responsibility for hazardous substances, such as asbestos, PCBs and coal tar that have been used or generated in the course of operations (Note G); and other contingencies (Note H). In accordance with the accounting rules, the Companies have accrued estimates of losses relating to the contingencies as to which loss is probable and can be reasonably estimated and no liability has been accrued for contingencies as to which loss is not probable or cannot be reasonably estimated.
The Utilities generally recover costs for asbestos lawsuits, workers’ compensation and environmental remediation pursuant to their current rate plans. Changes during the terms of the rate plans to the amounts accrued for these contingencies would not impact earnings.
Accounting for Long-Lived Assets
The accounting rules for property, plant and equipment require that certain long-lived assets must be tested for recoverability whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. The carrying amount of a long-lived asset is deemed not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Under the accounting rules, an impairment loss is recognized if the carrying amount is not recoverable from such cash flows, and exceeds its fair value, which approximates market value.
Accounting for Goodwill
In accordance with the accounting rules for goodwill and intangible assets, Con Edison is required to test goodwill for impairment annually. See Note K to the financial statements in Item 8. Goodwill is tested for impairment using a two-step approach. The first step of the goodwill impairment test compares the estimated fair value of a reporting unit with its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired. If the carrying value exceeds the estimated fair value of the reporting unit, the second step is performed to measure the amount of impairment loss, if any. The second step requires a calculation of the implied fair value of goodwill.
Goodwill was $429 million at December 31, 2013. The most recent test, which was performed during 2013 did not require
any second-step assessment and did not result in any impairment. The company’s most significant assumptions surrounding the goodwill impairment test relate to the estimates of reporting unit fair values. The company estimated fair values based primarily on discounted cash flows and on market values for a proxy group of companies.
Accounting for Derivative Instruments
The Companies apply the accounting rules for derivatives and hedging to their derivative financial instruments. The Companies use derivative financial instruments to hedge market price fluctuations in related underlying transactions for the physical purchase and sale of electricity and gas and interest rate risk on certain debt securities. The Utilities are permitted by their respective regulators to reflect in rates all reasonably incurred gains and losses on these instruments. See “Financial and Commodity Market Risks,” below and Note O to the financial statements in Item 8.
Where the Companies are required to make mark-to-market estimates pursuant to the accounting rules, the estimates of gains and losses at a particular period end do not reflect the end results of particular transactions, and will most likely not reflect the actual gain or loss at the conclusion of a transaction. Substantially all of the estimated gains or losses are based on prices supplied by external sources such as the fair value of exchange-traded futures and options and the fair value of positions for which price quotations are available through or derived from brokers or other market sources.
Accounting for Leases
The Companies apply the accounting rules for leases and other related pronouncements to their leasing transactions. In accordance with the accounting rules, Con Edison accounted for Con Edison Development’s two “Lease In/Lease Out” or LILO transactions as leveraged leases. At December 31, 2012, the company’s investment in these leases, net of non-recourse debt, was carried as a single amount in Con Edison’s consolidated balance sheet included in Item 8. In 2013, a court disallowed tax losses claimed by Con Edison relating to Con Edison Development’s LILO transactions and the company subsequently terminated the transactions, resulting in a charge to earnings in 2013 of $95 million (after taxes of $63 million). The transactions did not impact earnings in either 2012 or 2011. See Notes J and L to the financial statements in Item 8.
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.
The principal factors affecting Con Edison’s liquidity are its investments in the Utilities, the dividends it pays to its shareholders and the dividends it receives from the Utilities and cash flows from financing activities discussed below.
The principal factors affecting CECONY’s liquidity are its cash flows from operating activities, cash used in investing activities (including construction expenditures), the dividends it pays to Con Edison and cash flows from financing activities discussed below.
The Companies generally maintain minimal cash balances and use short-term borrowings to meet their working capital needs and other cash requirements. The Companies repay their short-term borrowings using funds from long-term financings and operating activities. The Utilities’ cost of capital, including working capital, is reflected in the rates they charge to their customers.
Each of the Companies believes that it will be able to meet its reasonably likely short-term and long-term cash requirements. See “The Companies Require Access to Capital Markets to Satisfy Funding Requirements” and “The Companies Also Face Other Risks That Are Beyond Their Control” in Item 1A, and “Capital Requirements and Resources” in Item 1.
Changes in the Companies’ cash and temporary cash investments resulting from operating, investing and financing activities for the years ended December 31, 2013, 2012 and 2011 are summarized as follows:
Variance
2013
vs. 2012
2012
vs. 2011
Operating activities
Investing activities
Financing activities
Net change
Balance at beginning of period
Balance at end of period
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. See Note B to the financial statements in Item 8. The prices at which the Utilities provide energy to their customers are determined in accordance with their rate plans. 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 plans. See “Recoverable Energy Costs” in Note A to the financial statements in Item 8.
The Companies’ cash flows from operating activities also reflect the timing of the deduction for income tax purposes of their construction expenditures. Cash paid by Con Edison for income taxes, net of any refunds received was $69 million, $46 million and $(236) million in 2013, 2012 and 2011, respectively (including $163 million, $62 million and $(198) million for CECONY in 2013, 2012 and 2011, respectively). The Companies had no current federal income tax liabilities for 2012 and 2011 primarily due to deduction for costs incurred in connection with Superstorm Sandy and deductions under the bonus depreciation provisions of the federal tax code. The American Taxpayer Relief Act of 2012 has extended bonus depreciation provisions to assets placed in service before January 2014 (or, for certain types of assets, January 2015).
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. See “Rate Plans – CECONY– Electric and Gas and O&R – Electric and Gas” in Note B to the financial statements in Item 8.
Net cash flows from operating activities in 2013 for Con Edison and CECONY were $47 million lower and $297 million higher, respectively, than in 2012. The decrease in net cash flows for Con Edison reflects a special deposit the company made with federal and state tax agencies relating primarily to the LILO transactions. See “Lease In/Lease Out Transactions” in Note J to the financial statements in Item 8. The increase in net cash for CECONY reflects receipt of a property tax refund from the City of New York.
Net cash flows from operating activities in 2012 for Con Edison and CECONY were $538 million and $587 million lower, respectively, than in 2011. The decreases in net cash flows reflect the higher estimated income tax payments, net of refund received, in 2012 ($282 million for Con Edison and $260 million for CECONY). The decrease in net cash flows is also due to the increased pension contributions in 2012 ($244 million for Con Edison and $232 million for CECONY). The Companies contributed $797 million and $553 million (of which $741 million and $509 million was contributed by CECONY) to the pension plan during 2012 and 2011, 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 and changes in future federal income taxes associated with increased removal costs. See Notes A, B and E to the financial statements in Item 8.
Cash Flows Used in Investing Activities
Net cash flows used in investing activities for Con Edison and CECONY were $136 million and $459 million higher, respectively, in 2013 than in 2012. The changes for Con Edison and CECONY reflect increased utility construction expenditures in 2013. In addition, for Con Edison, the change reflects increased non-utility construction expenditures, offset by receipt of grants related to solar energy projects, decreased investments in solar energy projects and the proceeds from the termination of the LILO transactions. See “Lease In/Lease Out Transactions” in Note J to the financial statements in Item 8.
Net cash flows used in investing activities for Con Edison and CECONY were $373 million and $11 million higher, respectively, in 2012 than in 2011. The changes for Con Edison and CECONY reflect increased utility construction expenditures in 2012. In addition, for Con Edison, the change reflects the increased non-utility construction expenditures, increased investments in solar energy projects and return of investment resulting from the receipt of government grant proceeds at a solar project.
Cash Flows from Financing Activities
Net cash flows from financing activities in 2013 for Con Edison and CECONY were $717 million and $461 million higher, respectively, than in 2012. Net cash flows from financing
activities in 2012 for Con Edison and CECONY were $347 million and $285 million higher, respectively, than in 2011.
Cash flows from financing activities for 2011 reflect the issuance of Con Edison common shares through its dividend reinvestment and employee stock plans (1.3 million shares for $31 million). In addition, as a result of the stock plan issuances, cash used to pay common stock dividends was reduced by $10 million in 2011. The number of shares issued through, and cash flows relating to, the plans in 2011, reflect the purchase in 2011 of shares in open-market transactions in connection with the plans.
CECONY had no issuances of long-term debt in 2011. Net cash flows from financing activities during the years ended December 31, 2013 and 2012 reflect the following CECONY transactions:
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;
Redeemed at maturity $500 million of 4.875 percent 10-year debentures; and
Redeemed at maturity $200 million of 3.85 percent 10-year debentures.
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); and
Redeemed at maturity $300 million 5.625 percent 10-year debentures.
O&R had no issuances of long-term debt in 2013, 2012 and 2011.
In 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 energy projects. The notes have a weighted average life of 15 years and final maturity of 2037.
Cash flows from financing activities of the Companies also reflect commercial paper issuance. The commercial paper amounts outstanding at December 31, 2013, 2012 and 2011 and the average daily balances for 2013, 2012 and 2011 for Con Edison and CECONY were as follows:
Out-
standingat Dec-
ember 31
Weighted average yield
Common stock issuances and external borrowings are sources of liquidity that could be affected by changes in credit ratings, financial performance and capital market conditions. For information about the Companies’ credit ratings and certain financial ratios, see “Capital Requirements and Resources” in Item 1.
Other Changes in Assets and Liabilities
The following table shows changes in certain assets and liabilities at December 31, 2013, compared with December 31, 2012.
Assets
Special deposits
Regulatory asset – Environmental remediation costs
Regulatory asset – Unrecognized pension and other postretirement costs
Liabilities
Notes payable
Accrued taxes
Superfund and other environmental costs
Accrued interest
Pension and retiree benefits
Special Deposits, Accrued Taxes and Accrued Interest
The increases in Con Edison’s special deposits, accrued taxes and accrued interest reflect the impact of the LILO transactions. See “Lease In/Lease Out Transactions” in Note J to the financial statements in Item 8.
Regulatory Asset for Environmental Remediation Costs and Liability for Superfund and Other Environmental Costs
The increase in the regulatory asset for environmental remediation costs reflects the provisions of the Utilities’ current rate plans pursuant to which they are permitted to recover or defer as regulatory assets certain site investigation and remediation costs. The increase in the liability for Superfund and other environmental costs reflects changes in the Utilities’ estimates of the cost to remediate their Superfund sites. See Note G to the financial statements in Item 8.
Regulatory Asset for Unrecognized Pension and Other Postretirement Costs and Liability for Pension and Retiree Benefits
The decrease in the regulatory asset for unrecognized pension and other postretirement costs and the liability for pension and retiree benefits reflects the final actuarial valuation of the pension and other retiree benefit plans as measured at December 31, 2013, 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 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 financial statements in Item 8.
Notes Payable
The increase in notes payable reflects, among other things, higher utility construction expenditures.
For information about capital requirements, contractual obligations and capital resources, see “Capital Requirements and Resources” in Item 1.
Off-Balance Sheet Arrangements
The Companies have no off-balance sheet arrangements other than a guarantee ($80 million maximum) issued by Con Edison Development on behalf of an entity in which it acquired a 50 percent interest in July 2013 (see “Guarantees” in Note H and Note Q to the financial statements in Item 8). The entity was formed to develop, construct and operate a photovoltaic solar energy generation facility with a capacity of 150 MW (AC) (with 92 MW (AC) currently in service). Con Edison Development is not the primary beneficiary of this entity since the power to direct the activities that most significantly impact the economics of the facility is shared equally between Con Edison Development and a third party. Currently, no payments are due under the guarantee. Con Edison Development’s share of the entity’s net income is included in Con Edison’s consolidated income statement.
Regulatory Matters
For Information about the Utilities’ rate plans and other regulatory matters affecting the Companies, see “Utility Regulation” in Item 1 and Note B to the financial statements in Item 8.
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 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 December 31, 2013, a 10 percent variation 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 variable rate tax-exempt debt interest expense 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 O to the financial statements in Item 8.
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 O to the financial statements in Item 8.
Con Edison estimates that, as of December 31, 2013, a 10 percent decline in market prices would result in a decline in fair value of $47 million for the derivative instruments used by the Utilities to hedge purchases of electricity and gas, of which $39 million is for CECONY and $8 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. See “Recoverable Energy Costs” in Note A to the financial statements in Item 8.
Con Edison’s competitive energy businesses use a value-at-risk (VaR) model to assess the market price risk of their portfolio of electricity and gas commodity fixed-price purchase and sales commitments, physical forward contracts, generating assets and commodity derivative instruments. VaR represents the potential change in fair value of the portfolio due to changes in market prices, for a specified time period and confidence level. These businesses estimate VaR across their portfolio 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 the portfolio, assuming a one-day holding period, for the years ended December 31, 2013 and 2012, respectively, was as follows:
95% Confidence Level, One-Day Holding Period
Average for the period
High
Low
The competitive energy businesses compare the measured VaR results against performance due to actual prices and stress test the portfolio each quarter using an assumed 30 percent price change from forecast. The stress test includes an assessment of the impact of volume changes on the portfolio because the businesses generally commit to sell their customers their actual requirements, an amount which is estimated when the sales commitments are made. The businesses limit the volume of commodity derivative instruments entered into relative to their estimated sale commitments to maintain net market price exposures to their estimated sale commitments within a certain percentage of maximum and minimum exposures.
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. See “Credit Exposure” in Note O to the financial statements in Item 8.
Investment Risk
The Companies’ investment risk relates to the investment of plan assets for their pension and other postretirement benefit plans. See “Application of Critical Accounting Policies – Accounting for Pensions and Other Postretirement Benefits,” above and Notes E and F to the financial statements in Item 8. 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 December 31, 2013, the pension plan investments consisted of 60 percent equity and 40 percent fixed income and other securities.
For information concerning climate change, environmental sustainability, potential liabilities arising from laws and regulations protecting the environment and other environmental matters, see “Environmental Matters” in Item 1 and Note G to the financial statements in Item 8.
Impact of Inflation
The Companies are affected by the decline in the purchasing power of the dollar caused by inflation. Regulation permits the Utilities to recover through depreciation only the historical cost of their plant assets even though in an inflationary economy the cost to replace the assets upon their retirement will substantially exceed historical costs. The impact is, however, partially offset by the repayment of the Companies’ long-term debt in dollars of lesser value than the dollars originally borrowed.
Material Contingencies
For information concerning potential liabilities arising from the Companies’ material contingencies, see “Application of Critical Accounting Policies – Accounting for Contingencies,” above, and Notes B, G and H to the financial statements in Item 8.
Results of Operations
See “Results of Operations – Summary,” above.
Results of operations reflect, among other things, the Companies’ accounting policies (see “Application of Critical Accounting Policies,” above) and rate plans that limit the rates the Utilities can charge their customers (see “Utility Regulation” in Item 1). 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. See Note B to the financial statements in Item 8.
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 (see “Recoverable Energy Costs” in Note A and “Regulatory Matters” in Note B to the financial statements in Item 8). 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 years ended December 31, 2013, 2012 and 2011 follows. For additional business segment financial information, see Note N to the financial statements in Item 8.
Year Ended December 31, 2013 Compared with Year Ended December 31, 2012
The Companies’ results of operations (which were discussed above under “Results of Operations – Summary”) in 2013 compared with 2012 were:
Purchased power
Fuel
Gas purchased for resale
Operating revenues less purchased power, fuel and gas purchased for resale (net revenues)
Other operations and maintenance
Taxes, other than income taxes
Other income less deductions
Net interest expense
Income before income tax expense
Income tax expense
Preferred stock dividend requirements
Net revenues
Operations and maintenance
CECONY’s results of electric operations for the year ended December 31, 2013 compared with the year ended December 31, 2012 is as follows:
Electric operating income
CECONY’s electric sales and deliveries, excluding off-system sales, in 2013 compared with 2012 were:
Residential/Religious(a)
Commercial/Industrial
Retail access customers
NYPA, Municipal Agency and other sales
CECONY’s electric operating revenues decreased $45 million in 2013 compared with 2012 due primarily to lower net revenues from the electric rate plan and other regulatory matters ($128 million, which includes a decrease of $76 million reflecting the use of certain regulatory liabilities in 2012 to offset a temporary surcharge under the electric rate plan), offset by higher purchased power ($36 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. See Note B to the financial statements in Item 8.
Electric delivery volumes in CECONY’s service area decreased 0.5 percent in 2013 compared with 2012. After adjusting for variations, principally weather and billing days, electric delivery volumes in CECONY’s service area decreased 1.3 percent in 2013 compared with 2012.
CECONY’s electric purchased power costs increased $36 million in 2013 compared with 2012 due to an increase in unit costs ($77 million), offset by a decrease in purchased volumes ($41 million). Electric fuel costs increased $15 million in 2013 compared with 2012 due to higher unit costs ($10 million) and sendout volumes from the company’s electric generating facilities ($5 million).
CECONY’s electric operating income decreased $98 million in 2013 compared with 2012. The decrease reflects primarily lower net revenues ($96 million, due primarily to the electric rate plan), higher taxes other than income taxes ($56 million, principally property taxes) and higher depreciation and amortization ($39 million), offset in part by lower operations and maintenance costs ($93 million). Operations and maintenance expenses primarily reflect a decrease in pension costs ($45 million) in the 2013 period as compared to the 2012 period when certain pension costs that were deferred from earlier periods were recognized under the electric rate plan and lower
healthcare costs ($11 million). Most of the operating expenses attributable to major storms in 2013 and 2012 were deferred as a regulatory asset. See “Regulatory Assets and Liabilities” in Note B to the financial statements in Item 8.
CECONY’s results of gas operations for the year ended December 31, 2013 compared with the year ended December 31, 2012 is as follows:
Gas operating income
CECONY’s gas sales and deliveries, excluding off-system sales, in 2013 compared with 2012 were:
Total firm sales and transportation
Interruptible sales(a)
Generation plants
CECONY’s gas operating revenues increased $201 million in 2013 compared with 2012 due primarily to an increase in gas purchased for resale costs ($145 million) and higher revenues from the gas rate plan and other regulatory matters ($62 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. See Note B to the financial statements in Item 8.
CECONY’s sales and transportation volumes for firm customers increased 16.0 percent in 2013 compared with 2012. After adjusting for variations, principally weather and billing days, firm gas sales and transportation volumes in the company’s service area increased 4.6 percent in 2013.
CECONY’s purchased gas cost increased $145 million in 2013 compared with 2012 due to higher sendout volumes ($91 million) and unit costs ($54 million).
CECONY’s gas operating income increased $16 million in 2013 compared with 2012. The increase reflects primarily higher net
revenues ($56 million), offset by higher operations and maintenance expense ($21 million, due primarily to an increase in the surcharges for assessments and fees that are collected in revenues from customers ($29 million), offset in part by lower pension costs ($6 million) and healthcare costs ($3 million)), higher depreciation and amortization ($10 million) and higher taxes other than income taxes ($9 million, principally local revenue taxes and property taxes).
CECONY’s results of steam operations for the year ended December 31, 2013 compared with the year ended December 31, 2012 is as follows:
Steam operating income
CECONY’s steam sales and deliveries in 2013 compared with 2012 were:
CECONY’s steam operating revenues increased $87 million in 2013 compared with 2012 due primarily to the weather impact on revenues ($50 million), the net change in rates under steam rate plans and other regulatory matters ($32 million) and higher purchased power ($17 million), offset by lower fuel costs ($5 million). Other steam operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plans. See Note B to the financial statements in Item 8.
Steam sales and delivery volumes increased 11.1 percent in 2013 compared with 2012. After adjusting for variations, principally weather and billing days, steam sales and deliveries decreased 2.2 percent in 2013, reflecting lower average normalized use per customer.
CECONY’s steam purchased power costs increased $17 million in 2013 compared with 2012 due to an increase in purchased volumes ($11 million) and unit costs ($6 million). Steam fuel costs decreased $5 million in 2013 compared with 2012 due to lower unit costs ($14 million), offset by higher sendout volumes ($9 million).
Steam operating income increased $49 million in 2013 compared with 2012. The increase reflects primarily higher net revenues ($75 million), offset in part by higher operations and maintenance expense ($19 million, due primarily to higher pension expense ($17 million)), taxes other than income taxes ($4 million, principally property taxes) and depreciation and amortization ($3 million).
Taxes, Other Than Income Taxes
At over $1.8 billion, taxes other than income taxes remain one of CECONY’s largest operating expenses. The principal components of, and variations in, taxes other than income taxes were:
Increase/
(Decrease)
Property taxes
State and local taxes related to revenue receipts
Payroll taxes
Other taxes
Net Interest Expense
Net interest expense decreased $24 million in 2013 compared with 2012 due primarily to lower interest charges on long-term debt and lower accrued interest as a result of certain federal income tax benefits. See Note L to the financial statements in Item 8.
Income Tax Expense
Income taxes decreased $9 million in 2013 compared with 2012. See Note L to the financial statements in Item 8.
Preferred Stock Dividend Requirements
Preferred stock dividend requirements decreased $3 million in 2013 compared with 2012 due to the company’s redemption, in May 2012, of all of its outstanding shares of $5 Cumulative Preferred Stock and Cumulative Preferred Stock ($100 par value).
O&R’s results of electric operations for the year ended December 31, 2013 compared with the year ended December 31, 2012 is as follows:
O&R’s electric sales and deliveries, excluding off-system sales, in 2013 compared with 2012 were:
Public authorities
O&R’s electric operating revenues increased $36 million in 2013 compared with 2012 due primarily to higher purchased power costs ($19 million) and the New York electric rate plan ($14 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 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. See Note B to the financial statements in Item 8.
Electric delivery volumes in O&R’s service area decreased 0.2 percent in 2013 compared with 2012. After adjusting for weather and other variations, electric delivery volumes in O&R’s service area decreased 0.8 percent in 2013 compared with 2012.
Electric operating income increased $4 million in 2013 compared with 2012. The increase reflects primarily higher net revenues ($17 million) and lower taxes other than income taxes ($1 million, principally property taxes), offset by higher operations and maintenance expense ($11 million, due primarily to changes in storm costs ($5 million) and an increase in surcharges for assessments and fees that are collected in revenues from customers ($4 million) and depreciation and amortization ($3 million). Most of the operating expenses attributable to major storms in 2013 and 2012 were deferred as a regulatory asset.
O&R’s results of gas operations for the year ended December 31, 2013 compared with the year ended December 31, 2012 is as follows:
O&R’s gas sales and deliveries, excluding off-system sales, in 2013 compared with 2012 were:
Interruptible sales
Other gas revenues
O&R’s gas operating revenues increased $2 million in 2013 compared with 2012 due primarily to the increase in gas purchased for resale in 2013 ($7 million), offset in part by the gas rate plan.
Sales and transportation volumes for firm customers increased 15.7 percent in 2013 compared with 2012. After adjusting for weather and other variations, total firm sales and transportation volumes increased 0.2 percent in 2013 compared with 2012.
Gas operating income decreased $7 million in 2013 compared with 2012. The decrease reflects primarily lower net revenues ($5 million) and higher taxes other than income taxes ($2 million, principally property taxes).
Taxes, other than income taxes, increased $1 million in 2013 compared with 2012. The principal components of taxes, other than income taxes, were:
Other Income (Deductions)
Other income (deductions) decreased $1 million in 2013 compared with 2012.
Net interest expense increased $7 million in 2013 compared with 2012 reflecting changes to accrued interest resulting from adjustments to prior year federal income tax returns.
Income taxes decreased $12 million in 2013 compared with 2012 due primarily to changes in estimates of accumulated deferred income taxes.
The competitive energy businesses’ results of operations for the year ended December 31, 2013 compared with the year ended December 31, 2012 is as follows:
The competitive energy businesses’ operating revenues decreased $117 million in 2013 compared with 2012, due primarily to lower electric retail and wholesale revenues, and the impact of the termination of the LILO transactions ($27 million, see “Lease In/Lease Out Transactions” in Note J to the financial statements in Item 8). Electric retail revenues decreased $99 million, due to lower sales volume ($138 million), offset by higher unit prices ($39 million). Electric wholesale revenues decreased $57 million in 2013 as compared with 2012, due to lower sales volumes. Solar revenues increased $38 million in 2013 compared with 2012 reflecting an increase in solar energy projects in service. Net mark-to-market values increased $6 million in 2013 as compared with 2012, of which $14 million in gains are reflected in revenues and $8 million in losses are reflected in purchased power costs. Other revenues increased $14 million in 2013 as compared with 2012, due primarily to higher other wholesale revenues.
Purchased power costs decreased $89 million in 2013 compared with 2012, due primarily to lower volumes ($180 million), offset by higher unit prices ($83 million) and changes in mark-to-market values ($8 million).
Operating income decreased $62 million in 2013 compared with 2012 due primarily to the impact of the termination of the LILO transactions ($27 million), lower gross margins ($23 million), increased depreciation ($15 million) and higher operating expenses ($3 million), offset by net mark-to-market effects ($6 million).
Net interest expense increased $134 million in 2013 compared to 2012 due primarily to the impact of the LILO transactions. See “Lease In/Lease Out Transactions” in Note J to the financial statements in Item 8.
Income taxes decreased $93 million in 2013 compared with 2012 due primarily to lower income before income tax expense and a tax benefit resulting from the acceptance by the IRS of the company’s claim for manufacturing tax deductions.
For Con Edison, “Other” also includes inter-company eliminations relating to operating revenues and operating expenses.
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011
The Companies’ results of operations (which were discussed above under “Results of Operations – Summary”) in 2012 compared with 2011 were:
Competitive EnergyBusinesses and Other(a)
2012-
2011Variation
CECONY’s results of electric operations for the year ended December 31, 2012 compared with the year ended December 31, 2011 is as follows:
CECONY’s electric sales and deliveries, excluding off-system sales, in 2012 compared with 2011 were:
CECONY’s electric operating revenues decreased $52 million in 2012 compared with 2011 due primarily to lower purchased power ($322 million) and fuel costs ($40 million), offset by higher revenues from the electric rate plan ($310 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. See Note B to the financial statements in Item 8.
Electric delivery volumes in CECONY’s service area decreased 1.1 percent in 2012 compared with 2011. After adjusting for variations, principally weather and billing days, electric delivery volumes in CECONY’s service area increased 0.2 percent in 2012 compared with 2011.
CECONY’s electric purchased power costs decreased $322 million in 2012 compared with 2011 due to a decrease in purchased volumes ($321 million) and unit costs ($1 million). Electric fuel costs decreased $40 million in 2012 compared with 2011 due to lower unit costs ($58 million), offset by higher sendout volumes from the company’s electric generating facilities ($18 million).
CECONY’s electric operating income decreased $2 million in 2012 compared with 2011. The decrease reflects primarily higher operations and maintenance costs ($232 million), due primarily to higher pension expense ($149 million), and increase in surcharges that are collected in revenues from customers ($25 million) and higher support and maintenance of company underground facilities to accommodate municipal projects ($14 million), higher depreciation and amortization ($54 million) and higher taxes other than income taxes ($26 million, principally property taxes), offset in part by higher net revenues ($310 million, due primarily to the electric rate plan). Most of the
operating expenses attributable to major storms in 2012 and 2011 were deferred as a regulatory asset. See “Regulatory Assets and Liabilities” in Note B to the financial statements in Item 8.
CECONY’s results of gas operations for the year ended December 31, 2012 compared with the year ended December 31, 2011 is as follows:
CECONY’s gas sales and deliveries, excluding off-system sales, in 2012 compared with 2011 were:
CECONY’s gas operating revenues decreased $106 million in 2012 compared with 2011 due primarily to a decrease in gas purchased for resale costs ($131 million), offset in part by higher revenues from the gas rate plan ($25 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. See Note B to the financial statements in Item 8.
CECONY’s sales and transportation volumes for firm customers decreased 7.2 percent in 2012 compared with 2011. After adjusting for variations, principally weather and billing days, firm gas sales and transportation volumes in the company’s service area increased 0.6 percent in 2012.
CECONY’s purchased gas cost decreased $131 million in 2012 compared with 2011 due to lower unit costs ($120 million) and sendout volumes ($11 million).
CECONY’s gas operating income increased $51 million in 2012 compared with 2011. The increase reflects primarily lower operations and maintenance expense ($36 million, due primarily to a decrease in the surcharges that are collected in revenues from customers ($34 million) and higher net revenues ($25 million), offset by higher depreciation and amortization ($10 million).
CECONY’s results of steam operations for the year ended December 31, 2012 compared with the year ended December 31, 2011 is as follows:
CECONY’s steam sales and deliveries in 2012 compared with 2011 were:
CECONY’s steam operating revenues decreased $87 million in 2012 compared with 2011 due primarily to the lower fuel costs ($62 million) and purchased power ($23 million). Other steam operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plans. See Note B to the financial statements in Item 8.
Steam sales and delivery volumes decreased 11.6 percent in 2012 compared with 2011. After adjusting for variations, principally weather and billing days, steam sales and deliveries decreased 1.5 percent in 2012, reflecting lower average normalized use per customer.
CECONY’s steam fuel costs decreased $62 million in 2012 compared with 2011 due to lower unit costs ($53 million) and sendout volumes ($9 million). Steam purchased power costs decreased $23 million in 2012 compared with 2011 due to a decrease in unit costs ($13 million) and purchased volumes ($10 million).
Steam operating income decreased $39 million in 2012 compared with 2011. The decrease reflects primarily lower net revenues ($2 million) and higher operations and maintenance expense ($31 million, due primarily to higher pension expense ($35 million)), taxes other than income taxes ($5 million, principally property taxes) and depreciation and amortization ($1 million).
At over $1.7 billion, taxes other than income taxes remain one of CECONY’s largest operating expenses. The principal components of, and variations in, taxes other than income taxes were:
Net interest expense increased $11 million in 2012 compared with 2011 due primarily to interest on regulatory liabilities and the issuance by CECONY in March 2012 of $400 million of 4.2 percent 30-year debentures.
Income taxes decreased $29 million in 2012 compared with 2011 due primarily to higher deductions for injuries and damages payments in 2012.
Preferred stock dividend requirements decreased $8 million in 2012 compared with 2011 due to the company’s redemption, in May 2012, of all of its outstanding shares of $5 Cumulative Preferred Stock and Cumulative Preferred Stock ($100 par value).
O&R’s results of electric operations for the year ended December 31, 2012 compared with the year ended December 31, 2011 is as follows:
O&R’s electric sales and deliveries, excluding off-system sales, in 2012 compared with 2011 were:
O&R’s electric operating revenues decreased $49 million in 2012 compared with 2011 due primarily to lower purchased power costs ($69 million), offset in part by the New York electric rate plan ($12 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 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. See Note B to the financial statements in Item 8.
Electric delivery volumes in O&R’s service area decreased 1.0 percent in 2012 compared with 2011. After adjusting for weather and other variations, electric delivery volumes in O&R’s service area increased 0.8 percent in 2012 compared with 2011.
Electric operating income increased $2 million in 2012 compared with 2011. The increase reflects primarily higher net revenues ($20 million), offset by higher operations and maintenance expense ($9 million, due to higher pension and health care expense), taxes other than income taxes ($6 million, principally property taxes) and depreciation and amortization ($3 million). Most of the operating expenses attributable to major storms in 2012 and 2011 were deferred as a regulatory asset.
O&R’s results of gas operations for the year ended December 31, 2012 compared with the year ended December 31, 2011 is as follows:
O&R’s gas sales and deliveries, excluding off-system sales, in 2012 compared with 2011 were:
O&R’s gas operating revenues decreased $11 million in 2012 compared with 2011 due primarily to the decrease in gas purchased for resale in 2012 ($18 million), offset in part by the gas rate plan.
Sales and transportation volumes for firm customers decreased 6.1 percent in 2012 compared with 2011. After adjusting for weather and other variations, total firm sales and transportation volumes increased 1.4 percent in 2012 compared with 2011.
Gas operating income increased $7 million in 2012 compared with 2011. The increase reflects primarily higher net revenues ($7 million) and lower operations and maintenance costs ($2 million), offset by higher depreciation and amortization ($2 million).
Taxes, other than income taxes, increased $6 million in 2012 compared with 2011. The principal components of taxes, other than income taxes, were:
Other income (deductions) decreased $2 million in 2012 compared with 2011.
Net interest expense decreased $4 million in 2012 compared with 2011 reflecting changes to accrued interest resulting from adjustments to prior year federal income tax returns.
The competitive energy businesses’ results of operations for the year ended December 31, 2012 compared with the year ended December 31, 2011 is as follows:
The competitive energy businesses’ operating revenues decreased $404 million in 2012 compared with 2011, due primarily to lower electric retail and wholesale revenues. Electric wholesale revenues decreased $143 million in 2012 as compared with 2011, due to lower sales volumes ($110 million) and unit prices ($33 million). Electric retail revenues decreased $257 million, due to lower sales volume ($148 million) and unit prices ($109 million). Net mark-to-market values increased $90 million in 2012 as compared with 2011, of which $70 million in gains are reflected in purchased power costs and $20 million in gains are reflected in revenues. Other revenues decreased $24 million in 2012 as compared with 2011 due primarily to lower energy services revenues ($25 million) and other wholesale revenues ($15 million), partially offset by higher solar revenues ($14 million).
Purchased power costs decreased $447 million in 2012 compared with 2011, due primarily to lower volumes ($220 million), lower unit prices ($157 million) and changes in mark-to-market values ($70 million).
Operating income increased $79 million in 2012 compared with 2011 due primarily to net mark-to-market effects ($90 million) and higher solar margins ($14 million), offset by lower electric retail margins ($22 million).
For information about Con Edison’s primary market risks associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments, see “Financial and Commodity Market Risks,” in Item 7 (which information is incorporated herein by reference).
For information about CECONY’s primary market risks associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments, see “Financial and Commodity Market Risks,” in Item 7 (which information is incorporated herein by reference).
Report of Management on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Income Statement for the years ended December 31, 2013, 2012 and 2011
Consolidated Statement of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011
Consolidated Statement of Cash Flows for the years ended December 31, 2013, 2012 and 2011
Consolidated Balance Sheet at December 31, 2013 and 2012
Consolidated Statement of Common Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011
Consolidated Statement of Capitalization at December 31, 2013 and 2012
Consolidated Statement of Common Shareholder’s Equity for the years ended December 31, 2013, 2012 and 2011
Notes to the Financial Statements
Financial Statement Schedules
Schedule I – Condensed Financial Information
Schedule II – Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in financial statements or notes thereto.
Supplementary Financial Information
Selected Quarterly Financial Data for the years ended December 31, 2013 and 2012 (Unaudited)
First
Quarter
Third
Net income (a)
Net income for common stock (a)
Basic earnings per common share
Diluted earnings per common share
In the opinion of Con Edison, these quarterly amounts include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation.
In the opinion of CECONY, these quarterly amounts include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation.
Management of Consolidated Edison, Inc. and its subsidiaries (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of the effectiveness of controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Management of the Company assessed the effectiveness of internal control over financial reporting as of December 31, 2013, using the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (1992). Based on that assessment, management has concluded that the Company had effective internal control over financial reporting as of December 31, 2013.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, has been audited by PricewaterhouseCoopers LLP, Con Edison’s independent registered public accounting firm, as stated in their report which appears on the following page of this Annual Report on Form 10-K.
President and Chief Executive Officer
February 20, 2014
To the Board of Directors and Stockholders of Consolidated Edison, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Consolidated Edison, Inc. and its subsidiaries (the Company) at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
Consolidated Income Statement
OPERATING REVENUES
Non-utility
TOTAL OPERATING REVENUES
OPERATING EXPENSES
TOTAL OPERATING EXPENSES
OPERATING INCOME
OTHER INCOME (DEDUCTIONS)
Investment and other income
Allowance for equity funds used during construction
Other deductions
TOTAL OTHER INCOME
INCOME BEFORE INTEREST AND INCOME TAX EXPENSE
INTEREST EXPENSE
Interest on long-term debt
Other interest
Allowance for borrowed funds used during construction
NET INTEREST EXPENSE
INCOME BEFORE INCOME TAX EXPENSE
INCOME TAX EXPENSE
NET INCOME
Preferred stock dividend requirements of subsidiary
NET INCOME FOR COMMON STOCK
Net income for common stock per common share — basic
Net income for common stock per common share — diluted
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
AVERAGE NUMBER OF SHARES OUTSTANDING — BASIC (IN MILLIONS)
AVERAGE NUMBER OF SHARES OUTSTANDING — DILUTED (IN MILLIONS)
The accompanying notes are an integral part of these financial statements.
Consolidated Statement of Comprehensive Income
OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES
Pension plan liability adjustments, net of $20, $4 and $(12) taxes in 2013, 2012 and 2011, respectively
TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES
COMPREHENSIVE INCOME
COMPREHENSIVE INCOME FOR COMMON STOCK
Consolidated Statement of Cash Flows
OPERATING ACTIVITIES
Net Income
PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME
Deferred income taxes
Rate case amortization and accruals
Common equity component of allowance for funds used during construction
Net derivative (gains)/losses
Pre-tax gains on the termination of LILO transactions
Other non-cash items (net)
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable—customers, less allowance for uncollectibles
Materials and supplies, including fuel oil and gas in storage
Other receivables and other current assets
Prepayments
Accounts payable
Pensions and retiree benefits obligations
Pensions and retiree benefits contributions
Superfund and environmental remediation costs (net)
Deferred charges, noncurrent assets and other regulatory assets
Deferred credits and other regulatory liabilities
Other assets
Other liabilities
NET CASH FLOWS FROM OPERATING ACTIVITIES
INVESTING ACTIVITIES
Utility construction expenditures
Cost of removal less salvage
Non-utility construction expenditures
Investments in solar energy projects
Proceeds from grants related to solar energy projects
Increase in restricted cash
Proceeds from the termination of LILO transactions
NET CASH FLOWS USED IN INVESTING ACTIVITIES
FINANCING ACTIVITIES
Net proceeds of short-term debt
Issuance of long-term debt
Retirement of long-term debt
Debt issuance costs
Common stock dividends
Issuance of common shares for stock plans, net of repurchases
Preferred stock dividends
Preferred stock redemption
NET CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD
BALANCE AT BEGINNING OF PERIOD
BALANCE AT END OF PERIOD
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid/(refunded) during the period for:
Interest
Income taxes
Consolidated Balance Sheet
ASSETS
CURRENT ASSETS
Cash and temporary cash investments
Accounts receivable — customers, less allowance for uncollectible accounts of $93 and $94 in 2013 and 2012, respectively
Other receivables, less allowance for uncollectible accounts of $10 in 2013 and 2012
Accrued unbilled revenue
Fuel oil, gas in storage, materials and supplies, at average cost
Regulatory assets
Deferred tax assets — current
Other current assets
TOTAL CURRENT ASSETS
INVESTMENTS
UTILITY PLANT, AT ORIGINAL COST
TOTAL
Less: Accumulated depreciation
Net
Construction work in progress
NET UTILITY PLANT
NON-UTILITY PLANT
Non-utility property, less accumulated depreciation of $90 and $68 in 2013 and
2012, respectively
NET PLANT
OTHER NONCURRENT ASSETS
Goodwill
Intangible assets, less accumulated amortization of $4 in 2013 and 2012
Other deferred charges and noncurrent assets
TOTAL OTHER NONCURRENT ASSETS
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Long-term debt due within one year
Customer deposits
Accrued wages
Fair value of derivative liabilities
Regulatory liabilities
Other current liabilities
TOTAL CURRENT LIABILITIES
NONCURRENT LIABILITIES
Obligations under capital leases
Provision for injuries and damages
Pensions and retiree benefits
Asset retirement obligations
Deferred income taxes and investment tax credits
Other deferred credits and noncurrent liabilities
TOTAL NONCURRENT LIABILITIES
LONG-TERM DEBT
COMMON SHAREHOLDERS’ EQUITY (See Statement of Common Shareholders’ Equity)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
Consolidated Statement of Common Shareholders’ Equity
AccumulatedOtherComprehensive
Income/(Loss)
BALANCE AS OFDECEMBER 31, 2010
Issuance of common shares – dividend reinvestment and employee stock plans
Common stock repurchases
Other comprehensive income
BALANCE AS OFDECEMBER 31, 2011
BALANCE AS OFDECEMBER 31, 2012
BALANCE AS OFDECEMBER 31, 2013
Consolidated Statement of Capitalization
TOTAL COMMON SHAREHOLDERS’ EQUITY BEFORE
ACCUMULATED OTHER COMPREHENSIVE LOSS
Pension plan liability adjustments, net of $(10) and $(30) taxes in 2013 and 2012, respectively
Unrealized gains/(losses) on derivatives qualified as cash flow hedges, less reclassification adjustment for gains/(losses) included in net income and reclassification adjustment for unrealized losses included in regulatory assets, net of $(2) taxes in 2013 and 2012
TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS, NET OF TAXES
TOTAL COMMON SHAREHOLDERS’ EQUITY (SEE STATEMENT OF COMMON SHAREHOLDERS’ EQUITY)
DEBENTURES:
2014
2015
2016
2018
2019
2020
2027
2033
2034
2035
2036
2037
2038
2039
2040
2042
2043
TOTAL DEBENTURES
TRANSITION BONDS:
2019*
TOTAL TRANSITION BONDS
TAX-EXEMPT DEBT - Notes issued to New York State Energy Research and Development Authority for Facilities Revenue Bonds**:
2032
TOTAL TAX-EXEMPT DEBT
Other long-term debt
Unamortized debt discount
Less: long-term debt due within one year
TOTAL LONG-TERM DEBT
TOTAL CAPITALIZATION
Management of Consolidated Edison Company of New York, Inc. and its subsidiaries (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable, but not absolute, assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Management of the Company assessed the effectiveness of internal control over financial reporting as of December 31, 2013, using the criteria established by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (1992). Based on that assessment, management has concluded that the Company had effective internal control over financial reporting as of December 31, 2013.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, has been audited by PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, as stated in their report which appears on the following page of this Annual Report on Form 10-K.
Chief Executive Officer
To the Board of Trustees and Stockholder of Consolidated Edison Company of New York, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Consolidated Edison Company of New York, Inc. and its subsidiaries (the Company) at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established inInternal Control –Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
CONSOLIDATED INCOME STATEMENT
TOTAL OTHER INCOME (DEDUCTIONS)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Pension plan liability adjustments, net of $2, $(1) and $(1) taxes in 2013, 2012 and 2011, respectively
CONSOLIDATED STATEMENT OF CASH FLOWS
Dividend to parent
CONSOLIDATED BALANCE SHEET
Accounts receivable – customers, less allowance for uncollectible accounts of $87 in 2013 and 2012
Other receivables, less allowance for uncollectible accounts of $8 and $9 in 2013 and 2012, respectively
Accounts receivable from affiliated companies
NON-UTILITY PROPERTY
Non-utility property, less accumulated depreciation of $25 in 2013 and 2012
LIABILITIES AND SHAREHOLDER’S EQUITY
Accounts payable to affiliated companies
Accrued taxes to affiliated companies
COMMON SHAREHOLDER’S EQUITY (See Statement of Common Shareholder’s Equity)
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDER’S EQUITY
RepurchasedCon Edison
Stock
CapitalStock
Expense
BALANCE AS OF DECEMBER 31, 2010
Common stock dividend to parent
Cumulative preferred dividends
BALANCE AS OF DECEMBER 31, 2011
BALANCE AS OF DECEMBER 31, 2012
BALANCE AS OF DECEMBER 31, 2013
CONSOLIDATED STATEMENT OF CAPITALIZATION
TOTAL COMMON SHAREHOLDER’S EQUITY BEFORE
Pension plan liability adjustments, net of $(2) and $(4) taxes in 2013 and 2012, respectively
Unrealized gains on derivatives qualified as cash flow hedges, less reclassification adjustment for gains included in net income, net of $(2) taxes in 2013 and 2012
TOTAL COMMON SHAREHOLDER’S EQUITY (SEE STATEMENT OF COMMON SHAREHOLDER’S EQUITY)
TAX-EXEMPT DEBT – Notes issued to New York State Energy Research and Development Authority for Facilities Revenue Bonds*:
NOTES TO THE FINANCIAL STATEMENTS
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.
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 company which sells to retail customers electricity purchased in wholesale markets and enters into related hedging transactions and also provides energy-related products and services to retail customers; Consolidated Edison Energy, Inc. (Con Edison Energy), a company that provides energy-related products and services to wholesale customers; and Consolidated Edison Development, Inc. (Con Edison Development), a company that participates in infrastructure projects.
Note A – Summary of Significant Accounting Policies
Principles of Consolidation
The Companies’ consolidated financial statements include the accounts of their respective majority-owned subsidiaries, and variable interest entities (see Note Q), as required. All intercompany balances and transactions have been eliminated.
Accounting Policies
The accounting policies of Con Edison and its subsidiaries conform to accounting principles generally accepted in the United States of America. For the Utilities, these accounting principles include the accounting rules for regulated operations and the accounting requirements of the Federal Energy Regulatory Commission (FERC) and the state public utility regulatory commissions having jurisdiction.
The Utilities’ principal regulatory assets and liabilities are detailed in Note B. The Utilities are receiving or being credited with a return on all of their regulatory assets for which a cash outflow has been made, and are paying or being charged with a return on all of their regulatory liabilities for which a cash inflow has been received. The Utilities’ regulatory assets and liabilities will be recovered from customers, or applied for customer benefit, in accordance with rate provisions approved by the applicable public utility regulatory commission.
Other significant accounting policies of the Companies are referenced below in this Note A and in the notes that follow.
Plant and Depreciation
Utility Plant
Utility plant is stated at original cost. The cost of repairs and maintenance is charged to expense and the cost of betterments is capitalized. The capitalized cost of additions to utility plant includes indirect costs such as engineering, supervision, payroll taxes, pensions, other benefits and an allowance for funds used during construction (AFDC). The original cost of property is charged to expense over the estimated useful lives of the assets. Upon retirement, the original cost of property is charged to accumulated depreciation. See Note R.
Rates used for AFDC include the cost of borrowed funds and a reasonable rate of return on the Utilities’ own funds when so used, determined in accordance with regulations of the FERC or
Notes to the Financial Statements — Continued
the state public utility regulatory authority having jurisdiction. The rate is compounded semiannually, and the amounts applicable to borrowed funds are treated as a reduction of interest charges, while the amounts applicable to the Utilities’ own funds are credited to other income (deductions). The AFDC rates for CECONY were 4.0 percent, 6.5 percent and 6.9 percent for 2013, 2012, and 2011, respectively. The AFDC rates for O&R were 5.7 percent, 7.0 percent and 6.6 percent for 2013, 2012, and 2011, respectively.
The Utilities generally compute annual charges for depreciation using the straight-line method for financial statement purposes, with rates based on average service lives and net salvage factors. The average depreciation rate for CECONY was 3.2 percent for 2013 and 3.1 percent for 2012, and 2011. The average depreciation rates for O&R were 2.8 percent, 2.9 percent and 2.8 percent for 2013, 2012, and 2011, respectively.
The estimated lives for utility plant for CECONY range from 5 to 80 years for electric, 5 to 85 years for gas, 5 to 70 years for steam and 5 to 50 years for general plant. For O&R, the estimated lives for utility plant range from 5 to 75 years for electric, 5 to 75 years for gas and 5 to 50 years for general plant.
At December 31, 2013 and 2012, the capitalized cost of the Companies’ utility plant, net of accumulated depreciation, was as follows:
Generation
Transmission
Distribution
Gas*
Held for future use
Net Utility Plant
Under the Utilities’ rate plans, the aggregate annual depreciation allowance in effect at December 31, 2013 was $948 million, including $897 million under CECONY’s electric, gas and steam rate plans that have been approved by the New York State Public Service Commission (NYSPSC).
Non-Utility Plant
Non-utility plant is stated at original cost and consists primarily of land, gas storage and solar facilities that are currently not used within electric, gas or steam utility operations. Depreciation on these assets is computed using the straight-line method for financial statement purposes over their estimated useful lives, which range from 3 to 30 years.
In accordance with the accounting rules for goodwill and intangible assets, Con Edison is required to test goodwill for impairment annually. Goodwill is tested for impairment using a two-step approach. The first step of the goodwill impairment test compares the estimated fair value of a reporting unit with its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired. If the carrying value exceeds the estimated fair value of the reporting unit, the second step is performed to measure the amount of impairment loss, if any. The second step requires a calculation of the implied fair value of goodwill. See Note K.
Impairments
In accordance with the accounting rules for impairment or disposal of long-lived assets, the Companies evaluate the impairment of long-lived assets, based on projections of undiscounted future cash flows, whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. In the event an evaluation indicates that such cash flows cannot be expected to be sufficient to fully recover the assets, the assets are written down to their estimated fair value. No impairment charges were recognized in 2013, 2012 or 2011.
Revenues
The Utilities and Con Edison Solutions recognize revenues for energy service on a monthly billing cycle basis. The Utilities defer over a 12-month period net interruptible gas revenues, other than those authorized by the NYSPSC to be retained by the Utilities, for refund to firm gas sales and transportation customers. The Utilities and Con Edison Solutions accrue revenues at the end of each month for estimated energy service not yet billed to customers.
CECONY’s electric and gas rate plans and O&R’s New York electric and gas rate plans each contain a revenue decoupling mechanism under which the company’s actual energy delivery revenues are compared with the authorized delivery revenues and the difference accrued, with interest, for refund to, or recovery from, customers, as applicable. See “Rate Plans” in Note B.
The NYSPSC requires utilities to record gross receipts tax revenues and expenses on a gross income statement presentation basis (i.e., included in both revenue and expense).
The recovery of these taxes is generally provided for in the revenue requirement within each of the respective NYSPSC approved rate plans.
Recoverable Energy Costs
The Utilities generally recover all of their prudently incurred fuel, purchased power and gas costs, including hedging gains and losses, in accordance with rate provisions approved by the applicable state public utility commissions. If the actual energy supply costs for a given month are more or less than the amounts billed to customers for that month, the difference in most cases is recoverable from or refundable to customers. Differences between actual and billed electric and steam supply costs are generally deferred for charge or refund to customers during the next billing cycle (normally within one or two months). In addition, CECONY recovers the costs of its electric demand management programs, in excess of the costs reflected in rates, as part of recoverable energy costs. For the Utilities’ gas costs, differences between actual and billed gas costs during the 12-month period ending each August are charged or refunded to customers during a subsequent 12-month period.
The Utilities purchase electricity through the wholesale electricity market administered by the NYISO. The difference between purchased power and related costs initially billed to the Utilities by the NYISO and the actual cost of power subsequently calculated by the NYISO is refunded by the NYISO to the Utilities, or paid to the NYISO by the Utilities. The reconciliation payments or receipts are recoverable from or refundable to the Utilities’ customers.
Certain other payments to or receipts from the NYISO are also subject to reconciliation, with shortfalls or amounts in excess of specified rate allowances recoverable from or refundable to customers. These include proceeds from the sale through the NYISO of transmission rights on CECONY’s transmission system (transmission congestion contracts or TCCs).
Temporary Cash Investments
Temporary cash investments are short-term, highly-liquid investments that generally have maturities of three months or less at the date of purchase. They are stated at cost, which approximates market. The Companies consider temporary cash investments to be cash equivalents.
Investments
Investments consist primarily of the investments of Con Edison’s competitive energy businesses, which are accounted for under the equity method (depending on the subsidiaries’ percentage ownership) or accounted for as leveraged leases in accordance with the accounting rules for leases. See Note J for a discussion of investments in Lease In/Lease Out transactions. Utilities’ investments are recorded at fair value and include the deferred income plan and supplemental retirement income plan trust owned life insurance assets.
Pension and Other Postretirement Benefits
The accounting rules for retirement benefits require an employer to recognize an asset or liability for the overfunded or underfunded status of its pension and other postretirement benefit plans. For a pension plan, the asset or liability is the difference between the fair value of the plan’s assets and the projected benefit obligation. For any other postretirement benefit plan, the asset or liability is the difference between the fair value of the plan’s assets and the accumulated postretirement benefit obligation. The accounting rules generally require employers to recognize all unrecognized prior service costs and credits and unrecognized actuarial gains and losses in accumulated other comprehensive income (OCI), net of tax. Such amounts will be adjusted as they are subsequently recognized as components of net periodic benefit cost or income pursuant to the current recognition and amortization provisions.
For the Utilities’ pension and other postretirement benefit plans, regulatory accounting treatment is generally applied in accordance with the accounting rules for regulated operations. Unrecognized prior service costs or credits and unrecognized actuarial gains and losses are recorded to regulatory assets or liabilities, rather than OCI. See Notes E and F.
The net periodic benefit costs are recognized in accordance with the accounting rules for retirement benefits. Investment gains and losses are recognized in expense over a 15-year period and other actuarial gains and losses are recognized in expense over a 10-year period, subject to the deferral provisions in the rate plans.
In accordance with the Statement of Policy issued by the NYSPSC and its current electric, gas and steam rate plans, CECONY defers for payment to or recovery from customers the difference between such expenses and the amounts for such expenses reflected in rates. Generally, O&R also defers such difference pursuant to its rate plans. See Note B – Regulatory Matters.
The Companies calculate the expected return on pension and other postretirement benefit plan assets by multiplying the expected rate of return on plan assets by the market-related value (MRV) of plan assets at the beginning of the year, taking into consideration anticipated contributions and benefit payments that are to be made during the year. The accounting rules allow the MRV of plan assets to be either fair value or a calculated value that recognizes changes in fair value in a systematic and rational manner over not more than five years. The Companies use a calculated value when determining the
MRV of the plan assets that adjusts for 20 percent of the difference between fair value and expected MRV of plan assets. This calculated value has the effect of stabilizing variability in assets to which the Companies apply the expected return.
Federal Income Tax
In accordance with the accounting rules for income taxes, the Companies have recorded an accumulated deferred federal income tax liability for temporary differences between the book and tax basis of assets and liabilities at current tax rates. In accordance with rate plans, the Utilities have recovered amounts from customers for a portion of the tax liability they will pay in the future as a result of the reversal or “turn-around” of these temporary differences. As to the remaining tax liability, in accordance with the accounting rules for regulated operations, the Utilities have established regulatory assets for the net revenue requirements to be recovered from customers for the related future tax expense. See Notes B and L. In 1993, the NYSPSC issued a Policy Statement approving accounting procedures consistent with the accounting rules for income taxes and providing assurances that these future increases in taxes will be recoverable in rates. See Note L.
Accumulated deferred investment tax credits are amortized ratably over the lives of the related properties and applied as a reduction to future federal income tax expense.
Con Edison and its subsidiaries file a consolidated federal income tax return. The consolidated income tax liability is allocated to each member of the consolidated group using the separate return method. Each member pays or receives an amount based on its own taxable income or loss in accordance with tax sharing agreements among the members of the consolidated group. Tax loss carryforwards are allocated in accordance with consolidated tax return regulations.
State Income Tax
Con Edison and its subsidiaries file a combined New York State Corporation Business Franchise Tax Return. Similar to a federal consolidated income tax return, the income of all entities in the combined group is subject to New York State taxation, after adjustments for differences between federal and New York law and apportionment of income among the states in which the company does business. Each member of the group pays or receives an amount based on its own New York State taxable income or loss.
Research and Development Costs
Generally research and development costs are charged to operating expenses as incurred. Research and development costs were as follows:
Reclassification
Certain prior year amounts have been reclassified to conform with the current year presentation.
Earnings Per Common Share
In accordance with the accounting rules for earnings per share, Con Edison presents basic and diluted earnings per share on the face of its consolidated income statement. Basic earnings per share (EPS) are calculated by dividing earnings available to common shareholders (“Net income for common stock” on Con Edison’s consolidated income statement) by the weighted average number of Con Edison common shares outstanding during the period. In the calculation of diluted EPS, weighted average shares outstanding are increased for additional shares that would be outstanding if potentially dilutive securities were converted to common stock.
Potentially dilutive securities for Con Edison consist of restricted stock units, deferred stock units and stock options for which the average market price of the common shares for the period was greater than the exercise price. See Note M.
Basic and diluted EPS for Con Edison are calculated as follows:
Weighted average common shares outstanding – Basic
Add: Incremental shares attributable to effect of potentially dilutive securities
Adjusted weighted average common shares outstanding – Diluted
Net Income for common stock per common share – basic
Net Income for common stock per common share – diluted
The computation of diluted EPS for the years ended December 31, 2013 and 2012 exclude immaterial amounts of performance share awards which were not included because of their anti-dilutive effect. No such exclusions were required for the computation of diluted EPS for the year ended December 31, 2011.
Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Changes in Accumulated Other Comprehensive Income by Component
For 2013, changes to accumulated other comprehensive income (OCI) for Con Edison and CECONY are as follows:
Accumulated OCI, net of taxes, at December 31, 2012
OCI before reclassifications, net of tax of $15 and $1 for Con Edison and CECONY, respectively
Amounts reclassified from accumulated OCI related to pension plan liabilities, net of tax of $5 and $1 for Con Edison and CECONY, respectively(a)(b)
Total OCI, net of taxes, at December 31, 2013
Accumulated OCI, net of taxes, at December 31, 2013(b)
Note B – Regulatory Matters
CECONY — Electric
In March 2010, the NYSPSC adopted a November 2009 Joint Proposal among CECONY, NYSPSC staff and other parties, with respect to the company’s May 2009 request to the NYSPSC for an increase in the rates the company charged its customers for electric delivery service. The Joint Proposal included a rate plan that provided for electric base rate increases of $420 million, effective April 2010 and 2011, and $287 million, effective April 2012, with an additional $134 million to be collected through a surcharge in the rate year ending March 2013. In March 2012, the NYSPSC issued an order requiring that the $134 million surcharge that was to have been collected from customers during the rate year ending March 2013 instead be offset using certain CECONY regulatory liabilities that would have otherwise been refundable to or applied for the benefit of customers after the rate year.
The rate plan reflected the following major items:
A weighted average cost of capital of 7.76 percent, reflecting:
return on common equity of 10.15 percent, assuming achievement by the company of unspecified austerity measures that would result in reductions in operations and maintenance expenses of $27 million, $20 million and $13 million in the rate years ending March 2011, 2012 and 2013, respectively (the company did not achieve the unspecified austerity measures in the rate years ending March 2011, 2012 and 2013);
cost of long-term debt of 5.65 percent;
common equity ratio of 48 percent; and
average rate base of $14,887 million, $15,987 million and $16,826 million for the rate years ending March 2011, 2012 and 2013, respectively.
Deferral as a regulatory liability of the revenue requirement impact (i.e., return on investment, depreciation and income taxes) of the amount, if any, by which (A) actual average net plant balances allocable to the company’s electric business for (i) transmission and distribution, excluding municipal infrastructure support (T&D), (ii) generation, shared services and, subject to certain adjustments, municipal infrastructure support (Other) and (iii) a finance and supply chain enterprise resource project (ERP) are less than (B) amounts reflected in rates for the respective category for each rate year. The amounts reflected in rates were:
T&D
ERP
Any deferral for T&D and Other for the rate year ending March 2011 was to be based on average net plant balances for the year and for the rate years ending March 2012 and 2013 was to be based on average net plant balances over the term of the rate plan. Any deferral for ERP was to be based on average net plant balances for ERP over the term of the rate plan. The company deferred $8 million, an immaterial amount and $7 million as a regulatory liability pursuant to this provision in 2011, 2012 and 2013, respectively.
During the term of the rate plan, the company was not to accrue any additional revenue for carrying charges on any capital expenditures allocable to its electric business in excess of specified limits (which limits excluded certain expenditures, including expenditures for projects for which the company had been selected to receive grants under the American Recovery and Reinvestment Act of 2009):
T&D capital expenditures—$1,200 million for the rate year ending March 2011 and an aggregate $2,300 million for the period from April 2011 through March 2013 (such capital expenditures for such periods were not in excess of such limits);
Other capital expenditures—$220 million for the rate year ending March 2011 and an aggregate $402 million for the period from April 2011 through March 2013 (such capital expenditures for such periods were not in excess of such limits); and
ERP capital expenditures—$125 million (such capital expenditures for the term of the rate plan were less than $125 million).
Most of any actual earnings, excluding the effects of certain items, above a 11.15 percent return on equity for the rate year ended March 2011 and a 10.65 percent return on equity for the rate years ended March 2012 and 2013 (based on actual average common equity ratio, subject to a 50 percent maximum) were to be applied to reduce regulatory assets for pensions and other postretirement benefits and other costs. The rate plan’s earnings sharing provisions continued in effect up to January 2014 when the company’s new electric rate plan (see below) became effective. Actual earnings under the rate plan were $17.5 million above the threshold for earnings sharing for the period from April 1, 2013 to December 31, 2013.
Deferral as a regulatory asset or liability, as the case may be, of differences between the actual level of certain expenses, including, among others, expenses for pension and other postretirement benefits, environmental remediation, relocation of facilities to accommodate government projects, property taxes and (for the rate years ending March 2012 and 2013) long-term debt, and amounts for those expenses reflected in rates (with deferral for the difference in property taxes limited to 80 percent of the difference, subject to annual maximum for the remaining 20 percent of the difference of not more than a 10 basis point impact on return on common equity and deferral of facility relocation expenses in excess of amounts reflected in rates subject to certain limitations). In 2011, 2012 and 2013, the company deferred $39 million of net regulatory liabilities, $153 million of net regulatory liabilities and $42 million of net regulatory assets, respectively, under these provisions.
Continuation of the provisions relating to revenues from the sale of transmission rights on the company’s transmission system pursuant to which it was assumed the company will receive and retain $120 million annually from the sale of such rights with the difference between such actual revenues for the rate year and $120 million to be recoverable from or refundable to customers, as the case may be. In 2011, 2012 and 2013, the company accrued $26 million, $45 million and $27 million of revenues, respectively, under this provision.
Continuation of the revenue decoupling mechanism under which the company’s actual electric delivery revenues were to be compared with the delivery revenues reflected in rates, and the difference accrued as a regulatory liability (for refund to electric customers) or a regulatory asset (for recovery from electric customers), as the case may be. In 2011, 2012 and 2013, the company deferred for customer benefit $90 million, $59 million and $34 million of revenues, respectively, under this provision.
Continuation of the rate provisions pursuant to which the company recovered its purchased power and fuel costs from electric customers.
Continuation of provisions for potential operations penalties of up to $152 million annually if certain electric customer service and system reliability performance targets are not met. In 2011, the company recognized a $5 million system reliability penalty. In 2012 and 2013, the company did not recognize any penalties under these provisions.
Collection from electric customers of $249 million on an annual basis subject to potential refund following an NYSPSC review of the company’s capital expenditures during the April 2005 through March 2008 period for transmission and distribution utility plant (as to which, in March 2010, the NYSPSC approved a February 2010 Joint Proposal by the company and the NYSPSC staff pursuant to which the company, among other things, provided a $36 million credit to customers in 2010). The amount collected would also be subject to refund in the event the NYSPSC determined that some disallowance of costs the company has recovered is warranted to address potential impacts of alleged unlawful conduct by arrested employees and contractors (see “Other Regulatory Matters” below in this Note B).
In February 2014, the NYSPSC adopted a December 2013 Joint Proposal among CECONY, NYSPSC staff and other parties. The Joint Proposal includes an electric rate plan that covers the two-year period January 2014 through December 2015 and is designed to produce a reduction in annual revenues of $76 million in the rate year ending December 2014 and an increase in annual revenues of $124 million in the rate year ending December 2015. The impact of these base rate changes is being deferred which will result in a $30 million regulatory liability at December 31, 2015. The rate plan reflects the following major items with respect to CECONY’s rates for electric delivery service:
A weighted average cost of capital of 7.05 percent and 7.08 percent for the rate years ending December 31, 2014 and 2015, respectively, reflecting:
return on common equity of 9.2 percent;
cost of long-term debt of 5.17 percent and 5.23 percent for the rate years ending December 31, 2014 and 2015, respectively;
average rate base of $17,323 million and $18,113 million for the rate years ending December 2014 and 2015, respectively.
Capital expenditures of $1,487 million (including $180 million for storm hardening) and $1,708 million (including $278 million for storm hardening) in the rate years ending December 31, 2014 and 2015, respectively. These expenditures do not include expenditures for certain transmission projects (the Indian Point Contingency Plan projects) approved by the NYSPSC in October 2013 for which the NYSPSC endorsed the method by which the costs and benefits associated with the projects will be allocated among load serving entities and a cost recovery mechanism will be filed with the FERC.
Deferral as a regulatory liability of the revenue requirement impact (i.e., return on investment, depreciation and income taxes) of the amount, if any, by which (A) actual average net plant balances for the 24 months ending December 2015 allocable to the company’s electric business for (i) transmission and distribution, including municipal infrastructure support and excluding the Indian Point Contingency Plan projects (T&D), (ii) storm hardening, and (iii) generation and shared services (Other) are less than (B) amounts reflected in rates for the respective category for such period, provided that deferral is not required with respect to storm hardening or the reliability component of T&D if, among other things, the sum of the average net plant balances for these categories is at least equal to the sum of the amounts reflected in rates for the categories. The amounts reflected in rates are:
Storm hardening
Deferral as a regulatory asset or liability, as the case may be, of the related revenue requirement impact if, for the rate year ending December 2015, the NYSPSC determines that planned capital expenditures for storm hardening should be more or less than the amount reflected in rates.
Revenues for each of the rate years ending December 2014 and 2015 include $21 million as funding for a major storm reserve. For each major storm, the company will be able to charge against the reserve 98 percent of its incremental costs, other than capital expenditures, that are incurred not later than 30 days following the date on which the company is able to serve all customers. If major storm costs chargeable to the reserve are more or less than $21 million in either rate year, the company will defer the difference as a regulatory asset or liability, as the case may be. For incremental major storm costs incurred later than 30 days after the date the company is able to serve all customers, the company may file a petition with the NYSPSC for authorization to defer such costs as a regulatory asset.
Revenues for each of the rate years ending December 2014 and 2015 include $107 million with respect to major storm costs the company previously deferred (including for Superstorm Sandy) reflecting a three-year amortization of the deferred costs. The company’s collection from customers of amounts with respect to deferred major storm costs is subject to potential refund following NYSPSC staff review of the costs. See “Other Regulatory Matters,” below in this Note B.
Most of any actual earnings, excluding the effects of certain items, above a 9.8 percent annual return on equity (based on actual average common equity ratio, subject to a 50 percent maximum) would be applied to reduce regulatory assets for environmental remediation costs and other costs. In the event the company does not file for a rate increase to take effect in January 2016, the rate plan’s earnings sharing provisions will continue in effect until base rates are reset by the NYSPSC.
Deferral as a regulatory asset or liability, as the case may be, of differences between the actual level of certain expenses, including, among others, expenses for pension and other postretirement benefits, environmental remediation, property taxes and variable rate tax-exempt debt, and amounts for those expenses reflected in rates (with deferral for the difference in property taxes limited to 90 percent of the difference, subject to annual maximum for the remaining 10 percent of the difference of not more than a 10 basis point impact on return on common equity).
Continuation of a revenue decoupling mechanism under which the company’s actual electric delivery revenues would be compared with the delivery revenues reflected in rates, with the difference accrued as a regulatory liability or a regulatory asset, as the case may be.
Continuation of the rate provisions pursuant to which the company recovers its purchased power and fuel costs from electric customers. With respect to certain transmission service that commenced in May 2012 pursuant to the open access transmission tariff of PJM Interconnection L.L.C. (PJM), the company in 2014 will recover charges incurred from April 2013 to December 2013 in excess of amounts that were reflected in rates (approximately $20 million) and, commencing in January 2014 and unless and until changed by the NYSPSC, the company will recover all charges incurred associated with the transmission service. In January 2014, PJM submitted to FERC a request, which CECONY is opposing, that would substantially increase the charges for the transmission service.
Continuation of provisions for potential operations penalties of up to approximately $176 million annually if certain electric performance targets are not met.
Continuation of collection from electric customers of $249 million on an annual basis subject to potential refund in the NYSPSC proceeding commenced in February 2009 to examine the prudence of certain company expenditures following the arrests of certain employees (see “Other Regulatory Matters” below in this Note B).
O&R — Electric
In July 2008, the NYSPSC adopted a Joint Proposal among O&R, the NYSPSC staff and other parties for the rates O&R charged its New York customers for electric service from July 2008 through June 2011. The rate plan approved by the NYSPSC provided for electric rate increases of $15.6 million, $15.6 million and $5.7 million effective July 1, 2008, 2009 and 2010, respectively, and the collection of an additional $9.9 million during the 12-month period beginning July 1, 2010.
An annual return on common equity of 9.4 percent;
Most of any actual earnings, excluding the effects of certain items, above a 10.2 percent return on equity (based on actual average common equity ratio, subject to a 50 percent maximum) were to be applied to reduce regulatory assets for pension and other postretirement benefit expenses (the company did not reduce regulatory assets under this provision in 2009, 2010 or 2011);
Deferral as a regulatory asset or regulatory liability, as the case may be, of differences between the actual level of certain expenses, including, among others, expenses for pension and other postretirement
benefits, environmental remediation, property taxes and tax-exempt debt costs, and amounts for those expenses reflected in rates (the company deferred recognition of $3 million of expenses, $0.7 million of revenue and $0.3 million of expenses under this provision in 2009, 2010, and 2011, respectively);
Deferral as a regulatory liability of the revenue requirement impact (i.e., return on investment, depreciation and income taxes) of the amount, if any, by which actual transmission and distribution related capital expenditures are less than amounts reflected in rates (the company deferred $8 million, $12 million, and $7 million of revenues under this provision in 2009, 2010, and 2011, respectively);
Deferral as a regulatory asset of increases, if any, in certain expenses above a 4 percent annual inflation rate, but only if the actual annual return on common equity is less than 9.4 percent (the company did not defer any expenses under this provision in 2009, 2010 or 2011);
Potential negative earnings adjustments of up to $3 million annually if certain customer service and system reliability performance targets were not met (the company met the performance targets in 2009 and 2011; the company reduced revenues by $1 million under this provision in 2010);
Implementation of a revenue decoupling mechanism under which actual energy delivery revenues were to be compared with the authorized delivery revenues with the difference accrued, with interest, for refund to, or recovery from, customers, as applicable (the company accrued $12.5 million, $5.1 million, and $3.3 million of revenues pursuant to this provision in 2009, 2010, and 2011, respectively);
Continuation of the rate provisions pursuant to which the company recovers its purchased power costs from customers; and
Withdrawal of the litigation O&R commenced seeking to annul the NYSPSC’s March and October 2007 orders relating to O&R’s electric rates.
In June 2011, the NYSPSC adopted an order granting O&R an electric rate increase, effective July 1, 2011, of $26.6 million. The NYSPSC ruling reflected the following major items:
A weighted average cost of capital of 7.22 percent, reflecting:
a return on common equity of 9.2 percent, assuming achievement by the company of $825,000 of austerity measures;
cost of long-term debt of 5.50 percent; and
common equity ratio of 48 percent.
Continuation of a revenue decoupling mechanism;
A provision for reconciliation of certain differences in actual average net utility plant to the amount reflected in rates ($718 million) and continuation of rate provisions under which differences between the actual level of certain expenses, including, among others, expenses for pension and other postretirement benefits, environmental remediation and tax-exempt debt costs are reconciled to amounts for those expenses reflected in rates;
Continuation of the rate provisions pursuant to which the company recovers its purchased power costs from customers;
Discontinuation of the provisions under which property taxes were reconciled to amounts reflected in rates;
Discontinuation of the inclusion in rates of funding for the company’s annual incentive plan for non-officer management employees;
Continuation of provisions for potential operations penalties of up to $3 million annually if certain customer service and system reliability performance targets are not met (in 2011, O&R did not recognize any operations penalties under these provisions or the corresponding provisions of the O&R rate plan discussed above); and
O&R was directed to produce a report detailing its implementation plans for the recommendations made in connection with the NYSPSC’s management audit of CECONY, with a forecast of costs to achieve and expected savings.
In June 2012, the NYSPSC adopted a February 2012 Joint Proposal among O&R, NYSPSC staff and the Utility Intervention Unit of the New York State Department of State Division of Consumer Protection with respect to the company’s rates for electric delivery service rendered in New York. The Joint Proposal includes a rate plan that covers the three-year period from July 2012 through June 2015. The rate plan provides for electric base rate increases of $19.4 million, $8.8 million and $15.2 million, effective July 2012, 2013 and 2014, respectively, which is being implemented, at the NYSPSC’s option, with increases of $15.2 million effective July 2012 and 2013 and an increase of $13.1 million, together with a surcharge of $2.1 million, effective July 2014. The rate plan reflects the following major items:
A weighted average cost of capital of 7.61 percent, 7.65 percent and 7.48 percent for the rate years ending June 30, 2013, 2014 and 2015, respectively, reflecting:
a return on common equity of 9.4 percent, 9.5 percent and 9.6 percent for the rate years ending June 30, 2013, 2014 and 2015, respectively;
cost of long-term debt of 6.07 percent for each of the rate years ending June 30, 2013 and 2014 and 5.64 percent for the rate year ending June 30, 2015;
common equity ratio of 48 percent for each of the rate years ending June 30, 2013, 2014 and 2015; and
average rate base of $671 million, $708 million and $759 million for the rate years ending June 30, 2013, 2014 and 2015, respectively;
Sharing with electric customers of any actual earnings, excluding the effects of certain items, above specified percentage returns on common equity (based on the actual average common equity ratio, subject to a 50 percent maximum):
the company will allocate to customers the revenue requirement equivalent of 50 percent, 75 percent and 90 percent of any such earnings for each rate year in excess of 80 basis points, 180 basis points and 280 basis points, respectively, above the return on common equity for that rate year indicated above; and
the earnings sharing allocation between the company and customers will be on a cumulative basis at the end of rate year three;
Continuation of a provision which defers as a regulatory liability for the benefit of customers or, subject to certain limitations, a regulatory asset for recovery from customers, as the case may be, the revenue requirement impact of the amount by which actual average net utility plant for each rate year is different than the average net utility plant reflected in rates ($678 million, $704 million and $753 million for the rate years ending June 30, 2013, 2014 and 2015, respectively) (the company deferred $1.1 million as a regulatory asset pursuant to this provision in 2013);
Deferral as a regulatory asset or regulatory liability, as the case may be, of differences between the actual level of certain expenses, including among others, pension and other postretirement benefits, environmental remediation, tax-exempt debt costs and property taxes and amounts for those expenses reflected in rates (the company deferred recognition of $4.1 million of expenses under this provision in 2013); and
Continuation of provisions for potential operations penalties of up to $3 million annually if certain customer service and system reliability performance targets are not met (in 2012 and 2013, O&R did not recognize any operations penalties).
In May 2010, O&R’s New Jersey regulated utility subsidiary, Rockland Electric Company (RECO), the Division of Rate Counsel, staff of the New Jersey Board of Public Utilities (NJBPU) and certain other parties entered into a stipulation of settlement with respect to the company’s August 2009 request to increase the rates that it can charge its customers for electric delivery service. The stipulation, which was approved by the Board of the NJBPU, provided for an electric rate increase, effective May 17, 2010, of $9.8 million. The stipulation reflected a return on common equity of 10.3 percent and a common equity ratio of approximately 50 percent. The stipulation continued current provisions with respect to recovery from customers of the cost of purchased power and did not provide for reconciliation of actual expenses to amounts reflected in electric rates for pension and other postretirement benefit costs. The stipulation required RECO to file a base rate case by December 1, 2013.
In November 2013, RECO filed a request with the NJBPU for a net increase in the rates it charges for electric service, effective September 2014, of $19.3 million. The filing reflects a return on common equity of 10.25 percent and a common equity ratio of 52.2 percent. The filing proposes the recovery over a three-year period of $25.4 million of costs incurred in response to major storm events in 2011 and 2012 that had been deferred for recovery and the continuation of the current provisions with respect to recovery from customers of the cost of purchased power.
CECONY — Gas
In September 2010, the NYSPSC adopted a May 2010 Joint Proposal among CECONY, the staff of the NYSPSC and other parties, with respect to the company’s rates for gas delivery service. The Joint Proposal included a gas rate plan that provided for base rate increases of $47.1 million, $47.9 million and $46.7 million, effective October 2010, 2011 and 2012, respectively. The rate plan reflected the following major items:
A weighted average cost of capital of 7.46 percent, reflecting:
return on common equity of 9.6 percent, assuming achievement by the company of cost avoidance for productivity and “austerity”. The unspecified
austerity measures assume reductions in costs of $6 million, $4 million and $2 million in the rate years ending September 2011, 2012 and 2013, respectively;
cost of long-term debt of 5.57 percent;
average rate base of $3,027 million, $3,245 million and $3,434 million for the rate years ending September 2011, 2012 and 2013, respectively.
Deferral as a regulatory liability of the revenue requirement impact (i.e., return on investment, depreciation and income taxes) of the amount, if any, by which actual average net plant balances allocable to the company’s gas business are less than the amounts reflected in rates: $2,934 million, $3,148 million and $3,346 million for the rate years ending September 2011, 2012 and 2013, respectively. For the rate years ending September 2012 and 2013, $2.9 million and $9.5 million were deferred, respectively. No such deferral was required for the rate year ended September 2011.
Most of any actual earnings, excluding the effects of certain items, above a 10.35 percent return for the rate year ended September 2011 and a 10.15 percent for the rate years ended September 2012 and 2013 (based on actual average common equity ratio, subject to a 50 percent maximum) were to be applied to reduce regulatory assets for pensions and other postretirement benefits and other costs. The specified annual returns were to be calculated on a cumulative basis over the term of the rate plan. The rate plan’s earnings sharing provisions continued in effect up to January 2014 when the company’s new gas rate plan (see below) became effective. Actual earnings under the rate plan were not above the earnings sharing levels.
Deferral as a regulatory asset or liability, as the case may be, of differences between the actual level of certain expenses, including, among others, expenses for pension and other postretirement benefits, environmental remediation, property taxes and long-term debt, and amounts for those expenses reflected in rates (with deferral for the difference in property taxes limited to 80 percent of the difference, subject to an annual maximum for the remaining 20 percent of the difference of not more than the equivalent in revenue requirement of a 10 basis point impact on return on common equity). In 2011, 2012 and 2013, the company deferred $0.3 million of net regulatory liabilities, $38 million of net regulatory assets and $26 million of net regulatory assets, respectively, under these provisions.
Continuation of provisions pursuant to which the company was to retain net revenues from non-firm customer transactions. In each year of the rate plan, the company was to retain up to $58 million of any such revenues and 25 percent of any such revenues above $58 million. If such revenues were below $58 million in a rate year, the company was to accrue a regulatory asset equal to (A) the amount by which such revenues were less than $33 million plus (B) 80 percent of the difference between $58 million and the level of such revenues at or above $33 million. The company retained $70 million, $57 million and $64 million of such net revenues in 2011, 2012 and 2013, respectively, under these provisions.
Continuation of the provisions pursuant to which the effects of weather on gas delivery revenues during each billing cycle are reflected in customer bills for that billing cycle, and a revenue decoupling mechanism under which the company’s actual gas delivery revenues, inclusive of any such weather adjustment, would be compared with the delivery revenues reflected in rates, with the difference accrued as a regulatory liability (for refund to gas customers) or a regulatory asset (for recovery from gas customers), as the case may be. In 2011, 2012 and 2013, the company deferred $20 million of regulatory liabilities, $22 million of regulatory liabilities and $36 million of regulatory liabilities, respectively, under this provision.
Continuation of the rate provisions pursuant to which the company recovers its costs of purchased gas from gas customers.
Continuation of provisions for potential penalties (up to $12.6 million annually) if certain gas customer service and system performance targets are not met. In 2011, 2012 and 2013, the company did not recognize any expenses under these provisions.
Continued collection from gas customers of $32 million on an annual basis subject to potential refund (see “Other Regulatory Matters” below in this Note B).
In February 2014, the NYSPSC adopted a December 2013 Joint Proposal among CECONY, NYSPSC staff and other parties. The Joint Proposal includes a gas rate plan that covers the three-year period January 2014 through December 2016 and is designed to produce a reduction in annual revenues of $55 million in the rate year ending December 2014 and increases in annual revenues of
$39 million and $57 million in the rate years ending December 2015 and 2016, respectively. The impact of these base rate changes is being deferred which will result in a $32 million regulatory liability at December 31, 2016. The rate plan reflects the following major items with respect to CECONY’s rates for gas delivery service:
A weighted average cost of capital of 7.10 percent, 7.13 percent and 7.21 percent for the rate years ending December 2014, 2015 and 2016, respectively, reflecting:
return on common equity of 9.3 percent;
cost of long-term debt of 5.17 percent, 5.23 percent and 5.39 percent for the rate years ending December 2014, 2015 and 2016, respectively;
average rate base of $3,521 million, $3,863 million and $4,236 million for the rate years ending December 2014, 2015 and 2016, respectively.
Capital expenditures of $524 million (including $5 million for storm hardening), $586 million (including $36 million for storm hardening), and $627 million (including $57 million for storm hardening) in the rate years ending December 31, 2014, 2015 and 2016, respectively.
Deferral as a regulatory liability of the revenue requirement impact of the amounts, if any, by which actual average net plant balances for the 36 months ending December 2016 allocable to the company’s gas business for gas delivery (including municipal infrastructure support) and storm hardening are less than the amounts reflected in rates for the respective category for such period. The amounts reflected in rates are:
Gas delivery
Deferral as a regulatory asset or liability, as the case may be, of the related revenue requirement impact if, for the rate years ending December 2015 and 2016, the NYSPSC determines that planned capital expenditures for storm hardening should be more or less than the amount reflected in rates.
Most of any actual earnings, excluding the effects of certain items, above a 9.9 percent annual return on equity (based on actual average common equity ratio, subject to a 50 percent maximum) would be applied to reduce regulatory assets for environmental remediation costs and other costs. In the event the company does not file for a rate increase to take effect in January 2017, the rate plan’s earnings sharing provisions will continue in effect until base rates are reset by the NYSPSC.
Provisions pursuant to which the company will retain net revenues from non-firm customer transactions. In each year of the rate plan, the company will retain up to $65 million of any such revenues and 15 percent of any such revenues above $65 million. If such revenues are below $65 million in a rate year, the company will accrue as a current asset the amount by which such revenues are less than $65 million.
Continuation of the provisions pursuant to which the effects of weather on gas delivery revenues are reflected in customer bills, and a revenue decoupling mechanism under which the company’s actual gas delivery revenues, inclusive of any such weather adjustment, would be compared with the delivery revenues reflected in rates, with the difference accrued as a regulatory liability or a regulatory asset, as the case may be.
Provisions for potential penalties (up to $33 million in 2014, $44 million in 2015, and $56 million in 2016) if certain gas performance targets are not met.
Continued collection from gas customers of $32 million on an annual basis subject to potential refund in the February 2009 NYSPSC prudence proceeding (see “Other Regulatory Matters” below in this Note B).
O&R — Gas
In October 2009, the NYSPSC adopted a June 2009 Joint Proposal among O&R, NYSPSC staff and other parties. As
approved, the Joint Proposal established a gas rate plan that increased base rates $9 million in each of the rate years ended October 2010 and 2011 and $4.6 million in rate year ended October 2012, with an additional $4.3 million to be collected through a surcharge in the rate year ended October 2012. The rate plan reflected the following major items:
An annual return on common equity of 10.4 percent;
Most of any actual earnings above an 11.4 percent annual return on common equity (based upon the actual average common equity ratio, subject to a maximum 50 percent of capitalization) were to be applied to reduce regulatory assets (in 2010, 2011, 2012 and 2013, the company did not defer any revenues under this provision);
Deferral as a regulatory asset or liability, as the case may be, of differences between the actual level of certain expenses, including expenses for pension and other postretirement benefits, environmental remediation, property taxes and taxable and tax-exempt long-term debt, and amounts for those expenses reflected in rates (in 2010, 2011, 2012 and 2013, the company deferred $3.1 million, $2.9 million, $0.7 million and $8.3 million, respectively, of expenses under this provision);
Deferral as a regulatory liability of the revenue requirement impact (i.e., return on investment, depreciation and income taxes) of the amount, if any, by which average gas net plant balances are less than balances reflected in rates (in 2010, 2011 and 2012, the company deferred $1.5 million of revenues, and $1 million and $0.7 million of expenses, respectively, and no deferral was made in 2013 under this provision);
Deferral as a regulatory asset of increases, if any over the course of the rate plan, in certain expenses above a 4 percent annual inflation rate, but only if the actual annual return on common equity is less than 10.4 percent (in 2010, 2011, 2012 and 2013, the company did not defer any revenues under this provision);
Implementation of a revenue decoupling mechanism (in 2010, 2011, 2012 and 2013, the company accrued $0.8 million, $2.8 million, $4.7 million and $0.7 million, respectively, of revenues under this provision);
Continuation of the provisions pursuant to which the company recovers its cost of purchasing gas and the provisions pursuant to which the effects of weather on gas income are moderated; and
Potential negative earnings adjustments of up to $1.4 million annually if certain operations and customer service requirements are not met (in 2010, 2011, 2012 and 2013, the company did not have any negative earnings adjustments under this provision).
Because the company did not file for a rate increase to take effect in November 2012, the earnings sharing levels for the rate year ending October 2012 will continue in effect until base rates are reset by the NYSPSC.
CECONY — Steam
In September 2010 the NYSPSC adopted a May 2010 Joint Proposal among CECONY, NYSPSC staff and other parties, with respect to the company’s rates for steam service. The Joint Proposal included a steam rate plan that provided for rate increases of $49.5 million, effective October 2010 and 2011, and $17.8 million, effective October 2012, with an additional $31.7 million to be collected through a surcharge in the rate year ending September 2013. The rate plan reflected the following major items:
The same weighted average cost of capital, return on common equity (assuming, for the steam business, achievement of unspecified reductions in costs of $4.5 million, $3 million and $1.5 million in the rate years ending September 2011, 2012 and 2013, respectively), cost of long-term debt and common equity ratio provided for in the September 2010 rate plan for CECONY’s gas business (discussed above) and average steam rate base of $1,589 million, $1,603 million and $1,613 million for the rate years ending September 2011, 2012 and 2013, respectively.
Deferral as a regulatory liability of the revenue requirement impact of the amount, if any, by which actual average net plant balances allocable to the company’s steam business were less than the amounts reflected in rates for the respective category for each rate year. The company deferred $0.3 million in 2011, reduced its liability by $0.2 million in 2012, and made no deferral in 2013. The amounts reflected in rates are:
Steam production
Steam distribution
Earnings sharing, expense deferral and potential refund ($6 million annually for steam) provisions substantially the same as discussed above for the May 2010 Joint Proposal with respect to CECONY’s gas business. In 2011 and 2012, the company did not recognize any such earnings sharing, expense deferral or potential
refund. In 2013, earnings were $0.5 million above the threshold for earnings sharing.
Continuation of the rate provisions pursuant to which the company recovers its cost of fuel and purchased steam from its steam customers.
Continuation of provisions for potential penalties (up to approximately $1 million annually) if certain steam customer service and system performance targets are not met. In 2011, 2012 and 2013, the company did not recognize any expense under these provisions.
In 2013 the NYSPSC approved the phase-in, over a period of seven years, of an increase in the allocation to steam customers of the fuel costs for the company’s East River Repowering Project (ERRP, which cogenerates electricity and steam) that are above the market value of the electric energy generated by ERRP.
In February 2014, the NYSPSC adopted a December 2013 Joint Proposal among CECONY, NYSPSC staff and other parties. The Joint Proposal includes a steam rate plan that covers the three-year period January 2014 through December 2016 and is designed to produce a reduction in annual revenues of $22 million in the rate year ending December 2014 and increases in annual revenues of $20 million in each of the rate years ending December 2015 and 2016. The impact of these base rate changes is being deferred which will result in an $8 million regulatory liability at December 31, 2016. The rate plan reflects the following major items with respect to CECONY’s rates for steam service:
The same weighted average cost of capital, return on common equity, cost of long-term debt and common equity ratio as discussed above for the December 2013 Joint Proposal with respect to CECONY’s gas business and average steam rate base of $1,511 million, $1,547 million and $1,604 million for the rate years ending December 2014, 2015 and 2016, respectively.
Capital expenditures of $82 million (including $27 million for storm hardening), $94 million (including $31 million for storm hardening), and $98 million (including $35 million for storm hardening) in the rate years ending December 31, 2014, 2015 and 2016, respectively.
Deferral as a regulatory liability of the revenue requirement impact of the amounts, if any, by which actual average net plant balances for the 36 months ending December 2016 allocable to the company’s steam business for steam production and distribution and storm hardening are less than the amounts reflected in rates for the respective category for such period. The amounts reflected in rates are:
Deferral as a regulatory asset or liability, as the case may be, of the related revenue requirement impact if, for the rate years ending December 2015 and 2016, the NYSPSC determines that planned capital expenditures for storm hardening should be more or less than the amount reflected in rates. Earnings sharing, expense deferral and potential refund ($6 million annually for steam) provisions substantially as discussed above for the December 2013 Joint Proposal with respect to CECONY’s gas business.
Continuation of provisions for potential penalties (up to approximately $1 million annually) if certain steam performance targets are not met.
Other Regulatory Matters
In February 2009, the 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 December 31, 2013, the company had collected an estimated $1,389 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 are exploring a settlement in this proceeding. There is no assurance that there will be a settlement, and any settlement would be subject to NYSPSC approval. At December 31, 2013, the company had a $40 million regulatory liability relating to this matter. Included in the $40 million regulatory liability is $16 million the company recovered from vendors, arrested employees and insurers relating to this matter. Pursuant to the December 2013 Joint Proposal (discussed above in this Note B), the company will apply $15 million of these recovered amounts for the benefit of customers to offset a like amount of regulatory assets. The company currently estimates that any additional amount the NYSPSC requires the company to refund to customers could range in amount from $25 million up to an amount based on the NYSPSC consultant’s $208 million estimate of overcharges.
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 December 31, 2013, CECONY and O&R incurred response and restoration costs for Superstorm Sandy of $483 million and $91 million, respectively (including capital expenditures of $147 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. CECONY’s current electric rate plan includes collection from customers of deferred storm costs (including for Superstorm Sandy), subject to refund following NYSPSC review of the costs. O&R expects to request recovery of deferred storm costs for its New York electric operations, which are also subject to NYSPSC review, when it next files with the NYSPSC for a new electric rate plan. The November 2013 electric rate request RECO filed with the NJBPU includes a proposal for recovery over a three-year period of its deferred storm costs of $27 million. In March 2013, the NJBPU established a proceeding to review the prudency of costs incurred by New Jersey utilities in response to major storm events in 2011 and 2012. See “Rate Plans — CECONY-Electric and O&R-Electric,” above.
Regulatory Assets and Liabilities
Regulatory assets and liabilities at December 31, 2013 and 2012 were comprised of the following items:
Unrecognized pension and other postretirement costs
Future income tax
Environmental remediation costs
Deferred storm costs
Pension and other postretirement benefits deferrals
Revenue taxes
Net electric deferrals
Surcharge for New York State assessment
Unamortized loss on reacquired debt
O&R transition bond charges
Property tax reconciliation
Workers’ compensation
Deferred derivative losses – long-term
Regulatory assets – long-term
Deferred derivative losses – current
Recoverable energy costs – current
Regulatory assets – current
Total Regulatory Assets
Allowance for cost of removal less salvage
Net unbilled revenue deferrals
Property tax refunds
Long-term interest rate reconciliation
Carrying charges on repair allowance and bonus depreciation
World Trade Center settlement proceeds
Other postretirement benefit deferrals
Expenditure prudence proceeding
Carrying charges on T&D net plant – electric and steam
Electric excess earnings
Regulatory liabilities – long-term
Refundable energy costs – current
Revenue decoupling mechanism
Deferred derivative gains – current
Electric surcharge offset
Regulatory liabilities—current
Total Regulatory Liabilities
“Unrecognized pension and other postretirement costs” represents the net regulatory asset associated with the accounting rules for retirement benefits. See Note A.
“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.
“Net electric deferrals” represents the remaining unamortized balance of certain regulatory assets and liabilities of CECONY that were combined effective April 1, 2010 and are being amortized to income over a ten year period, in accordance with CECONY’s March 2010 rate plan.
“Revenue taxes” represents the timing difference between taxes collected and paid by the Utilities to fund mass transportation.
Effective March 31, 2009, the NYSPSC authorized CECONY to accrue unbilled electric, gas and steam revenues. At December 31, 2013, CECONY has deferred the net margin on
the unbilled revenues for the future benefit of customers by recording a regulatory liability of $133 million for the difference between the unbilled revenues and energy cost liabilities.
Note C – Capitalization
Common Stock
At December 31, 2013 and 2012, Con Edison owned all of the issued and outstanding shares of common stock of the Utilities and the competitive energy businesses. CECONY owns 21,976,200 shares of Con Edison stock, which it purchased prior to 2001 in connection with Con Edison’s stock repurchase plan. CECONY presents in the financial statements the cost of the Con Edison stock it owns as a reduction of common shareholder’s equity.
Capitalization of Con Edison
The outstanding capitalization for each of the Companies is shown on its Consolidated Statement of Capitalization, and for Con Edison includes the Utilities’ outstanding debt.
Preferred Stock of CECONY
In May 2012, CECONY redeemed all of its outstanding shares of $5 Cumulative Preferred Stock and Cumulative Preferred Stock ($100 par value).
In accordance with NYSPSC requirements, the dividends that the Utilities generally pay are limited to not more than 100 percent of their respective income available for dividends calculated on a two-year rolling average basis. Excluded from the calculation of “income available for dividends” are non-cash charges to income resulting from accounting changes or charges to income resulting from significant unanticipated events. The restriction also does not apply to dividends paid in order to transfer to Con Edison proceeds from major transactions, such as asset sales, or to dividends reducing each utility subsidiary’s equity ratio to a level appropriate to its business risk.
Long-term Debt
Long-term debt maturing in the period 2014-2018 is as follows:
2017
The Utilities have issued $494 million of tax-exempt debt through the New York State Energy Research and Development Authority (NYSERDA) that currently bear interest at a rate determined weekly and is subject to tender by bondholders for purchase by the Utilities.
The carrying amounts and fair values of long-term debt are:
Carrying
Amount
Fair values of long-term debt have been estimated primarily using available market information. For Con Edison, $11,446 million and $636 million of the fair value of long-term debt at December 31, 2013 are classified as Level 2 and Level 3, respectively. For CECONY, $10,161 million and $636 million of the fair value of long-term debt at December 31, 2013 are classified as Level 2 and Level 3, respectively (see Note P). 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.
At December 31, 2013 and 2012, long-term debt of Con Edison included $22 million and $25 million, respectively, of Transition Bonds issued in 2004 by O&R’s New Jersey utility subsidiary through a special purpose entity.
Significant Debt Covenants
The significant debt covenants under the financing arrangements for the notes of Con Edison and the debentures of CECONY are obligations to pay principal and interest when due, covenants not to consolidate with or merge into any other corporation unless certain conditions are met and, for Con Edison’s notes, covenants that Con Edison shall continue its utility business in New York City and shall not permit Con Edison’s ratio of consolidated debt to consolidated capital to exceed 0.675 to 1. Con Edison’s notes are also subject to cross default provisions with respect to other indebtedness of Con Edison or its material subsidiaries having a then outstanding principal balance in excess of $100 million. CECONY’s debentures have no cross default provisions. The tax-exempt financing arrangements of the Utilities are subject to covenants for the CECONY debentures discussed above and the covenants discussed below. The Companies believe that they were in compliance with their significant debt covenants at December 31, 2013.
The tax-exempt financing arrangements involved the issuance of uncollateralized promissory notes of the Utilities to NYSERDA in exchange for the net proceeds of a like amount of tax-exempt bonds with substantially the same terms sold to the public by NYSERDA. The tax-exempt financing arrangements include covenants with respect to the tax-exempt status of the financing, including covenants with respect to the use of the facilities financed.
The arrangements include provisions for the maintenance of liquidity and credit facilities, the failure to comply with which would, except as otherwise provided, constitute an event of default with respect to the debt to which such provisions applied.
The failure to comply with debt covenants would, except as otherwise provided, constitute an event of default with respect to the debt to which such provisions applied. If an event of default were to occur, the principal and accrued interest on the debt to which such event of default applied and, in the case of the Con Edison notes, a make-whole premium might and, in the case of certain events of default would, become due and payable immediately.
The liquidity and credit facilities currently in effect for the tax-exempt financing include covenants that the ratio of debt to total capital of the obligated utility will not at any time exceed 0.65 to 1 and that, subject to certain exceptions, the utility will not mortgage, lien, pledge or otherwise encumber its assets. Certain of the facilities also include as events of default, defaults in payments of other debt obligations in excess of specified levels ($150 million or $100 million for CECONY, depending on the facility).
Note D – Short-Term Borrowing
In October 2011, Con Edison and the Utilities entered into a Credit Agreement (Credit Agreement), under which banks are committed to provide loans and letters of credit on a revolving credit basis. The Credit Agreement, as amended in 2013, expires in October 2017. There is a maximum of $2.25 billion of credit available through October 2016 and approximately $2.1 billion of credit available from then through October 2017. The full amount is available to CECONY and $1 billion is available to Con Edison, including up to $1.2 billion of letters of credit. The Credit Agreement supports the Companies’ commercial paper programs. The Companies have not borrowed under the Credit Agreement. At December 31, 2013, Con Edison had $1,451 million of commercial paper outstanding of which $1,210 million was outstanding under CECONY’s program. The weighted average interest rate was 0.2 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 December 31, 2013 and 2012, $26 million (including $11 million for CECONY) and $131 million (including $121 million for CECONY) of letters of credit were outstanding under the Credit Agreement.
The banks’ commitments under the Credit Agreement are subject to certain conditions, including that there be no event of default. The commitments are not subject to maintenance of credit rating levels or the absence of a material adverse change. Upon a change of control of, or upon an event of default by one of the Companies, the banks may terminate their commitments with respect to that company, declare any amounts owed by that company under the Credit Agreement immediately due and payable and require that company to provide cash collateral relating to the letters of credit issued for it under the Credit Agreement. Events of default include the exceeding at any time of a ratio of consolidated debt to consolidated total capital of 0.65 to 1 (at December 31, 2013 this ratio was 0.50 to 1 for Con Edison and CECONY); having liens on its assets in an aggregate amount exceeding 5 percent of its consolidated total capital, subject to certain exceptions; and the failure, following any applicable notice period, to meet certain other customary covenants. Interest and fees charged for the revolving credit facilities and any loans made or letters of credit issued under the Credit Agreement reflect the Companies’ respective credit ratings.
See Note S for information about short-term borrowing between related parties.
Note E — Pension Benefits
Con Edison maintains a tax-qualified, non-contributory pension plan that covers substantially all employees of CECONY and O&R and certain employees of Con Edison’s competitive energy businesses. The plan is designed to comply with the Internal Revenue Code and the Employee Retirement Income Security Act of 1974. In addition, Con Edison maintains additional non-qualified supplemental pension plans.
Net Periodic Benefit Cost
The components of the Companies’ net periodic benefit costs for 2013, 2012, and 2011 were as follows:
Service cost – including administrative expenses
Interest cost on projected benefit obligation
Recognition of net actuarial loss
Recognition of prior service costs
NET PERIODIC BENEFIT COST
Amortization of regulatory asset*
TOTAL PERIODIC BENEFIT COST
Cost capitalized
Reconciliation to rate level
Cost charged to operating expenses
Funded Status
The funded status at December 31, 2013, 2012, and 2011 was as follows:
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year
Service cost – excluding administrative expenses
Net actuarial (gain)/loss
Benefits paid
PROJECTED BENEFIT OBLIGATION AT END OF YEAR
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Administrative expenses
FAIR VALUE OF PLAN ASSETS AT END OF YEAR
FUNDED STATUS
Unrecognized net loss
Unrecognized prior service costs
Accumulated benefit obligation
The decrease in the pension plan’s projected benefit obligation (due primarily to increased discount rates) and an increase in actual return on plan assets, were the primary drivers in the decreased pension liability at Con Edison and CECONY of $2,829 million and $2,672 million, respectively, compared with December 31, 2012. For Con Edison, this decrease in pension liability resulted in a decrease to regulatory assets of $2,799 million for unrecognized net losses and unrecognized prior service costs associated with the Utilities consistent with the accounting rules for regulated operations and a credit to OCI of $24 million (net of taxes) for the unrecognized net losses and an immaterial change to OCI (net of taxes) for the unrecognized prior service costs associated with the competitive energy businesses and O&R’s New Jersey and Pennsylvania utility subsidiaries.
For CECONY, the decrease in pension liability resulted in a decrease to regulatory assets of $2,677 million for unrecognized net losses and unrecognized prior service costs consistent with the accounting rules for regulated operations, a credit to OCI of $3 million (net of taxes) for unrecognized net losses, and an immaterial change to OCI (net of taxes) for the unrecognized prior service costs associated with the competitive energy businesses.
A portion of the unrecognized net loss and prior service cost for the pension plan, equal to $619 million and $4 million, respectively, will be recognized from accumulated OCI and the regulatory asset into net periodic benefit cost over the next year for Con Edison. Included in these amounts are $586 million and $2 million, respectively, for CECONY.
At December 31, 2013 and 2012, Con Edison’s investments include $201 million and $164 million, respectively, held in external trust accounts for benefit payments pursuant to the supplemental retirement plans. Included in these amounts for CECONY were $183 million and $148 million, respectively. See Note P. The accumulated benefit obligations for the supplemental retirement plans for Con Edison and CECONY were $234 million and $199 million as of December 31, 2013 and $231 million and $193 million as of December 31, 2012, respectively.
Assumptions
The actuarial assumptions were as follows:
Weighted-average assumptions used to determine benefit obligations at December 31:
Rate of compensation increase
– CECONY
– O&R
Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31:
The expected return assumption reflects anticipated returns on the plan’s current and future assets. The Companies’ expected return was based on an evaluation of the current environment, market and economic outlook, relationships between the economy and asset class performance patterns, and recent and long-term trends in asset class performance. The projections were based on the plan’s target asset allocation.
Discount Rate Assumption
To determine the assumed discount rate, the Companies use a model that produces a yield curve based on yields on selected highly rated (Aa or higher by either Moody’s Investors Service (Moody’s) or Standard & Poor’s) corporate bonds. Bonds with insufficient liquidity, bonds with questionable pricing information and bonds that are not representative of the overall market are excluded from consideration. For example, the bonds used in the model cannot be callable, they must have a price between 50 percent and 200 percent of the original price, the yield must lie between 1 percent and 20 percent, and the amount of the bond issue outstanding must be in excess of $50 million. The spot rates defined by the yield curve and the plan’s projected benefit payments are used to develop a weighted average discount rate.
Expected Benefit Payments
Based on current assumptions, the Companies expect to make the following benefit payments over the next ten years:
Expected Contributions
Based on estimates as of December 31, 2013, the Companies expect to make contributions to the pension plan during 2014 of $575 million (of which $536 million is to be contributed by CECONY). The Companies’ policy is to fund their accounting cost to the extent tax deductible.
Plan Assets
The asset allocations for the pension plan at the end of 2013, 2012, and 2011, and the target allocation for 2014 are as follows:
Equity Securities
Debt Securities
Real Estate
Con Edison has established a pension trust for the investment of assets to be used for the exclusive purpose of providing retirement benefits to participants and beneficiaries and payment of plan expenses.
Pursuant to resolutions adopted by Con Edison’s Board of Directors, the Management Development and Compensation Committee of the Board of Directors (the Committee) has general oversight responsibility for Con Edison’s pension and other employee benefit plans. The pension plan’s named fiduciaries have been granted the authority to control and manage the operation and administration of the plans, including overall responsibility for the investment of assets in the trust and the power to appoint and terminate investment managers.
The investment objectives of the Con Edison pension plan are to maintain a level and form of assets adequate to meet benefit obligations to participants, to achieve the expected long-term total return on the trust assets within a prudent level of risk and maintain a level of volatility that is not expected to have a material impact on the Company’s expected contribution and expense or the Company’s ability to meet plan obligations. The assets of the plan have no significant concentration of risk in one country (other than the United States), industry or entity.
The strategic asset allocation is intended to meet the objectives of the pension plan by diversifying its funds across asset classes, investment styles and fund managers. An asset/liability study typically is conducted every few years to determine whether the current strategic asset allocation continues to represent the appropriate balance of expected risk and reward for the plan to meet expected liabilities. Each study considers the investment risk of the asset allocation and determines the optimal asset allocation for the plan. The target asset allocation for 2014 reflects the results of such a study conducted in 2011.
Individual fund managers operate under written guidelines provided by Con Edison, which cover such areas as investment objectives, performance measurement, permissible investments, investment restrictions, trading and execution, and communication and reporting requirements. Con Edison management regularly monitors, and the named fiduciaries review and report to the Committee regarding, asset class performance, total fund performance, and compliance with asset allocation guidelines. Management changes fund managers and rebalances the portfolio as appropriate. At the direction of the named fiduciaries, such changes are reported to the Committee.
Assets measured at fair value on a recurring basis are summarized below under a three-level hierarchy established by the accounting rules which define the levels within the hierarchy as follows:
Level 1 – Consists of fair value measurements whose value is based on quoted prices in active markets for identical assets or liabilities.
Level 2 – Consists of fair value measurements whose value is based on significant other observable inputs.
Level 3 – Consists of fair value measurements whose value is based on significant unobservable inputs.
The fair values of the pension plan assets at December 31, 2013 by asset category are as follows:
U.S. Equity(a)
International Equity(b)
Private Equity(c)
U.S. Government Issued Debt(d)
Corporate Bonds Debt(e)
Structured Assets Debt(f)
Other Fixed Income Debt(g)
Real Estate(h)
Cash and Cash Equivalents(i)
Futures(j)
Hedge Funds(k)
Total investments
Funds for retiree health benefits(l)
Investments (excluding funds for retiree health benefits)
Pending activities(m)
Total fair value of plan net assets
U.S. Government Issued Debt includes agency and treasury securities.
The table below provides a reconciliation of the beginning and ending net balances for assets at December 31, 2013 classified as Level 3 in the fair value hierarchy.
Private Equity
Hedge Funds
Funds for retiree health benefits
The fair values of the pension plan assets at December 31, 2012 by asset category are as follows:
Funds for retiree health benefits(k)
Pending activities(l)
The table below provides a reconciliation of the beginning and ending net balances for assets at December 31, 2012 classified as Level 3 in the fair value hierarchy.
Corporate Bonds
Structured Assets
Other Fixed Income
The Companies also offer a defined contribution savings plan that covers substantially all employees and made contributions to the plan as follows:
Note F — Other Postretirement Benefits
The Utilities currently have contributory comprehensive hospital, medical and prescription drug programs for all retirees, their dependents and surviving spouses.
CECONY also has a contributory life insurance program for bargaining unit employees and provides basic life insurance benefits up to a specified maximum at no cost to retired management employees. O&R has a non-contributory life insurance program for retirees. Certain employees of Con Edison’s competitive energy businesses are eligible to receive benefits under these programs.
The components of the Companies’ net periodic postretirement benefit costs for 2013, 2012, and 2011 were as follows:
Service cost
Interest cost on accumulated other postretirement benefit obligation
Recognition of prior service cost
Recognition of transition obligation
NET PERIODIC POSTRETIREMENT BENEFIT COST
The funded status of the programs at December 31, 2013, 2012, and 2011 were as follows:
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year
Interest cost on accumulated postretirement benefit obligation
Amendments
Net actuarial loss/(gain)
Benefits paid and administrative expenses
Participant contributions
Medicare prescription subsidy
BENEFIT OBLIGATION AT END OF YEAR
EGWP payments
Unrecognized net transition liability at January 1, 1993
In 2012, the Utilities amended their postretirement life and health benefit plans for management employees, resulting in a reduction to the obligation of $102 million. Also in 2012, the Utilities amended the retiree contributions for supplemental postretirement life insurance for CECONY management and weekly retirees, resulting in a reduction to the obligation of $25 million. Also in 2012, the Utilities elected to change the method of receiving the subsidy under Medicare Part D for retiree prescription drug coverage from the Retiree Drug Subsidy to the Employer Group Waiver Plan (EGWP) beginning in January 2013. Participation in the EGWP allows Con Edison to offer substantially the same postretirement benefits to eligible participants while increasing subsidy reimbursements received by the plans from the Federal Government. This change was effective January 2013 and, as a result, the Utilities recognized a reduction to its postretirement health benefit obligation of $306 million as of December 31, 2012, which was recorded as an actuarial gain.
The decrease in the value of the other postretirement benefit plan obligation (due primarily to increased discount rates) and an increase in actual return on plan assets, were the primary drivers in the decreased liability for other postretirement benefits at Con Edison and CECONY of $125 million and $95 million, respectively, compared with December 31, 2012. For Con Edison, this decreased liability resulted in a decrease to regulatory assets of $148 million for unrecognized net losses and unrecognized prior service costs associated with the Utilities consistent with the accounting rules for regulated operations and a credit to OCI of $4 million (net of taxes) for the unrecognized net losses and an immaterial change to OCI (net of taxes) for the unrecognized prior service costs associated with the competitive energy businesses and O&R’s New Jersey and Pennsylvania utility subsidiaries.
For CECONY, the decrease in liability resulted in a decrease to regulatory assets of $120 million for unrecognized net losses and unrecognized prior service costs associated with the company consistent with the accounting rules for regulated operations and an immaterial change to OCI for unrecognized net losses and unrecognized prior service costs associated with the competitive energy businesses.
A portion of the unrecognized net losses and prior service costs for the other postretirement benefits, equal to $59 million
and $(19) million, respectively, will be recognized from accumulated OCI and the regulatory asset into net periodic benefit cost over the next year for Con Edison. Included in these amounts are $52 million and $(15) million, respectively, for CECONY.
Discount Rate
Expected Return on Plan Assets
Refer to Note E for descriptions of the basis for determining the expected return on assets, investment policies and strategies, and the assumed discount rate.
The health care cost trend rate used to determine net periodic benefit cost for the year ended December 31, 2013 was 5.75 percent, which is assumed to decrease gradually to 4.50 percent by 2018 and remain at that level thereafter. The health care cost trend rate used to determine benefit obligations as of December 31, 2013 was 5.50 percent, which is assumed to decrease gradually to 4.50 percent by 2018 and remain at that level thereafter.
A one-percentage point change in the assumed health care cost trend rate would have the following effects at December 31, 2014:
Effect on accumulated other postretirement benefit obligation
Effect on service cost and interest cost components for 2013
Based on current assumptions, the Companies expect to make the following benefit payments over the next ten years, net of receipt of governmental subsidies:
BENEFIT PAYMENTS
Based on estimates as of December 31, 2013, Con Edison expects to make a contribution of $7 million, nearly all of which is for CECONY, to the other postretirement benefit plans in 2014.
The asset allocations for CECONY’s other postretirement benefit plans at the end of 2013, 2012 and 2011, and the target allocation for 2014 are as follows:
Con Edison has established postretirement health and life insurance benefit plan trusts for the investment of assets to be used for the exclusive purpose of providing other postretirement benefits to participants and beneficiaries.
Refer to Note E for a discussion of Con Edison’s investment policy for its benefit plans.
The fair values of the plan assets at December 31, 2013 by asset category (see description of levels in Note E) are as follows:
Equity(a)
Other Fixed Income Debt(b)
Cash and Cash Equivalents(c)
Funds for retiree health benefits(d)
Investments (including funds for retiree health benefits)
Pending activities(e)
Transfers
In/(Out) of
Level 3
The fair values of the plan assets at December 31, 2012 by asset category (see description of levels in Note E) are as follows:
Other Fixed Income(c)
Cash and Cash Equivalents(d)
Funds for retiree health benefits(e)
Pending activities(f)
EndingBalance as ofDecember 31,
Note G — Environmental Matters
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.
The accrued liabilities and regulatory assets related to Superfund Sites at December 31, 2013 and 2012 were as follows:
Accrued Liabilities:
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 plans, 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 at December 31, 2013 and 2012 were as follows:
Remediation costs incurred
Insurance recoveries received*
In 2013, 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 $2.4 billion. In 2013, 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 $167 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 2013, Con Edison and CECONY estimated that their aggregate undiscounted potential liabilities for these suits and additional suits that may be brought over the next 15 years were $8 million and $7 million, respectively. The estimates were 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 plans, 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 December 31, 2013 and 2012 were as follows:
Accrued liability – asbestos suits
Regulatory assets – asbestos suits
Accrued liability – workers’ compensation
Regulatory assets – workers’ compensation
Note H — Other Material Contingencies
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 90 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 notified its insurers of the incident and believes that the policies in force at the time of the incident will cover the company’s costs to satisfy its liability to others in connection with the suits. At December 31, 2013, the company has accrued its estimated liability for the suits of $50 million and an insurance receivable in the same amount.
Other Contingencies
See “Other Regulatory Matters” in Note B.
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 $1,331 million and $859 million at December 31, 2013 and 2012, respectively.
A summary, by type and term, of Con Edison’s total guarantees at December 31, 2013 is as follows:
Energy transactions
Solar energy projects
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.
Solar Energy Projects — Con Edison and Con Edison Development guarantee payments associated with the investment in solar energy facilities on behalf of their
wholly-owned subsidiaries. In addition, Con Edison Development has entered into a guarantee ($80 million maximum) on behalf of an entity in which it has a 50 percent interest (see Note Q) in connection with the construction of solar energy facilities. Con Edison Development also provided $3 million in guarantees to Travelers Insurance Company for indemnity agreements for surety bonds in connection with the construction and operation of solar energy facilities performed by its subsidiaries.
Other — Other guarantees primarily relate to 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 ($25 million). In addition, Con Edison issued a guarantee to the Public Utility Commission of Texas covering obligations of Con Edison Solutions as a retail electric provider. Con Edison’s estimate of the maximum potential obligation for this guarantee is $5 million as of December 31, 2013.
Note I – Electricity Purchase Agreements
CECONY has long-term electricity purchase agreements with non-utility generators and others for generating capacity. The company recovers its purchased power costs in accordance with provisions approved by the NYSPSC. See “Recoverable Energy Costs” in Note A.
At December 31, 2013, the significant terms of the electricity purchase agreements were as follows:
Contract
Start
Date
Indian Point
Independence
Linden Cogeneration
Astoria Energy
Selkirk
Brooklyn Navy Yard
Indeck Corinth
Assuming performance by the parties to the electricity purchase agreements, CECONY is obligated over the terms of the agreements to make capacity and other fixed payments.
The future capacity and other fixed payments under the contracts are estimated to be as follows:
For energy delivered under most of the electricity purchase agreements, CECONY is obligated to pay variable prices. The company’s payments under the agreements for capacity, energy and other fixed payments in 2013, 2012, and 2011 were as follows:
Note J – Leases
Con Edison’s subsidiaries lease electric transmission facilities, gas distribution facilities, land, office buildings and equipment. In accordance with the accounting rules for leases, these leases are classified as either capital leases or operating leases. Most of the operating leases provide the option to renew at the fair rental value for future periods. Generally, it is expected that leases will be renewed or replaced in the normal course of business.
Capital leases: For ratemaking purposes capital leases are treated as operating leases; therefore, in accordance with the accounting rules for regulated operations, the amortization of the leased asset is based on the rental payments recovered from customers. The following assets under capital leases are included in the Companies’ consolidated balance sheets at December 31, 2013 and 2012:
UTILITY PLANT
Common
The accumulated amortization of the capital leases for Con Edison and CECONY was $1 million and $0.6 million, respectively at December 31, 2013, and $1 million and $0.4 million, respectively at December 31, 2012.
The future minimum lease commitments for the above assets are as follows:
All years thereafter
Less: amount representing interest
Present value of net minimum lease payment
Operating leases: The future minimum lease commitments under the Companies’ non-cancelable operating lease agreements are as follows:
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 involved 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 accounted for the two LILO transactions as leveraged leases. Accordingly, the company’s investment in these leases, net of non-recourse debt, was carried as a single amount in Con Edison’s consolidated balance sheet and income was recognized pursuant to a method that incorporated a level rate of return for those years when net investment in the lease was positive. 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. During 2013, as discussed below, the company terminated its LILO transactions and at December 31, 2013 no longer had an investment recorded for these leases in its consolidated balance sheet.
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. In June 2013, Con Edison entered into a closing agreement with the IRS regarding the 1997 and 1999 LILO transactions.
As a result of the January 2013 Court of Appeals decision, 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 L). In June 2013, the 1999 LILO transaction was terminated, as a result of which the company realized a $29 million gain (after-tax) and received net cash proceeds of $108 million. In August 2013, the 1997 LILO transaction was terminated, resulting in a $26 million gain (after-tax) and net cash proceeds of $92 million. The effect on Con Edison’s consolidated income statement is as follows:
For the Year Ended
December 31, 2013
The transactions did not impact earnings in 2012 or 2011.
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 the LILO transactions in past tax years and interest thereon. During 2013, $125 million of the deposit was returned from the IRS at the company’s request. Also in 2013, the deposit balance was reduced by an additional $48 million, due to a $10 million refund from the IRS and the application of $38 million toward the settlement of tax and interest for certain tax years, primarily relating to tax liability from the LILO transactions. In 2014, the company expects to apply the remainder of its January 2013 deposit against its federal and state tax liabilities for other tax years.
Note K – Goodwill
In 2013 and 2012, Con Edison completed impairment tests for its goodwill of $406 million related to the O&R merger, and determined that it was not impaired. For the impairment test, $245 million and $161 million of the goodwill were allocated to CECONY and O&R, respectively. In 2013 and 2012, Con Edison completed impairment tests for the goodwill of $23 million related to two energy services companies acquired by Con Edison Solutions and an interest in a gas storage company acquired by Con Edison Development, and determined that the goodwill was not impaired.
Note L – Income Tax
The components of income tax are as follows:
State
Current
Deferred
Federal
Amortization of investment tax credits
Total charge to income tax expense
The tax effects of temporary differences, which gave rise to deferred tax assets and liabilities, are as follows:
Deferred tax liabilities:
Depreciation
Regulatory asset – future income tax
State income tax
Pension
Capitalized overheads
Unamortized investment tax credits
Total deferred tax liabilities
Deferred tax assets:
Regulatory liability – future income tax
Loss carryforwards
Loss carryforwards, valuation reserve
Total deferred tax assets
Net deferred tax liabilities and investment tax credits
Deferred income taxes and investment tax credits – noncurrent
Deferred tax assets – current
Reconciliation of the difference between income tax expense and the amount computed by applying the prevailing statutory income tax rate to income before income taxes is as follows:
STATUTORY TAX RATE
Cost of removal
Manufacturing deduction
Effective Tax Rate
In 2013, Con Edison applied its entire amount of federal and New York State net operating loss carryforwards of $529 million and $213 million, respectively. For New York City income tax purposes, Con Edison has a net operating loss carryforward available from the years 1999 through 2013 for which a deferred tax asset of $12 million has been recognized and will not expire until the years 2019 through 2033. A full valuation allowance has been provided; as it is not more likely than not that the deferred tax asset will be realized.
In September 2013, the IRS issued final regulations, effective in 2014, that provide guidance on the appropriate tax treatment of costs incurred to acquire, produce or improve tangible property, as well as routine maintenance and repair costs. Proposed regulations were issued addressing the tax treatment of asset dispositions. The application of these regulations is not expected to have a material impact on the Companies’ financial position, results of operations or liquidity.
Uncertain Tax Positions
Under the accounting rules for income taxes, the Companies are not permitted to recognize the tax benefit attributable to a tax position unless such position is more likely than not to be sustained upon examination by taxing authorities, including resolution of any related appeals and litigation processes, based solely on the technical merits of the position.
The Companies’ 2011 and 2010 federal income tax returns reflect, among other things, an incremental current deduction for the costs of certain repairs to utility plant (the “repair allowance deductions”). Prior to 2009, the Companies capitalized such costs and included these costs in depreciation expense in federal income tax returns. In 2012, with respect to the repair allowance deductions, Con Edison and CECONY recorded liabilities for uncertain tax positions of $72 million and $66 million, respectively. In 2013, the IRS accepted the Companies’ 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 J), Con Edison increased its estimated prior year liabilities for federal and state uncertain tax positions by $249 million, with a corresponding reduction to accumulated deferred income tax liabilities. In June 2013, Con Edison entered into a closing agreement with the IRS regarding the 1997 and 1999 LILO transactions, as a result of which Con Edison decreased its estimated prior year liabilities for federal and state uncertain tax positions by $249 million, with a corresponding increase to its current income tax liability. These changes to the Companies’ estimated liabilities for uncertain tax positions had no impact on income tax expense for the year ended December 31, 2013.
During the third quarter of 2013, the IRS completed its audits of the Companies’ federal income tax returns for the tax years 1998 through 2011 and Con Edison and CECONY recognized income tax benefits of approximately $13 million and $7 million, respectively, including $6 million that favorably affected Con Edison’s effective tax rate in 2013. Any adjustments to the federal income tax returns would result in changes to the Companies’ state income tax returns. The Companies’ state income tax returns for their primary jurisdiction, New York, for years beginning with 2006 remain open for examination.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for Con Edison and CECONY follows:
Balance at January 1
Additions based on tax positions related to the current year
Additions based on tax positions of prior years
Reductions for tax positions of prior years
Settlements
Balance at December 31
At December 31, 2013, the Companies’ estimated liabilities for uncertain tax positions ($9 million for Con Edison and an immaterial amount for CECONY) were classified on their respective consolidated balance sheets as a noncurrent liability ($9 million for Con Edison) and as a current liability (an immaterial amount for CECONY). As of December 31, 2013, the Companies reasonably expect to resolve an immaterial amount of their uncertain tax positions within the next 12 months.
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 2013, Con Edison recognized $121 million of interest expense ($131 million related to the LILO transactions, less a reduction of $10 million in accrued interest expense primarily associated with repair allowance deductions and reversing other uncertain tax positions in 2013). In 2012 and 2011, the Companies recognized an immaterial amount of interest and no penalties for uncertain tax positions in their consolidated income statements. At December 31, 2013 and 2012, the Companies recognized an immaterial amount of interest and no penalties in their consolidated balance sheets.
At December 31, 2013, the total amount of unrecognized tax benefits that, if recognized, would affect the Companies’ effective tax rate is $9 million for Con Edison and an immaterial amount for CECONY.
Note M – Stock-Based Compensation
The Companies may compensate employees and directors with, among other things, stock options, stock units, restricted stock units and contributions to the stock purchase plan. The 1996 Stock Option Plan, under which no new awards may be issued, provided for awards of stock options to officers and employees. The last awards under the 1996 Stock Option Plan expired in 2013. The Long Term Incentive Plan, approved by Con Edison’s shareholders in 2003 (the 2003 LTIP), and the Long Term Incentive Plan, approved by Con Edison’s shareholders in 2013 (2013 LTIP), are collectively referred to herein as the LTIP. The LTIP provides for, among other things, awards to employees of restricted stock units and stock options and, to Con Edison’s non-employee directors, stock units. Existing awards under the 2003 LTIP continue in effect, however no new awards may be issued under the 2003 LTIP. The 2013 LTIP provides for awards for up to five million shares of common stock.
Shares of Con Edison common stock used to satisfy the Companies’ obligations with respect to stock-based compensation may be new (authorized, but unissued) shares, treasury shares or shares purchased in the open market. The Companies intend to use treasury shares to fulfill their stock-based compensation obligations for 2014.
Under the accounting rules for stock compensation, the Companies have recognized the cost of stock-based compensation as an expense using a fair value measurement method. The following table summarizes stock-based compensation expense recognized by the Companies in the years ended December 31, 2013, 2012, and 2011:
Performance-based restricted stock
Time-based restricted stock
Non-employee director deferred stock compensation
Income Tax Benefit
Stock Options
The Companies last issued stock options in 2006. The stock options generally vested over a three-year period and have a term of ten years. Options were granted at an exercise price equal to the fair market value of a common share when the option was granted. The Companies generally recognized compensation expense (based on the fair value of stock option awards) over the continuous service period in which the options vested. Awards to employees eligible for retirement were expensed in the month awarded.
The outstanding options are “equity awards” because shares of Con Edison common stock are delivered upon exercise of the options. As equity awards, the fair value of the options is measured at the grant date. There were no options granted in 2013 and 2012.
A summary of changes in the status of stock options awarded as of December 31, 2013 is as follows:
Outstanding at 12/31/12
Exercised
Forfeited
Outstanding at 12/31/13
The changes in the fair value of all outstanding options from their grant dates to December 31, 2013 and 2012 (aggregate intrinsic value) for Con Edison were $6 million and $8 million, respectively. The changes in the fair value of all outstanding options from their grant dates to December 31, 2013 and 2012 (aggregate intrinsic value) for CECONY were $5 million and $6 million, respectively. The aggregate intrinsic value of options exercised in 2013 and 2012 were $2 million and $5 million, respectively, and the cash received by Con Edison for payment of the exercise price was $5 million and $14 million, respectively. The weighted average remaining contractual life of options outstanding is one year as of December 31, 2013.
The following table summarizes stock options outstanding at December 31, 2013 for each plan year for the Companies:
Options
Outstanding/Exercisable
WeightedAverageExercise
Price
2006
2005
2004
The income tax benefit Con Edison realized from stock options exercised in the years ended December 31, 2013, 2012 and 2011 was $10 million, an immaterial amount and $2 million, respectively.
Restricted Stock and Stock Units
Restricted stock and stock unit awards under the LTIP have been made as follows: (i) time-based awards to certain employees; (ii) awards that provide for adjustment of the number of units (performance-restricted stock units or Performance RSUs) to certain officers and employees; and (iii) awards to non-employee directors. Restricted stock and stock units awarded represent the right to receive, upon vesting, shares of Con Edison common stock, or, except for units awarded under the directors’ plan, the cash value of shares or a combination thereof.
In accordance with the accounting rules for stock compensation, for time-based awards, the Companies have accrued a liability based on the market value of a common share on the grant date and are recognizing compensation expense over the vesting period. The vesting period for awards is three years and is based on the employee’s continuous service to Con Edison. Prior to vesting, the awards are subject
to forfeiture in whole or in part under certain circumstances. The awards are “liability awards” because each restricted stock unit represents the right to receive, upon vesting, one share of Con Edison common stock, the cash value of a share or a combination thereof. As such, prior to vesting, changes in the fair value of the units are reflected in net income. A summary of changes in the status of time-based awards during the year ended December 31, 2013 is as follows:
Non-vested at 12/31/12
Granted
Vested
Non-vested at 12/31/13
The total expense to be recognized by the Companies in future periods for unvested time-based awards outstanding as of December 31, 2013 for Con Edison was $2 million, including $1 million for CECONY, and is expected to be recognized over a weighted average period of one year.
The number of units in each annual Performance RSU award is subject to adjustment as follows: (i) 50 percent of the units awarded will be multiplied by a factor that may range from 0 to 150 percent for management employees and from 0 to 200 percent for officers, based on Con Edison’s total shareholder return relative to a specified peer group during a specified performance period (the TSR portion); and (ii) 50 percent of the units awarded will be multiplied by a factor that may range from 0 to 120 percent for management employees and from 0 to 200 percent for officers based on determinations made in connection with CECONY’s Executive Incentive Plan, CECONY’s Management Variable Pay Plan for non-officers, or, for certain officers, the O&R Annual Team Incentive Plan or goals relating to Con Edison’s competitive energy businesses (the EIP portion). Performance RSU awards generally vest when the performance period ends.
For the TSR portion of Performance RSUs, the Companies use a Monte Carlo simulation model to estimate the fair value of the awards. The fair value is recomputed each reporting period as of the earlier of the reporting date and the vesting date. For the EIP portion of Performance RSUs, the fair value of the awards is determined using the market price as of the earlier of the reporting date or the vesting date multiplied by the average EIP determination over the vesting period. Performance RSUs are “liability awards” because each Performance RSU represents the right to receive, upon vesting, one share of Con Edison common stock, the cash value of a share or a combination thereof. As such, changes in the fair value of the Performance RSUs are reflected in net income. The following table illustrates the assumptions used to calculate the fair value of the awards:
Risk-free interest rate
Expected term
Expected volatility
The risk-free rate is based on the U.S. Treasury zero-coupon yield curve on the date of grant. The expected term of the Performance RSUs is three years, which equals the vesting period. The Companies do not expect significant forfeitures to occur. The expected volatility is calculated using daily closing stock prices over a period of three years, which approximates the expected term of the awards.
A summary of changes in the status of the Performance RSUs’ TSR portion during the year ended December 31, 2013 is as follows:
A summary of changes in the status of the Performance RSUs’ EIP portion during the year ended December 31, 2013 is as follows:
The total expense to be recognized by Con Edison in future periods for unvested Performance RSUs outstanding as of December 31, 2013 is $18 million, including $15 million for CECONY and is expected to be recognized over a weighted average period of one year for both Con Edison and CECONY.
Under the LTIP, each non-employee director receives stock units, which are deferred until the director’s separation from service or another date specified by the director. Each director may also elect to defer all or a portion of their retainers and meeting fees into additional stock units, which are deferred until the director’s termination of service or another date specified by the director. Directors may elect to receive dividend equivalents earned on stock units either in deferred stock units or cash payments. Non-employee directors’ stock units issued under the LTIP are considered “equity awards,” because they may only be settled in shares. Directors immediately vest in units issued to them. The fair value of the units is determined using the closing price of Con Edison’s common stock on the business day immediately preceding the date of issue. In the year ended December 31, 2013, approximately 32,114 units were issued at a weighted average grant date price of $59.16.
Stock Purchase Plan
The Stock Purchase Plan provides for the Companies to contribute up to $1 for each $9 invested by their directors, officers or employees to purchase Con Edison common stock under the plan. Eligible participants may invest up to $25,000 during any calendar year (subject to an additional limitation for officers and employees of not more than 20 percent of their pay). Dividends paid on shares held under the plan are reinvested in additional shares unless otherwise directed by the participant.
Participants in the plan immediately vest in shares purchased by them under the plan. The fair value of the shares of Con Edison common stock purchased under the plan was calculated using the average of the high and low composite sale prices at which shares were traded at the New York Stock Exchange on the trading day immediately preceding such purchase dates. During 2013, 2012, and 2011, 864,281, 665,718 and 721,520 shares were purchased under the Stock Purchase Plan at a weighted average price of $57.24, $59.72 and $52.50 per share, respectively.
Note N — Financial Information by Business Segment
The business segments of each of the Companies, which are its operating segments, were determined based on management’s reporting and decision-making requirements in accordance with the accounting rules for segment reporting.
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.
All revenues of these business segments are from customers located in the United States of America. Also, all assets of the business segments are located in the United States of America. The accounting policies of the segments are the same as those described in Note A.
Common services shared by the business segments are assigned directly or allocated based on various cost factors, depending on the nature of the service provided.
The financial data for the business segments are as follows:
As of and for the Year EndedDecember 31, 2013
(Millions of Dollars)
Consolidation adjustments
Other*
Other**
As of and for the Year EndedDecember 31, 2012
As of and for the Year EndedDecember 31, 2011
Note O — 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 December 31, 2013 were:
Derivative assets
Derivative liabilities
Net derivative assets/(liabilities)
The fair values of the Companies’ commodity derivatives including the offsetting of assets and liabilities at December 31, 2012 were:
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. 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, 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.
At December 31, 2013, Con Edison and CECONY had $164 million and $20 million of credit exposure in connection with energy supply and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $84 million with independent system operators, $46 million with commodity exchange brokers, $33 million with investment-grade counterparties and $1 million with non-investment grade/non-rated counterparties. CECONY’s net credit exposure consisted of $17 million with commodity exchange brokers and $3 million with investment-grade counterparties.
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.
The fair values of the Companies’ commodity derivatives at December 31, 2013 were:
Long-term
Total derivative assets
Impact of netting
Net derivative assets
Total derivative liabilities
Net derivative liabilities
The fair values of the Companies’ commodity derivatives at December 31, 2012 were:
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. See “Recoverable Energy Costs” in Note A. 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.
The following table presents the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the year ended December 31, 2013:
Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a)
Deferred or Recognized in Income for the Year Ended December 31, 2013
Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:
Total deferred gains/(losses)
Net deferred gains/(losses)
Pre-tax gain/(loss) recognized in income
Total pre-tax gain/(loss) recognized in income
The following table presents the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the year ended December 31, 2012:
Deferred or Recognized in Income for the Year Ended December 31, 2012
Purchased power expense
Non-utility revenue
As of December 31, 2013, Con Edison had 1,116 contracts, including 547 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:
Number
ofContracts(a)
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 December 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:
Aggregate fair value – net liabilities
Collateral posted
Additional collateral(b) (downgrade one level from current ratings)
Additional collateral(b) (downgrade to below investment grade from current ratings)
Interest Rate Swap
O&R has an interest rate swap, which terminates in October 2014, 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 December 31, 2013 was an unrealized loss of $2 million, which has been included in Con Edison’s consolidated balance sheet as a current liability/fair value of derivative liabilities and a regulatory asset. The increase in the fair value of the swap for the year ended December 31, 2013 was $4 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.
Note P – 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.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 are summarized below.
Netting
Adjustments(d)
Derivative assets:
Commodity(a)(e)(f)
Other assets(c)(e)(f)
Derivative liabilities:
Interest rate contract(b)(e)(f)
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 are summarized below.
Con
Edison
Commodity(a)(e)(i)
Other assets(c)(e)(f)(i)
Commodity(a)(e)(h)(i)
Interest rate contract(b)(e)(g)(i)
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 atDecember 31, 2013
Con Edison – Commodity
Electricity
Discounted Cash Flow
Forward energy prices(a)
Forward capacity prices(a)
$27.75 - $124.75 per MWH
$9.50 per kW - month
Transmission Congestion Contracts / Financial Transmission Rights
Discount to adjust auction prices for inter-zonal forward price curves(b)
Discount to adjust auction prices for historical monthly realized settlements(b)
Inter-zonal forward price curves adjusted for historical zonal losses(b)
(5.8)% - 36.5%
(102.4)% - 49.1%
$(0.31) - $10.25
Total Con Edison—Commodity
CECONY – Commodity
Transmission Congestion Contracts
The table listed below provides a reconciliation of the beginning and ending net balances for assets and liabilities measured at fair value for the years ended December 31, 2013 and 2012 and classified as Level 3 in the fair value hierarchy:
For Year Ended December 31, 2013
Total Gains/(Losses) –
Realized and Unrealized
Ending
Balance as of
Derivatives:
Commodity
For the Year Ended December 31, 2012
December 31, 2012
Interest rate contract
Other assets(a)
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 ($2 million loss and $12 million loss) and purchased power costs ($5 million gain and $46 million loss) on the consolidated income statement for the years ended December 31, 2013 and 2012, respectively. The change in fair value relating to Level 3 commodity derivative assets and liabilities held at December 31, 2013 and 2012 is included in non-utility revenues ($2 million loss and $12 million loss), and purchased power costs ($3 million gain and $46 million gain) on the consolidated income statement for the years ended December 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 December 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 Q – Variable Interest Entities
The Companies have not identified any interests they have in any variable interest entity (VIE) that would require the Companies to include the financial position and results of operations of the VIE in the Companies’ consolidated financial statements.
The accounting rules for consolidation address the consolidation of a VIE by a business enterprise that is the primary beneficiary. A VIE is an entity that does not have a sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest. The primary beneficiary is the business enterprise that has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and either absorbs a significant amount of the VIE’s losses or has the right to receive benefits that could be significant to the VIE.
Con Edison enters into arrangements including leases, partnerships and electricity purchase agreements, with various entities. As a result of these arrangements, Con Edison retains or may retain a variable interest in these entities.
CECONY has a variable interest in a non-consolidated VIE, Astoria Energy, LLC (Astoria Energy), with which CECONY has entered into a long-term electricity purchase agreement. CECONY is not the primary beneficiary of this VIE since
CECONY does not have the power to direct the activities that CECONY believes most significantly impact the economic performance of Astoria Energy. In particular, CECONY has not invested in, or guaranteed the indebtedness of, Astoria Energy and CECONY does not operate or maintain Astoria Energy’s generating facilities. CECONY also has long-term electricity purchase agreements with the following five potential VIEs: Sithe/Independence Power Partners, LP, Cogen Technologies Linden Venture, LP, Selkirk Cogen Partners, LP, Brooklyn Navy Yard Cogeneration Partners, LP, and Indeck Energy Services of Corinth, Inc. In 2013, requests were made of these five counterparties for information necessary to determine whether the entity was a VIE and whether CECONY is the primary beneficiary; however, the information was not made available. See Note I for information on these electricity purchase agreements, the payments pursuant to which constitute CECONY’s maximum exposure to loss with respect to Astoria Energy and the five potential VIEs.
Con Edison has a variable interest in a non-consolidated VIE, Pilesgrove Solar, LLC (Pilesgrove), in which Con Edison Development, starting in 2010, participated with a third party to develop, construct, and operate a photovoltaic solar energy project. The project was constructed for approximately $90 million and commenced commercial operation in August 2011. Con Edison is not the primary beneficiary of this VIE since the power to direct the activities that most significantly impact the economics of Pilesgrove is shared equally between Con Edison Development and the third party. Included in the Con Edison’s consolidated balance sheet at December 31, 2013 is $25 million in assets related to Pilesgrove which represents Con Edison Development’s investment including earnings in Pilesgrove and is the current maximum exposure to loss in Pilesgrove.
Con Edison has variable interests in Copper Mountain Solar 2 Holdings, LLC (CMS 2) and Mesquite Solar 1 Holdings, LLC (MS 1), non-consolidated entities in which Con Edison Development purchased a 50 percent membership interest in 2013. CMS 2 owns a project company that is developing a 150 MW (AC) solar energy project (with 92 MW currently in service) in Nevada. MS 1 owns a project company that owns a 150 MW (AC) solar energy project in Arizona. Electricity generated by the projects is sold to Pacific Gas and Electric Company pursuant to long-term power purchase agreements. Con Edison is not the primary beneficiary of these variable interest entities since the power to direct the activities that most significantly impact the economics of CMS 2 and MS 1 is shared equally between Con Edison Development and a third party. At December 31, 2013, Con Edison’s consolidated balance sheet includes $75 million and $104 million in investments (including earnings) related to CMS 2 and MS 1, respectively, which assessed in accordance with the accounting rules for variable interest entities, is Con Edison’s current maximum exposure to loss in the entities. In addition, Con Edison and Con Edison Development have issued certain guarantees to third parties in connection with the CMS 2 and MS 1 projects. See “Guarantees” in Note H.
Note R – Asset Retirement Obligations
The Companies account for retirement obligations on their assets in accordance with the accounting rules for asset retirement obligations.
The Companies recorded asset retirement obligations associated with the removal of asbestos and asbestos-containing material in their buildings (other than generating station and substation building structures themselves), electric equipment, and steam and gas distribution systems. The Companies also recorded asset retirement obligations relating to gas pipelines abandoned in place. The estimates of future liabilities were developed using historical information, and where available, quoted prices from outside contractors.
The Companies did not record an asset retirement obligation for the removal of asbestos associated with the generating station and substation building structures themselves. For these building structures, the Companies were unable to reasonably estimate their asset retirement obligations because the Companies were unable to estimate the undiscounted retirement costs or the retirement dates and settlement dates. The amount of the undiscounted retirement costs could vary considerably depending on the disposition method for the building structures, and the method has not been determined. The Companies anticipate continuing to use these building structures in their businesses for an indefinite period, and so the retirement dates and settlement dates are not determinable.
The accrued liability for asset retirement obligations and the regulatory liabilities for allowance for cost of removal less salvage for the Companies at December 31, 2013 and 2012 were as follows:
Accrued liability – asset retirement obligations
Regulatory liabilities – allowance for cost of removal less salvage
Note S – Related Party Transactions
The Utilities and Con Edison’s competitive businesses provide administrative and other services to each other pursuant to cost allocation procedures approved by the NYSPSC. The costs of administrative and other services provided by CECONY to, and received by it from, Con Edison and its other subsidiaries for the years ended December 31, 2013, 2012, and 2011 were as follows:
Cost of services provided
Cost of services received
In addition, CECONY and O&R have joint gas supply arrangements, in connection with which CECONY sold to O&R $123 million, $54 million and $81 million of natural gas for the years ended December 31, 2013, 2012, and 2011, respectively. These amounts are net of the effect of related hedging transactions.
FERC has authorized CECONY through 2015 to lend funds to O&R from time to time, for periods of not more than 12 months, in amounts not to exceed $250 million outstanding at any time, at prevailing market rates. There were no outstanding loans to O&R at December 31, 2013 and 2012.
Note T – 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 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 O.
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.
In July 2013, the FASB issued ASU No. 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB Emerging Issues Task Force).” The new guidance permits designating the Federal Funds Effective Swap Rate as a benchmark interest rate for hedge accounting. Previously, only the U.S. Treasury and LIBOR rates were allowed under the hedge accounting rules in U.S. GAAP. The new guidance also eliminates the restriction on using different benchmark interest rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The application of this guidance does not have a material impact on the Companies’ financial position, results of operations and liquidity.
In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a Consensus of the FASB Emerging Issues Task Force).” The amendments require a liability related to an unrecognized tax benefit to be presented on a net basis with its associated deferred tax asset when utilization of such deferred tax assets is required or expected in the event the uncertain tax position is disallowed. Otherwise, the unrecognized tax benefit will be presented as a liability and will not be netted against deferred tax assets. For public entities, the amendments are effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The application of this guidance is not expected to have a material impact on the Companies’ financial position, results of operations and liquidity. See Note L.
Schedule I
Condensed Financial Information of Consolidated Edison, Inc.*
Condensed Statement of Income and Comprehensive Income
(Parent Company Only)
Equity in earnings of subsidiaries
Other income (deductions), net of taxes
Interest expense
Net Income for Common Stock
Comprehensive Income for Common Stock
Net Income Per Common Share – Basic
Net Income Per Common Share – Diluted
Dividends Declared Per Share Of Common Stock
Average Number Of Shares Outstanding—Basic (In Millions)
Average Number Of Shares Outstanding—Diluted (In Millions)
Condensed Statement of Cash Flows
Dividends received from:
Change in Assets:
Other – net
Net Cash Flows from Operating Activities
Investing Activities
Contributions to subsidiaries
Net Cash Flows Used in Investing Activities
Financing Activities
Net Cash Flows Used in Financing Activities
Net Change for the Period
Balance at Beginning of Period
Balance at End of Period
Condensed Balance Sheet
Current Assets
Accounts receivable – other
Total Current Assets
Investments in subsidiaries
Deferred income tax
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities
Total Current Liabilities
Noncurrent Liabilities
Total Liabilities
Shareholders’ Equity
Common stock, including additional paid–in capital
Retained earnings
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
Schedule II
Valuation and Qualifying Accounts
For the Years Ended December 31, 2013, 2012 and 2011
COLUMN C
Additions
COLUMN A
Description
(1)
Charged ToCosts AndExpenses
None.
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.
For the Companies’ Reports of Management On Internal Control Over Financial Reporting and the related opinions of PricewaterhouseCoopers LLP (presented in the Reports of Independent Registered Public Accounting Firm), see Item 8 of this report (which information is incorporated herein by reference).
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.
Information required by Part III as to Con Edison, other than the information required in Item 12 of this report by Item 201(d) of Regulation S-K, is incorporated by reference from Con Edison’s definitive proxy statement for its Annual Meeting of Stockholders to be held on May 19, 2014. The proxy statement is to be filed pursuant to Regulation 14A not later than 120 days after December 31, 2013, the close of the fiscal year covered by this report.
The information required pursuant to Item 201(d) of Regulation S-K as at December 31, 2013 is as follows:
Equity Compensation Plan Information
Equity compensation plans approved by security holders
2003 LTIP(1)
2013 LTIP(2)
Total equity compensation plans approved by security holders
Total equity compensation plans not approved by security holders
For additional information about Con Edison’s stock-based compensation, see Note M to the financial statements in Item 8 of this report (which information is incorporated herein by reference).
In accordance with General Instruction G(3) to Form 10-K, other information regarding Con Edison’s Executive Officers may be found in Part I of this report under the caption “Executive Officers of the Registrant.”
Information required by Items 10, 11, 12 and 13 of Part III as to CECONY is omitted pursuant to Instruction (I)(2) to Form 10-K (Omission of Information by Certain Wholly-Owned Subsidiaries).
In accordance with General Instruction G(3) to Form 10-K, other information regarding CECONY’s Executive Officers may be found in Part I of this report under the caption “Executive Officers of the Registrant.”
Fees paid or payable by CECONY to its principal accountant, PricewaterhouseCoopers LLP, for services related to 2013 and 2012 are as follows:
Audit fees
Audit-related fees(a)
Tax fees
All other fees
Total fees
Con Edison’s Audit Committee or, as delegated by the Audit Committee, the Chair of the Committee, approves in advance each auditing service and non-audit service permitted by applicable laws and regulations, including tax services, to be provided to CECONY by its independent accountants.
(a) Documents filed as part of this report:
1. List of Financial Statements – See financial statements listed in Item 8.
2. List of Financial Statement Schedules –See schedules listed in Item 8.
3. List of Exhibits
Exhibits listed below which have been filed previously with the Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, and which were designated as noted below, are hereby incorporated by reference and made a part of this report with the same effect as if filed with the report. Exhibits listed below that were not previously filed are filed herewith.
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.
Securities Exchange Act
File No. 1-1217
5/16/88
6/2/89
4/28/92
8/21/92
2/18/98
5.875%
5.10%
4.70%
5.70%
5.30%
5.250%
5.375%
5.85%
6.20%
5.50%
6.30%
6.75%
7.125%
5.55%
6.65%
4.45%
4.20%
3.95%
Employment Agreement, dated February 18, 1999, between CECONY and Frances Resheske.
(Designated in CECONY’s Annual Report on Form 10-K, for the year ended December 31, 2006 (File No. 1-1217) as Exhibit 10.2.14)
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Securities Exchange Act of 1934 by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Securities Exchange Act of 1934
No annual report to security holders covering CECONY’s last fiscal year has been sent to its security holders. No proxy statement, form of proxy or other proxy soliciting material has been sent to CECONY’s security holders during such period.
Pursuant to the requirements of Section 13 or 15(d) 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, on February 20, 2014.
/s/ Robert Hoglund
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, and in the capacities indicated, on February 20, 2014.
/s/ John McAvoy
Chief Executive Officer and Trustee (Principal Executive Officer)
/s/ Robert Muccilo
/s/ Kevin Burke
Kevin Burke
Chairman of the Board and Director
Chairman of the Board and Trustee
/s/ Vincent A. Calarco
Vincent A. Calarco
Director
Trustee
/s/ George Campbell Jr.
George Campbell Jr.
/s/ Gordon J. Davis
Gordon J. Davis
/s/ Michael J. Del Giudice
Michael J. Del Giudice
/s/ Ellen V. Futter
Ellen V. Futter
/s/ John F. Killian
John F. Killian
/s/ Eugene R. McGrath
Eugene R. McGrath
/s/ Sally H. Piñero
Sally H. Piñero
/s/ Michael W. Ranger
Michael W. Ranger
/s/ L. Frederick Sutherland
L. Frederick Sutherland