UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014
OR
For the transition period from to
Commission
File Number
Exact name of registrant as specified in its charter
and principal office address and telephone number
State ofIncorporation
I.R.S. EmployerID. Number
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 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of May 2, 2014, Con Edison had outstanding 292,894,192 Common Shares ($.10 par value). All of the outstanding common equity of CECONY is held by Con Edison.
Filing Format
This Quarterly Report on Form 10-Q is a combined report being filed separately by two different registrants: Consolidated Edison, Inc. (Con Edison) and Consolidated Edison Company of New York, Inc. (CECONY). CECONY is a subsidiary of Con Edison and, as such, the information in this report about CECONY also applies to Con Edison. As used in this report, the term the “Companies” refers to Con Edison and CECONY. However, CECONY makes no representation as to the information contained in this report relating to Con Edison or the subsidiaries of Con Edison other than itself.
Glossary of Terms
The following is a glossary of frequently used abbreviations or acronyms that are used in the Companies’ SEC reports:
TABLE OF CONTENTS
Financial Statements (Unaudited)
Con Edison
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Cash Flows
Consolidated Balance Sheet
Consolidated Statement of Common Shareholders’ Equity
CECONY
Consolidated Statement of Common Shareholder’s Equity
Notes to the Financial Statements (Unaudited)
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
Legal Proceedings
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Exhibits
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements intended to qualify for the safe-harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements of future expectation and not facts. Words such as “expects,” “estimates,” “anticipates,” “intends,” “believes,” “plans,” “will” and similar expressions identify forward-looking statements. Forward-looking statements are based on information available at the time the statements are made, and accordingly speak only as of that time. Actual results or developments might differ materially from those included in the forward-looking statements because of various risks, including:
the failure to operate energy facilities safely and reliably could adversely affect the Companies;
the failure to properly complete construction projects could adversely affect the Companies;
the failure of processes and systems and the performance of employees and contractors could adversely affect the Companies;
the Companies are extensively regulated and are subject to penalties;
the Utilities’ rate plans may not provide a reasonable return;
the Companies may be adversely affected by changes to the Utilities’ rate plans;
the Companies are exposed to risks from the environmental consequences of their operations;
a disruption in the wholesale energy markets or failure by an energy supplier could adversely affect the Companies;
the Companies have substantial unfunded pension and other postretirement benefit liabilities;
Con Edison’s ability to pay dividends or interest depends on dividends from its subsidiaries;
the Companies require access to capital markets to satisfy funding requirements;
a cyber attack could adversely affect the Companies; and
the Companies also face other risks that are beyond their control.
Consolidated Edison, Inc.
CONSOLIDATED INCOME STATEMENT (UNAUDITED)
For the Three Months
Ended March 31,
OPERATING REVENUES
Electric
Gas
Steam
Non-utility
TOTAL OPERATING REVENUES
OPERATING EXPENSES
Purchased power
Fuel
Gas purchased for resale
Other operations and maintenance
Depreciation and amortization
Taxes, other than income taxes
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 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 (UNAUDITED)
NET INCOME
OTHER COMPREHENSIVE INCOME, NET OF TAXES
Pension plan liability adjustments, net of $2 taxes in 2014 and 2013
TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAXES
COMPREHENSIVE INCOME FOR COMMON STOCK
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
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
Other non-cash items (net)
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable – customers, less allowance for uncollectibles
Special deposits
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
Accrued taxes
Accrued interest
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/(USED IN) 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
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
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 during the period for:
Interest
Income taxes
CONSOLIDATED BALANCE SHEET (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and temporary cash investments
Accounts receivable – customers, less allowance for uncollectible accounts of $96 and $93 in 2014 and 2013, respectively
Other receivables, less allowance for uncollectible accounts of $10 in 2014 and 2013
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
General
TOTAL
Less: Accumulated depreciation
Net
Construction work in progress
NET UTILITY PLANT
NON-UTILITY PLANT
Non-utility property, less accumulated depreciation of $97 and $90 in 2014 and 2013, respectively
NET PLANT
OTHER NONCURRENT ASSETS
Goodwill
Intangible assets, less accumulated amortization of $4 in 2014 and 2013
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
Notes payable
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
Superfund and other environmental costs
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 (UNAUDITED)
AdditionalPaid-InCapital
RetainedEarnings
CapitalStockExpense
BALANCE AS OF DECEMBER 31, 2012
Net income for common stock
Other comprehensive income
BALANCE AS OF MARCH 31, 2013
BALANCE AS OF DECEMBER 31, 2013
BALANCE AS OF MARCH 31, 2014
Consolidated Edison Company of New York, Inc.
Pension plan liability adjustments, net of $- taxes in 2014 and 2013
COMPREHENSIVE INCOME
Net income
Accounts receivable—customers, less allowance for uncollectibles
NET CASH FLOWS FROM OPERATING ACTIVITIES
Dividend to parent
NET CASH FLOWS USED IN FINANCING ACTIVITIES
Accounts receivable – customers, less allowance for uncollectible accounts of $90 and $87 in 2014 and 2013, respectively
Other receivables, less allowance for uncollectible accounts of $9 and $8 in 2014 and 2013, respectively
Accounts receivable from affiliated companies
UTILITY PLANT AT ORIGINAL COST
NON-UTILITY PROPERTY
Non-utility property, less accumulated depreciation of $25 in 2014 and 2013
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 (UNAUDITED)
Additional
Paid-InCapital
Retained
Earnings
RepurchasedCon Edison
Stock
CapitalStock
Expense
AccumulatedOther
Comprehensive
Income/(Loss)
Common stock dividend to parent
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
These combined notes accompany and form an integral part of the separate consolidated financial statements of each of the two separate registrants: Consolidated Edison, Inc. and its subsidiaries (Con Edison) and Consolidated Edison Company of New York, Inc. and its subsidiaries (CECONY). CECONY is a subsidiary of Con Edison and as such its financial condition and results of operations and cash flows, which are presented separately in the CECONY consolidated financial statements, are also consolidated, along with those of Con Edison’s other utility subsidiary, Orange and Rockland Utilities, Inc. (O&R), and Con Edison’s competitive energy businesses (discussed below) in Con Edison’s consolidated financial statements. The term “Utilities” is used in these notes to refer to CECONY and O&R.
As used in these notes, the term “Companies” refers to Con Edison and CECONY and, except as otherwise noted, the information in these combined notes relates to each of the Companies. However, CECONY makes no representation as to information relating to Con Edison or the subsidiaries of Con Edison other than itself.
The separate interim consolidated financial statements of each of the Companies are unaudited but, in the opinion of their respective managements, reflect all adjustments (which include only normally recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The Companies’ separate interim consolidated financial statements should be read together with their separate audited financial statements (including the combined notes thereto) included in Item 8 of their combined Annual Report on Form 10-K for the year ended December 31, 2013. Certain prior period amounts have been reclassified to conform to the current period presentation.
Con Edison has two regulated utility subsidiaries: CECONY and O&R. CECONY provides electric service and gas service in New York City and Westchester County. The company also provides steam service in parts of Manhattan. O&R, along with its regulated utility subsidiaries, provides electric service in southeastern New York and adjacent areas of northern New Jersey and eastern Pennsylvania and gas service in southeastern New York and adjacent areas of eastern Pennsylvania. Con Edison has the following competitive energy businesses: Consolidated Edison Solutions, Inc. (Con Edison Solutions), a 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
Earnings Per Common Share
For the three months ended March 31, 2014 and 2013, basic and diluted earnings per share (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 three months ended March 31, 2014 excludes 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 three months ended March 31, 2013.
Changes in Accumulated Other Comprehensive Income by Component
For the three months ended March 31, 2014 and 2013, changes to accumulated other comprehensive income (OCI) for Con Edison and CECONY are as follows:
2014
Beginning balance, accumulated OCI, net of taxes
OCI before reclassifications, net of tax of $1 and $1 for Con Edison and $- and $- for CECONY, respectively
Amounts reclassified from accumulated OCI related to pension plan liabilities, net of tax of $1 and $1 for Con Edison and $- and $- for CECONY (a)(b)
Current period total OCI, net of taxes
Ending balance, accumulated OCI, net of taxes (b)
Note B — Regulatory Matters
Other Regulatory Matters
In February 2009, the New York State Public Service Commission (NYSPSC) commenced a proceeding to examine the prudence of certain CECONY expenditures following the arrests of employees for accepting illegal payments from a construction contractor. Subsequently, additional employees were arrested for accepting illegal payments from materials suppliers and an engineering firm. The arrested employees were terminated by the company and have pled guilty or been convicted. Pursuant to NYSPSC orders, a portion of the company’s revenues (currently, $249 million, $32 million and $6 million on an annual basis for electric, gas and steam service, respectively) is being collected subject to potential refund to customers. The amount of electric revenues collected subject to refund, which was established in a different proceeding, and the amount of gas and steam revenues collected subject to refund were not established as indicative of the company’s potential liability in this proceeding. At March 31, 2014, the company had collected an estimated $1,462 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. In May 2014, the NYSPSC’s Chief Administrative Law Judge appointed a settlement judge to assist the parties. There is no assurance that there will be a settlement, and any settlement would be subject to NYSPSC approval. At March 31, 2014, the company had a $38 million regulatory liability relating to this matter. Included in the regulatory liability was $16 million the company recovered from vendors, arrested employees and insurers relating to this matter. Pursuant to the current rate plans, the company is applying $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 March 31, 2014, CECONY and O&R incurred response and restoration costs for Superstorm Sandy of $490 million and $93 million, respectively (including capital expenditures of $149 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. 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. In November 2013, RECO filed an electric rate request with the NJBPU which includes a proposal for recovery over a three-year period of its deferred storm costs of $27 million. In May 2014, RECO, the NJBPU staff and the New Jersey Division of Rate Counsel entered into a stipulation of settlement regarding RECO’s deferred storm costs. The stipulation, which is subject to NJBPU approval, provides that RECO’s deferred storm costs are deemed reasonable, prudent and eligible for recovery over a period to be determined in RECO’s electric rate proceeding.
Regulatory Assets and Liabilities
Regulatory assets and liabilities at March 31, 2014 and December 31, 2013 were comprised of the following items:
Unrecognized pension and other postretirement costs
Future income tax
Environmental remediation costs
Deferred storm costs
Revenue taxes
Pension and other postretirement benefits deferrals
Surcharge for New York State assessment
Net electric deferrals
Unamortized loss on reacquired debt
O&R transition bond charges
Preferred stock redemption
Property tax reconciliation
Workers’ compensation
Deferred derivative losses – noncurrent
Other
Regulatory assets – noncurrent
Deferred derivative losses – current
Recoverable energy costs – current
Regulatory assets – current
Total Regulatory Assets
Allowance for cost of removal less salvage
Property tax refunds
Long-term interest rate reconciliation
Carrying charges on repair allowance and bonus depreciation
New York State income tax rate change
Net unbilled revenue deferrals
World Trade Center settlement proceeds
Other postretirement benefit deferrals
2014 rate plan base rate revenue deferral
Prudence proceeding
Unrecognized other postretirement benefits costs
Carrying charges on T&D net plant – electric and steam
Electric excess earnings
Regulatory liabilities – noncurrent
Refundable energy costs – current
Deferred derivative gains – current
Revenue decoupling mechanism
Regulatory liabilities – current
Total Regulatory Liabilities
Note C — Capitalization
In February 2014, CECONY redeemed at maturity $200 million of 4.70 percent 10-year debentures. In March 2014, CECONY issued $850 million aggregate principal amount of 4.45 percent 30-year debentures.
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, $12,364 million and $636 million of the fair value of long-term debt at March 31, 2014 are classified as Level 2 and Level 3, respectively. For CECONY, $11,056 million and $636 million of the fair value of long-term debt at March 31, 2014 are classified as Level 2 and Level 3, respectively (see Note M). The $636 million of long-term debt classified as Level 3 is CECONY’s tax-exempt, auction-rate securities for which the market is highly illiquid and there is a lack of observable inputs.
Note D — Short-Term Borrowing
At March 31, 2014, Con Edison had $830 million of commercial paper outstanding of which $669 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, 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 March 31, 2014 and December 31, 2013, no loans were outstanding under the Companies’ credit agreement and $56 million (including $11 million for CECONY) and $26 million (including $11 million for CECONY) of letters of credit were outstanding, respectively, under the credit agreement.
Note E — Pension Benefits
Net Periodic Benefit Cost
The components of the Companies’ net periodic benefit costs for the three months ended March 31, 2014 and 2013 were as follows:
Service cost – including administrative expenses
Interest cost on projected benefit obligation
Expected return on plan assets
Recognition of net actuarial loss
Recognition of prior service costs
NET PERIODIC BENEFIT COST
Cost capitalized
Reconciliation to rate level
Cost charged to operating expenses
Expected Contributions
Based on estimates as of March 31, 2014, the Companies expect to make contributions to the pension plan during 2014 of $564 million (of which $524 million is to be contributed by CECONY). The Companies’ policy is to fund their accounting cost to the extent tax deductible. During the first quarter of 2014, CECONY contributed $200 million to the pension plan. The Companies expect to fund $13 million for the non-qualified supplemental plans in 2014.
Note F — Other Postretirement Benefits
The components of the Companies’ net periodic postretirement benefit costs for the three months ended March 31, 2014 and 2013 were as follows:
Service cost
Interest cost on accumulated other postretirement benefit obligation
Recognition of prior service cost
NET PERIODIC POSTRETIREMENT BENEFIT COST
Based on estimates as of March 31, 2014, 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.
Note G — Environmental Matters
Superfund Sites
Hazardous substances, such as asbestos, polychlorinated biphenyls (PCBs) and coal tar, have been used or generated in the course of operations of the Utilities and their predecessors and are present at sites and in facilities and equipment they currently or previously owned, including sites at which gas was manufactured or stored.
The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state statutes (Superfund) impose joint and several liability, regardless of fault, upon generators of hazardous substances for investigation and remediation costs (which include costs of demolition, removal, disposal, storage, replacement, containment, and monitoring) and natural resource damages. Liability under these laws can be material and may be imposed for contamination from past acts, even though such past acts may have been lawful at the time they occurred. The sites at which the Utilities have been asserted to have liability under these laws, including their manufactured gas plant sites and any neighboring areas to which contamination may have migrated, are referred to herein as “Superfund Sites.”
For Superfund Sites where there are other potentially responsible parties and the Utilities are not managing the site investigation and remediation, the accrued liability represents an estimate of the amount the Utilities will need to pay to investigate and, where determinable, discharge their related obligations. For Superfund Sites (including the manufactured gas plant sites) for which one of the Utilities is managing the investigation and remediation, the accrued liability represents an estimate of the company’s share of undiscounted cost to investigate the sites and, for sites that have been investigated in whole or in part, the cost to remediate the sites, if remediation is necessary and if a reasonable estimate of such cost can be made. Remediation costs are estimated in light of the information available, applicable remediation standards, and experience with similar sites.
The accrued liabilities and regulatory assets related to Superfund Sites at March 31, 2014 and December 31, 2013 were as follows:
Accrued Liabilities:
Manufactured gas plant sites
Other Superfund Sites
Total
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 for the three months ended March 31, 2014 and 2013 were as follows:
Remediation costs incurred
Insurance recoveries received*
* Reduced amount deferred for recovery from customers
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 March 31, 2014 and December 31, 2013 were as follows:
Accrued liability – asbestos suits
Regulatory assets – asbestos suits
Accrued liability – workers’ compensation
Regulatory assets – workers’ compensation
Note H – Other Material Contingencies
Manhattan Steam Main Rupture
In July 2007, a CECONY steam main located in midtown Manhattan ruptured. It has been reported that one person died and others were injured as a result of the incident. Several buildings in the area were damaged. Debris from the incident included dirt and mud
containing asbestos. The response to the incident required the closing of several buildings and streets for various periods. Approximately 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 March 31, 2014, the company had accrued its estimated liability for the suits of $50 million and an insurance receivable in the same amount.
Manhattan Explosion and Fire
On March 12, 2014, two multi-use five-story tall buildings located on Park Avenue between 116th and 117th Street in Manhattan were destroyed by an explosion and fire. CECONY had delivered gas to the buildings through service lines from a distribution main located below ground on Park Avenue. Eight people died and more than 48 people were injured. Additional buildings were also damaged. The National Transportation Safety Board is investigating. The parties to the investigation include the company, the City of New York, the Pipeline and Hazardous Materials Safety Administration and the NYSPSC (which is also conducting an investigation). Several suits are pending against the company seeking generally unspecified damages for personal injury and property damage. 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, in excess of a required retention (the amount of which is not material), to satisfy any liability it may have for damages in connection with the incident. The company is unable to estimate the amount or range of its possible loss related to the incident. At March 31, 2014, the company had not accrued a liability for the incident.
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 $1,500 million and $1,331 million at March 31, 2014 and December 31, 2013, respectively.
A summary, by type and term, of Con Edison’s total guarantees at March 31, 2014 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 two guarantees ($80 million maximum and $208 million maximum, respectively) on behalf of two entities in which it has a 50 percent interest 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 March 31, 2014.
Note I – Lease In/Lease Out Transactions
As a result of the January 2013 Court of Appeals decision, in March 2013, Con Edison recorded an after-tax charge of $150 million to reflect, as required by the accounting rules for leveraged lease transactions, the recalculation of the accounting effect of the LILO transactions based on the revised after-tax cash flows projected from the inception of the leveraged leases as well as the interest on the potential tax liability resulting from the disallowance of federal and state income tax losses with respect to the LILO transactions. In the first quarter of 2014, the interest accrued on the liability was reduced by $13 million ($7 million, net of tax). See “Uncertain Tax Positions” in Note J.
The effect of the LILO transactions on Con Edison’s consolidated income statement for the three months ended as of March 31, 2014 and 2013 were as follows:
Increase/(decrease) to non-utility operating revenues
(Increase)/decrease to other interest expense
Income tax benefit/(expense)
Total increase/(decrease) in net income
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 the first quarter of 2014, Con Edison applied the remainder of the deposit against its federal and state tax liabilities, including interest. See “Uncertain Tax Positions” in Note J.
Note J — Income Tax
In the first quarter of 2013, the IRS accepted on audit Con Edison’s claim for manufacturing tax deductions. Accordingly, Con Edison’s effective tax rate was favorably impacted by $15 million. In addition, as a result of interest expense on the LILO disallowances and reduction to non-utility operating revenues (see Note I), income before income tax expense for the first quarter of 2013 was significantly lower than the first quarter of 2014. Other recurring tax rate reconciling items in the first quarter of 2014 and 2013 are comparable. However, as a result of lower income before income tax expense in 2013, Con Edison’s effective tax rate was 23 percent for the three months ended March 31, 2013, compared to 35 percent for the same period in 2014.
On March 31, 2014, tax legislation was enacted in the State of New York that reduces the corporate franchise tax rate from 7.1 percent to 6.5 percent, beginning January 1, 2016. The application of this legislation decreased Con Edison’s accumulated deferred tax liabilities by $77 million ($72 million for CECONY), decreased Con Edison’s regulatory asset for future income tax by $11 million ($10 million for CECONY) and increased Con Edison’s regulatory liability by $66 million ($62 million for CECONY). The impact of this tax legislation on Con Edison’s effective tax rate was immaterial and there was no impact on CECONY’s effective tax rate for the three months ended March 31, 2014.
Uncertain Tax Positions
During the first quarter of 2013, the IRS accepted Con Edison’s deductions for repair costs to utility plant (the “repair allowance deductions”). As a result of this settlement, Con Edison and CECONY reduced their estimated liabilities for prior year uncertain tax positions by $72 million and $66 million, respectively, with a corresponding increase to accumulated deferred income tax liabilities. In addition, as a result of the January 2013 Court of Appeals decision (see Note I), Con Edison increased its estimated prior year liabilities for federal and state uncertain tax positions by $249 million in the first quarter of 2013, with a corresponding reduction to accumulated deferred income tax liabilities. These changes to the Companies’ estimated liabilities for uncertain tax positions had no impact on income tax expense in the first quarter of 2013. As a result of positions taken on the various amended state tax returns filed in the first quarter of 2014, Con Edison increased its estimated liabilities for uncertain tax positions by $22 million. The amended state tax returns contain uncertain tax positions unique to the states, and the returns remain open for examination. At March 31, 2014, the estimated liability for uncertain tax positions for Con Edison was $31 million and was reflected as a noncurrent liability on its consolidated balance sheet. CECONY had no liabilities for uncertain tax positions.
The Companies recognize interest on liabilities for uncertain tax positions in interest expense and would recognize penalties, if any, in operating expenses in the Companies’ consolidated income statements. In the first quarter of 2014, Con Edison recognized an immaterial amount of interest expense and no penalties for uncertain tax positions in its consolidated income statements. In the first quarter of 2013, Con Edison recognized $126 million of interest expense ($131 million related to the LILO transactions, less a reduction of $5 million in accrued interest expense primarily associated with repair allowance deductions). At March 31, 2014 and December 31, 2013, Con Edison recognized an immaterial amount of accrued interest on its consolidated balance sheets.
As of March 31, 2014, Con Edison reasonably expects to resolve approximately $13 million ($8 million, net of federal taxes) of its uncertainties related to certain tax matters within the next twelve months, of which the entire amount, if recognized, would affect Con Edison’s effective tax rate. The total amount of unrecognized tax benefits, if recognized, that would affect Con Edison’s effective tax rate is $31 million ($20 million, net of federal taxes).
Note K – Financial Information by Business Segment
The financial data for the business segments are as follows:
Operating
revenues
income
Consolidation adjustments
Total CECONY
O&R
Total O&R
Competitive energy businesses
Other*
Total Con Edison
Note L – 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.
The Companies enter into master agreements for their commodity derivatives. These agreements typically provide for setoff in the event of contract termination. In such case, generally the non-defaulting or non-affected party’s payable will be set-off by the other party’s payable. The non-defaulting party will customarily notify the defaulting party within a specific time period and come to an agreement on the early termination amount.
The fair values of the Companies’ commodity derivatives including the offsetting of assets and liabilities at March 31, 2014 were:
Gross
Amounts ofRecognizedAssets/(Liabilities)
Net Amounts ofAssets/(Liabilities)Presented in
the Statement
of FinancialPosition
Gross Amounts Not
Offset in the Statement
of Financial Position
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, 2013 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 March 31, 2014, Con Edison and CECONY had $236 million and $48 million of credit exposure in connection with energy supply and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $96 million with independent system operators, $78 million with commodity exchange brokers, $60 million with investment-grade counterparties and $2 million with non-investment grade/non-rated counterparties. CECONY’s net credit exposure consisted of $28 million with commodity exchange brokers and $20 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 March 31, 2014 were:
Fair Value of Commodity Derivatives(a)
Balance Sheet Location
Current
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, 2013 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. 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 three months ended March 31, 2014:
Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a)
Deferred or Recognized in Income for the Three Months Ended March 31, 2014
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 three months ended March 31, 2013:
Deferred or Recognized in Income for the Three Months Ended March 31, 2013
As of March 31, 2014, Con Edison had 1,165 contracts, including 538 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:
The Companies also enter into electric congestion and gas basis swap contracts to hedge the congestion and transportation charges which are associated with electric and gas contracts and hedged volumes.
The collateral requirements associated with, and settlement of, derivative transactions are included in net cash flows from operating activities in the Companies’ consolidated statement of cash flows. Most derivative instrument contracts contain provisions that may require the Companies to provide collateral on derivative instruments in net liability positions. The amount of collateral to be provided will depend on the fair value of the derivative instruments and the Companies’ credit ratings.
The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position and collateral posted at March 31, 2014, 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 March 31, 2014 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 three months ended March 31, 2014 was immaterial. 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 M — 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 March 31, 2014 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, 2013 are summarized below.
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 Level3 atMarch 31, 2014
(Millions of Dollars)
Valuation
Techniques
Con Edison—Commodity
Electricity
Transmission Congestion Contracts / Financial Transmission Rights
(236.2)%-49.1%
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 as of March 31, 2014 and 2013 and classified as Level 3 in the fair value hierarchy:
Included in
Regulatory Assetsand Liabilities
Ending
Balance as of
March 31, 2014
Derivatives:
Commodity
Total Gains/(Losses)—
Realized and Unrealized
March 31,2013
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. Unrealized gains and losses for commodity derivatives are generally deferred on the consolidated balance sheet in accordance with the accounting rules for regulated operations.
For the competitive energy businesses, realized and unrealized gains and losses on Level 3 commodity derivative assets and liabilities are reported in non-utility revenues (immaterial and immaterial) and purchased power costs ($39 million gain and $19 million gain) on the consolidated income statement for the three months ended March 31, 2014 and 2013, respectively. The change in fair value relating to Level 3 commodity derivative assets and liabilities held at March 31, 2014 and 2013 is included in non-utility revenues (immaterial and immaterial) and purchased power costs ($8 million gain and $16 million gain) on the consolidated income statement for the three months ended March 31, 2014 and 2013, respectively.
The accounting rules for fair value measurements and disclosures require consideration of the impact of nonperformance risk (including credit risk) from a market participant perspective in the measurement of the fair value of assets and liabilities. At March 31, 2014, 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 historical default probability based on current credit ratings and a market-based method by using the counterparty (for an asset) or the Companies’ (for a liability) credit default swaps rates.
Note N — Variable Interest Entities
In March 2014, Con Edison Development purchased a 50 percent membership interest in Copper Mountain Solar 3 Holdings, LLC (CMS 3). As a result, Con Edison has a variable interest in CMS 3, which is a non-consolidated entity. CMS 3 owns a project company that is developing a 250 MW (AC) solar energy project in Nevada. Electricity generated by the project is to be sold to the Southern California Public Power Authority pursuant to a long-term power purchase agreement. Con Edison is not the primary beneficiary since the power to direct the activities that most significantly impact the economics of CMS 3 is shared equally between Con Edison Development and a third party. At March 31, 2014, Con Edison’s consolidated balance sheet includes $80 million in investments (including earnings) related to CMS 3, which assessed in accordance with the accounting rules for variable interest entities, is Con Edison’s current maximum exposure to loss in the entity. In addition, Con Edison and Con Edison Development have issued certain guarantees to third parties in connection with CMS 3. See “Guarantees” in Note H.
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
This combined management’s discussion and analysis of financial condition and results of operations relates to the consolidated financial statements (the First Quarter Financial Statements) included in this report of two separate registrants: Con Edison and CECONY and should be read in conjunction with the financial statements and the notes thereto. As used in this report, the term the “Companies” refers to Con Edison and CECONY. CECONY is a subsidiary of Con Edison and, as such, information in this management’s discussion and analysis about CECONY applies to Con Edison.
This MD&A should be read in conjunction with the First Quarter Financial Statements and the notes thereto and the MD&A in Item 7 of the Companies’ combined Annual Report on Form 10-K for the year ended December 31, 2013 (File Nos. 1-14514 and 1-1217, the Form 10-K).
Information in any item of this report referred to in this discussion and analysis is incorporated by reference herein. The use of terms such as “see” or “refer to” shall be deemed to incorporate by reference into this discussion and analysis the information to which reference is made.
Con Edison, incorporated in New York State in 1997, is a holding company which owns all of the outstanding common stock of CECONY, Orange and Rockland Utilities, Inc. (O&R) and the competitive energy businesses. As used in this report, the term the “Utilities” refers to CECONY and O&R.
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.
Competitive Energy Businesses
Con Edison pursues competitive energy opportunities through three wholly-owned subsidiaries: Con Edison Solutions, Con Edison Energy and Con Edison Development. These businesses 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 March 31, 2014, Con Edison’s equity investment in its competitive energy businesses was $503 million and their assets amounted to $1,419 million.
In March 2014, Con Edison Development agreed to sell a 50 percent membership interest in its wholly-owned subsidiary, CED California Holdings Financing I, LLC (CCH). CCH owns project companies that operate 110 MW of solar energy projects in California. Electricity generated by the projects is sold to Pacific Gas and Electric Company pursuant to long-term power purchase agreements. At March 31, 2014, CCH had approximately $374 million in net property, plant and equipment and $217 million in long-term debt.
Certain financial data of Con Edison’s businesses is presented below:
(Millions of Dollars, except
percentages)
Revenues
Total Utilities
Con Edison Solutions (a)
Con Edison Energy
Con Edison Development (b)
Other (c)
Con Edison’s net income for common stock for the three months ended March 31, 2014 was $361 million or $1.23 a share ($1.23 on a diluted basis) compared with $192 million or $0.66 a share ($0.65 on a diluted basis) for the three months ended March 31, 2013. See “Results of Operations – Summary,” below. For segment financial information, see Note K to the First Quarter Financial Statements and “Results of Operations,” below.
Results of Operations — Summary
Net income for common stock for the three months ended March 31, 2014 and 2013 was as follows:
Competitive energy businesses (a)
Other (b)
The Companies’ results of operations for the three months ended March 31, 2014, as compared with the 2013 period reflect changes in the rate plans of Con Edison’s utility subsidiaries, the weather impact on its steam delivery service, decreases in certain operations and maintenance expenses and increases in depreciation and property taxes, reflecting primarily the impact of higher utility plant balances. The results of operations also include the impact of the LILO transactions and the net mark-to-market effects of the competitive energy businesses.
Operations and maintenance expenses for CECONY primarily reflect a decrease in pension costs and lower surcharges for assessments and fees that are collected in revenues, offset in part by higher operating costs attributable to emergency response to weather related events.
The following table presents the estimated effect on earnings per share and net income for common stock for the 2014 period as compared with the 2013 period, resulting from these and other major factors:
per ShareVariation
Net Income for CommonStock Variation
CECONY (a)
Rate plans
Weather impact on steam revenues
Operations and maintenance expenses
Depreciation and property taxes
O&R (a)
Competitive energy businesses (b)
Other, including parent company expenses
Total variations
See “Results of Operations” below for further discussion and analysis of results of operations.
Liquidity and Capital Resources
The Companies’ liquidity reflects cash flows from operating, investing and financing activities, as shown on their respective consolidated statement of cash flows and as discussed below.
Changes in the Companies’ cash and temporary cash investments resulting from operating, investing and financing activities for the three months ended March 31, 2014 and 2013 are summarized as follows:
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. 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.
Net income is the result of cash and non-cash (or accrual) transactions. Only cash transactions affect the Companies’ cash flows from operating activities. Principal non-cash charges include depreciation and deferred income tax expense. Principal non-cash credits include amortizations of certain net regulatory liabilities. Non-cash charges or credits may also be accrued under the revenue decoupling and cost reconciliation mechanisms in the Utilities’ electric and gas rate plans in New York.
Net cash flows from operating activities for the three months ended March 31, 2014 for Con Edison and CECONY were $308 million higher and $339 million lower, respectively, than in 2013. The increase in net cash flows for Con Edison reflects the deposits made in 2013 with federal and state tax agencies primarily related to the LILO transactions (see Note I to the First Quarter Financial Statements), offset in part by higher income tax payments ($392 million) in 2014. The decrease in net cash for CECONY reflects primarily higher income tax payments ($231 million) in 2014.
The change in net cash flows also reflects the timing of payments for and recovery of energy costs. This timing is reflected within changes to accounts receivable – customers, recoverable energy costs and accounts payable balances.
The changes in regulatory assets principally reflect changes in deferred pension costs in accordance with the accounting rules for retirement benefits.
Cash Flows Used in Investing Activities
Net cash flows used in investing activities for Con Edison and CECONY were $29 million and $52 million lower, respectively, for the three months ended March 31, 2014 compared with the 2013 period. The changes for Con Edison and CECONY reflect decreased utility construction expenditures in 2014. In addition, for Con Edison, the change reflects increased investments in solar energy projects (see Note N to the First Quarter Financial Statements), offset in part by decreased non-utility construction expenditures and receipt of grants related to solar energy projects.
Cash Flows from Financing Activities
Net cash flows from financing activities for Con Edison and CECONY were $647 million lower and $27 million higher, respectively, in the three months ended March 31, 2014 compared with the 2013 period.
In March 2014, CECONY issued $850 million of 4.45 percent 30-year debentures, the net proceeds from the sale of which were used to repay short-term borrowings and for other general corporate purposes. In February 2014, CECONY redeemed at maturity $200 million of 4.70 percent 10-year debentures.
In February 2013, CECONY issued $700 million of 3.95 percent 30-year debentures, the net proceeds from the sale of which were used to repay short-term borrowings and for other general corporate purposes. In February 2013, CECONY redeemed at maturity $500 million of 4.875 percent 10-year debentures.
Cash flows from financing activities of the Companies also reflect commercial paper issuance. The commercial paper amounts outstanding at March 31, 2014 and 2013 and the average daily balances for the three months ended 2014 and 2013 for Con Edison and CECONY were as follows:
Weighted average yield
Other Changes in Assets and Liabilities
The following table shows changes in certain assets and liabilities at March 31, 2014, compared with December 31, 2013.
Assets
Regulatory asset — Unrecognized pension costs
Liabilities
Pension and retiree benefits
The increase in prepayments for Con Edison and CECONY reflects primarily CECONY’s January 2014 payment of its New York City semi-annual property taxes, offset by three months of amortization, while the December 2013 balance reflects the full amortization of the previous semi-annual payment.
Special Deposits and Accrued Taxes
The decreases in Con Edison’s special deposits and accrued taxes reflect the deposits made in 2013 with federal and state tax agencies primarily relating to the LILO transactions. See Note I to the First Quarter Financial Statements.
Regulatory Asset for Unrecognized Pension Costs and Liability for Pension and Retiree Benefits
The decrease in the regulatory asset for unrecognized pension 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 2014. See Notes B, E and F to the First Quarter Financial Statements.
Capital Requirements and Resources
For each of the Companies, the ratio of earnings to fixed charges (Securities and Exchange Commission basis) for the three months ended March 31, 2014 and 2013 and the twelve months ended December 31, 2013 was:
Con Edison (a)
For each of the Companies, the common equity ratio at March 31, 2014 and December 31, 2013 was:
Common Equity Ratio
(Percent of total capitalization)
Off-Balance Sheet Arrangements
The Companies have no off-balance sheet arrangements other than two guarantees ($80 million maximum and $208 million maximum) issued by Con Edison Development on behalf of two entities in which it acquired a 50 percent interest in July 2013 and March 2014, respectively (see “Guarantees” in Note H and Note N to the First Quarter Financial Statements). The entities were formed to develop, construct and operate photovoltaic solar energy facilities with a cumulative capacity of 400 MW (AC). Con Edison Development is not the primary beneficiary of these entities since the power to direct the activities that most significantly impact the economics of the facilities is shared equally between Con Edison Development and a third party. No payments have been made nor are any expected to be made under the guarantees.
Regulatory Matters
In December 2013, the New York State Public Service Commission (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.
In April 2014, following the issuance of a NYSPSC staff report and proposal that, among other things, recommended that the NYSPSC consider fundamental changes in the manner in which utilities provide service, the NYSPSC initiated its Reforming the Energy Vision proceeding to (1) improve system efficiency, empower customer choice, and encourage greater penetration of clean generation and energy efficiency technologies and practices; (2) examine how existing practices should be modified to establish Distributed System Platform Providers (DSPP), actively managing and coordinating distributed energy resources and providing a market enabling customers to optimize their energy priorities, provide system benefits, and be compensated for providing such system benefits; and (3) examine how the NYSPSC’s regulatory practices should be modified to incent utility practices that best promote the NYSPSC’s policies and objectives, including the promotion of energy efficiency, renewable energy, least cost energy supply, fuel diversity, system adequacy and reliability, demand elasticity, and customer empowerment. The NYSPSC indicated that its goal is to reach generic policy determinations with respect to DSPP and related issues and regulatory design and ratemaking issues by the end of 2014 and in the first quarter of 2015, respectively. The Utilities are not able to predict the outcome of the Reforming the Energy Vision proceeding or its impact on the Utilities.
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 March 31, 2014, 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 L to the First Quarter Financial Statements.
Commodity Price Risk
Con Edison’s commodity price risk relates primarily to the purchase and sale of electricity, gas and related derivative instruments. The Utilities and Con Edison’s competitive energy businesses apply risk management strategies to mitigate their related exposures. See Note L to the First Quarter Financial Statements.
Con Edison estimates that, as of March 31, 2014, a 10 percent decline in market prices would result in a decline in fair value of $54 million for the derivative instruments used by the Utilities to hedge purchases of electricity and gas, of which $46 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.
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 three months ended March 31, 2014 and the year ended December 31, 2013, respectively, was as follows:
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 L to the First Quarter Financial Statements.
Investment Risk
The Companies’ investment risk relates to the investment of plan assets for their pension and other postretirement benefit plans. The Companies’ current investment policy for pension plan assets includes investment targets of 60 percent equities and 40 percent fixed income and other securities. At March 31, 2014, the pension plan investments consisted of 59 percent equity and 41 percent fixed income and other securities.
Material Contingencies
For information concerning potential liabilities arising from the Companies’ material contingencies, see Notes B, G and H to the First Quarter Financial Statements.
Results of Operations
See “Results of Operations – Summary,” above.
Results of operations reflect, among other things, the Companies’ accounting policies and rate plans that limit the rates the Utilities can charge their customers. Under the revenue decoupling mechanisms currently applicable to CECONY’s electric and gas businesses and O&R’s electric and gas businesses in New York, the Utilities’ delivery revenues generally will not be affected by changes in delivery volumes from levels assumed when rates were approved. Revenues for CECONY’s steam business and O&R’s businesses in New Jersey and Pennsylvania are affected by changes in
delivery volumes resulting from weather, economic conditions and other factors.
In general, the Utilities recover on a current basis the fuel, gas purchased for resale and purchased power costs they incur in supplying energy to their full-service customers. Accordingly, such costs do not generally affect the Companies’ results of operations. Management uses the term “net revenues” (operating revenues less such costs) to identify changes in operating revenues that may affect the Companies’ results of operations. Management believes that, although “net revenues” may not be a measure determined in accordance with accounting principles generally accepted in the United States of America, the measure facilitates the analysis by management and investors of the Companies’ results of operations.
Con Edison’s principal business segments are CECONY’s regulated utility activities, O&R’s regulated utility activities and Con Edison’s competitive energy businesses. CECONY’s principal business segments are its regulated electric, gas and steam utility activities. A discussion of the results of operations by principal business segment for the three months ended March 31, 2014 and 2013 follows. For additional business segment financial information, see Note K to the First Quarter Financial Statements.
Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013
The Companies’ results of operations (which were discussed above under “Results of Operations – Summary”) in 2014 compared with 2013 were:
Operating revenues
Operating revenues less purchased power, fuel and gas purchased for resale (net revenues)
Operating income
Other income less deductions
Net interest expense
Income before income tax expense
Income tax expense
Net revenues
Operations and maintenance
CECONY’s results of electric operations for the three months ended March 31, 2014 compared with the 2013 period is as follows:
Electric operating income
CECONY’s electric sales and deliveries, excluding off-system sales, for the three months ended March 31, 2014 compared with the 2013 period were:
Residential/Religious(a)
Commercial/Industrial
Retail access customers
NYPA, Municipal Agency and other sales
Other operating revenues
CECONY’s electric operating revenues increased $260 million in the three months ended March 31, 2014 compared with the 2013 period due primarily to higher purchased power costs ($157 million) and fuel costs ($27 million), and recovery of certain expenses recognized in prior periods ($30 million). CECONY’s revenues from electric sales are subject to a revenue decoupling mechanism, as a result of which delivery revenues generally are not affected by changes in delivery volumes from levels assumed when rates were approved. Other electric operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the revenue decoupling mechanism and other provisions of the company’s rate plans.
Electric delivery volumes in CECONY’s service area increased 2.5 percent in the three months ended March 31, 2014 compared with the 2013 period. After adjusting for variations, principally weather and billing days, electric delivery volumes in CECONY’s service area increased 0.5 percent in the three months ended March 31, 2014 compared with the 2013 period.
CECONY’s electric purchased power costs increased $157 million in the three months ended March 31, 2014 compared with the 2013 due to an increase in unit costs ($146 million) and purchased volumes ($11 million). Electric fuel costs increased $27 million in the three months ended March 31, 2014 compared with the 2013 period due to higher unit costs ($25 million) and sendout volumes from the company’s electric generating facilities ($2 million).
CECONY’s electric operating income increased $68 million in the three months ended March 31, 2014 compared with the 2013 period. The increase reflects primarily higher net revenues ($76 million) and decreases in certain operations and maintenance expenses ($10 million), offset in part by higher taxes other than income taxes ($14 million, principally property taxes) and higher depreciation and amortization ($4 million). Operations and maintenance expenses primarily reflect a decrease in pension costs ($26 million) and lower surcharges for assessments and fees that are collected in revenues from customers ($18 million), offset in part by higher operating costs attributable to emergency response due to weather related events ($27 million) and higher support and maintenance of company underground facilities to accommodate municipal projects ($7 million).
CECONY’s results of gas operations for the three months ended March 31, 2014 compared with the 2013 period is as follows:
Gas operating income
CECONY’s gas sales and deliveries, excluding off-system sales, for the three months ended March 31, 2014 compared with the 2013 period were:
Residential
Firm transportation
Total firm sales and transportation
Interruptible sales (a)
NYPA
Generation plants
CECONY’s gas operating revenues increased $129 million in the three months ended March 31, 2014 compared with the 2013 period due primarily to an increase in gas purchased for resale costs ($127 million) and higher revenues from the recovery of certain costs ($2 million). CECONY’s revenues from gas sales are subject to a weather normalization clause and a revenue decoupling mechanism as a result of which delivery revenues are generally not affected by changes in delivery volumes from levels assumed when rates were
approved. Other gas operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plans.
CECONY’s sales and transportation volumes for firm customers increased 15.8 percent in the three months ended March 31, 2014 compared with the 2013 period. After adjusting for variations, principally weather and billing days, firm gas sales and transportation volumes in the company’s service area increased 2.0 percent in the three months ended March 31, 2014.
CECONY’s purchased gas cost increased $127 million in the three months ended March 31, 2014 compared with the 2013 period due to higher unit costs ($76 million) and sendout volumes ($51 million).
CECONY’s gas operating income decreased $9 million in the three months ended March 31, 2014 compared with the 2013 period. The decrease reflects primarily higher taxes other than income taxes ($7 million, principally local revenue taxes and property taxes) and higher operations and maintenance expense ($4 million, due primarily to higher pension costs ($4 million)).
CECONY’s results of steam operations for the three months ended March 31, 2014 compared with the 2013 period is as follows:
Steam operating income
CECONY’s steam sales and deliveries for the three months ended March 31, 2014 compared with the 2013 period were:
Apartment house
Annual power
CECONY’s steam operating revenues increased $9 million in the three months ended March 31, 2014 compared with the 2013 period due primarily to the weather impact on revenues ($23 million), higher purchased power costs ($5 million) and the net change in revenues from the recovery of certain costs ($1 million), offset in part by lower fuel costs ($18 million). Other steam operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plans.
Steam sales and delivery volumes increased 18.2 percent in the three months ended March 31, 2014 compared with the 2013 period. After adjusting for variations, principally weather and billing days, steam sales and deliveries increased 5.9 percent in the three months ended March 31, 2014.
CECONY’s steam purchased power costs increased $5 million in the three months ended March 31, 2014 compared with the 2013 period due to an increase in unit costs ($5 million). Steam fuel costs decreased $18 million in the three months ended March 31, 2014 compared with the 2013 period due to lower unit costs ($28 million), offset by higher sendout volumes ($10 million).
Steam operating income increased $24 million in the three months ended March 31, 2014 compared with the 2013 period. The increase reflects primarily higher
net revenues ($22 million) and lower operations and maintenance expense ($10 million, due primarily to lower pension expense ($10 million)), offset in part by higher taxes other than income taxes ($5 million, principally property taxes) and depreciation and amortization ($3 million).
Income Tax Expense
Income taxes increased $32 million in 2014 compared with 2013 due primarily to higher income before income tax expense.
2013
O&R’s results of electric operations for the three months ended March 31, 2014 compared with the 2013 period is as follows:
O&R’s electric sales and deliveries, excluding off-system sales, for the three months ended March 31, 2014 compared with the 2013 period were:
Public authorities
O&R’s electric operating revenues increased $18 million in the three months ended March 31, 2014 compared with the 2013 period due primarily to higher purchased power costs ($19 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.
Electric delivery volumes in O&R’s service area increased 4.7 percent in the three months ended March 31, 2014 compared with the 2013 period. After adjusting for weather and other variations, electric delivery volumes in O&R’s service area increased 0.8 percent in the three months ended March 31, 2014 compared with the 2013 period.
Electric operating income decreased $8 million in the three months ended March 31, 2014 compared with the 2013 period. The decrease reflects primarily higher operations and maintenance expenses ($8 million, reflecting primarily certain regulatory credits in the 2013 period ($3 million)).
O&R’s results of gas operations for the three months ended March 31, 2014 compared with the 2013 period is as follows:
O&R’s gas sales and deliveries, excluding off-system sales, for the three months ended March 31, 2014 compared with the 2013 period were:
Interruptible sales
Other gas revenues
O&R’s gas operating revenues increased $11 million in the three months ended March 31, 2014 compared with the 2013 period due primarily to an increase in gas purchased for resale costs in 2013 ($12 million), offset by the gas rate plan.
Sales and transportation volumes for firm customers increased 15.6 percent in the three months ended March 31, 2014 compared with the 2013 period. After adjusting for weather and other variations, total firm sales and transportation volumes increased 1.3 percent in the three months ended March 31, 2014 compared with the 2013 period.
Gas operating income was the same in the three months ended March 31, 2014 compared with the 2013 period.
Income taxes increased $4 million in three months ended March 31, 2014 compared with the 2013 period due primarily to changes in estimates of accumulated deferred income taxes in the 2013 period.
The competitive energy businesses’ results of operations for the three months ended March 31, 2014 compared with the 2013 period is as follows:
The competitive energy businesses’ operating revenues increased $177 million in the three months ended March 31, 2014 compared with the 2013 period, due primarily to the impact of the LILO transactions ($121 million, see Note I to the First Quarter Financial Statements) and higher electric retail revenues. Electric retail revenues increased $46 million due to higher unit prices. Wholesale revenues increased $8 million and energy services revenues increased $2 million in the three months ended March 31, 2014 compared with the 2013 period.
Purchased power costs increased $75 million in the three months ended March 31, 2014 compared with the 2013 period, due primarily to higher unit prices ($63 million) and changes in mark-to-market values ($25 million), offset by lower volumes ($12 million).
Operating income increased $84 million in the three months ended March 31, 2014 compared with the 2013 period due primarily to the impact of the LILO transactions ($121 million), offset by net mark-to-market effects ($25 million), lower gross margins ($9 million) and increased depreciation ($3 million).
Net Interest Expense
Net interest expense decreased $139 million in the three months ended March 31, 2014 compared to the 2013 period due primarily to the impact of the LILO transactions in 2013. See Note I to the First Quarter Financial Statements.
Income taxes increased $105 million in the three months ended March 31, 2014 compared with the 2013 period due primarily to the impact of the LILO transactions in 2013 (see Note I to the First Quarter Financial Statements), and a tax benefit in 2013 resulting from the acceptance by the IRS of the company’s claim for manufacturing tax deductions (see Note J to the First Quarter Financial Statements).
For Con Edison, “Other” also includes inter-company eliminations relating to operating revenues and operating expenses.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
For information about the Companies’ primary market risks associated with activities in derivative financial instruments, other financial instruments and derivative commodity instruments, see “Financial and Commodity Market Risks,” in Part I, Item 2 of this report, which information is incorporated herein by reference.
Item 4: Controls and Procedures
The Companies maintain disclosure controls and procedures designed to provide reasonable assurance that the information required to be disclosed in the reports that they submit to the Securities and Exchange Commission (SEC) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. For each of the Companies, its management, with the participation of its principal executive officer and principal financial officer, has evaluated its disclosure controls and procedures as of the end of the period covered by this report and, based on such evaluation, has concluded that the controls and procedures are effective to provide such reasonable assurance. Reasonable assurance is not absolute assurance, however, and there can be no assurance that any design of controls or procedures would be effective under all potential future conditions, regardless of how remote.
There was no change in the Companies’ internal control over financial reporting that occurred during the Companies’ most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companies’ internal control over financial reporting.
Part II Other Information
Item 1: Legal Proceedings
For information about certain legal proceedings affecting the Companies, see Notes B, G and H to the financial statements in Part I, Item 1 of this report, which information is incorporated herein by reference.
Item 1A: Risk Factors
There were no material changes in the Companies’ risk factors compared to those disclosed in Item 1A of the Form 10-K.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
January 1, 2014 to January 31, 2014
February 1, 2014 to February 28, 2014
March 1, 2014 to March 31, 2014
Item 6: Exhibits
CON EDISON
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Robert Hoglund
Senior Vice President, Chief
Financial Officer and Duly
Authorized Officer