Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012

OR

 

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

For the transition period from                      to                     

 

Commission
File Number

 

Exact name of registrant as specified in its charter

and principal office address and telephone number

  

State of
Incorporation

  

I.R.S. Employer
ID. Number

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

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

 

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

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

 

Con Edison        Yes x           No ¨   
CECONY        Yes x           No ¨   

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

 

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

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

 

Con Edison        Yes ¨           No x   
CECONY        Yes ¨           No x   

As of October 31, 2012, Con Edison had outstanding 292,872,896 Common Shares ($.10 par value). All of the outstanding common equity of CECONY is held by Con Edison.

Filing Format

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


Table of Contents

Glossary of Terms

 

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

 

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

 

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Table of Contents
Units of Measure     
AC    Alternating current
dths    Dekatherms
kV    Kilovolt
kWh    Kilowatt-hour
mdths    Thousand dekatherms
MMlbs    Million pounds
MVA    Megavolt ampere
MW    Megawatt or thousand kilowatts
MWH    Megawatt hour
Other     
AFDC    Allowance for funds used during construction
COSO    Committee of Sponsoring Organizations of the Treadway Commission
EMF    Electric and magnetic fields
ERRP    East River Repowering Project
Fitch    Fitch Ratings
First Quarter Form 10-Q    The Companies’ combined Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012
Form 10-K    The Companies’ combined Annual Report on Form 10-K for the year ended December 31, 2011
LTIP    Long Term Incentive Plan
Moody’s    Moody’s Investors Service
S&P    Standard & Poor’s Financial Services LLC
Second Quarter Form 10-Q    The Companies’ combined Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012
Third Quarter Form 10-Q    The Companies’ combined Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012
VaR    Value-at-Risk

 

      3   


Table of Contents

TABLE OF CONTENTS

 

          PAGE  
PART I—Financial Information  
ITEM 1  

Financial Statements (Unaudited)

 
 

Con Edison

 
 

Consolidated Income Statement

    6   
 

Consolidated Statement of Comprehensive Income

    7   
 

Consolidated Statement of Cash Flows

    8   
 

Consolidated Balance Sheet

    9   
 

Consolidated Statement of Common Shareholders’ Equity

    11   
 

CECONY

 
 

Consolidated Income Statement

    12   
 

Consolidated Statement of Comprehensive Income

    13   
 

Consolidated Statement of Cash Flows

    14   
 

Consolidated Balance Sheet

    15   
 

Consolidated Statement of Common Shareholder’s Equity

    17   
 

Notes to Financial Statements (Unaudited)

    18   
ITEM 2  

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

    40   
ITEM 3  

Quantitative and Qualitative Disclosures About Market Risk

    63   
ITEM 4  

Controls and Procedures

    63   
PART II—Other Information  
ITEM 1  

Legal Proceedings

    64   
ITEM 1A  

Risk Factors

    64   
ITEM 2  

Unregistered Sales of Equity Securities and Use of Proceeds

    64   
ITEM 6  

Exhibits

    65   
 

Signatures

    66   

 

4     


Table of Contents

FORWARD-LOOKING STATEMENTS

 

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

 

   

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

 

   

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

 

   

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

 

   

the Companies are extensively regulated and are subject to penalties;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

a cyber attack could adversely affect the Companies; and

 

   

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

 

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Consolidated Edison, Inc.   

CONSOLIDATED INCOME STATEMENT (UNAUDITED)

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
     2012     2011     2012     2011  
    (Millions of Dollars/Except Share Data)  

OPERATING REVENUES

       

Electric

    $2,810        $2,861        $6,762        $6,883   

Gas

    216        220        1,161        1,309   

Steam

    68        76        414        508   

Non-utility

    344        472        950        1,272   

TOTAL OPERATING REVENUES

    3,438        3,629        9,287        9,972   

OPERATING EXPENSES

       

Purchased power

    930        1,239        2,440        3,124   

Fuel

    59        73        213        317   

Gas purchased for resale

    56        73        314        491   

Operations and maintenance

    826        783        2,365        2,213   

Depreciation and amortization

    240        222        709        659   

Taxes, other than income taxes

    476        483        1,360        1,387   

TOTAL OPERATING EXPENSES

    2,587        2,873        7,401        8,191   

OPERATING INCOME

    851        756        1,886        1,781   

OTHER INCOME (DEDUCTIONS)

       

Investment and other income

    4               14        19   

Allowance for equity funds used during construction

    1        2        3        8   

Other deductions

    (3     (3     (13     (14

TOTAL OTHER INCOME (DEDUCTIONS)

    2        (1     4        13   

INCOME BEFORE INTEREST AND INCOME TAX EXPENSE

    853        755        1,890        1,794   

INTEREST EXPENSE

       

Interest on long-term debt

    146        145        440        437   

Other interest

    6               17        15   

Allowance for borrowed funds used during construction

           (1     (2     (4

NET INTEREST EXPENSE

    152        144        455        448   

INCOME BEFORE INCOME TAX EXPENSE

    701        611        1,435        1,346   

INCOME TAX EXPENSE

    261        225        501        477   

NET INCOME

    440        386        934        869   

Preferred stock dividend requirements of subsidiary

           (3     (3     (9

NET INCOME FOR COMMON STOCK

    $440        $383        $931        $860   

Net income for common stock per common share—basic

    $1.50        $1.31        $3.18        $2.94   

Net income for common stock per common share—diluted

    $1.49        $1.30        $3.16        $2.92   

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

    $0.605        $0.600        $1.815        $1.800   

AVERAGE NUMBER OF SHARES OUTSTANDING—BASIC (IN MILLIONS)

    292.9        292.9        292.9        292.5   

AVERAGE NUMBER OF SHARES OUTSTANDING—DILUTED (IN MILLIONS)

    294.6        294.6        294.6        294.2   

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

 

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Consolidated Edison, Inc.   

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
     2012     2011     2012     2011  
    (Millions of Dollars)  

NET INCOME

    $440        $386        $934        $869   

OTHER COMPREHENSIVE INCOME, NET OF TAXES

       

Pension plan liability adjustments, net of $1 and $5 taxes in 2012 and $1 and $4 in taxes 2011, respectively

    2        2        8        7   

TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAXES

    2        2        8        7   

COMPREHENSIVE INCOME

    $442        $388        $942        $876   

Preferred stock dividend requirements of subsidiary

           (3     (3     (9

COMPREHENSIVE INCOME FOR COMMON STOCK

    $442        $385        $939        $867   

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

 

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Consolidated Edison, Inc.   

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 

 

     For the Nine Months
Ended September 30,
 
       2012         2011    
    (Millions of Dollars)  

OPERATING ACTIVITIES

   

Net Income

    $    934        $    869   

PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME

   

Depreciation and amortization

    709        659   

Deferred income taxes

    344        368   

Rate case amortization and accruals

    32        39   

Common equity component of allowance for funds used during construction

    (3     (8

Net derivative gains

    (61     (25

Other non-cash items (net)

    (53     6   

CHANGES IN ASSETS AND LIABILITIES

   

Accounts receivable – customers, less allowance for uncollectibles

    (196     (4

Materials and supplies, including fuel oil and gas in storage

    1        (27

Other receivables and other current assets

    54        70   

Prepayments

    (288     (128

Accounts payable

    18        (50

Pensions and retiree benefits obligations

    713        578   

Pensions and retiree benefits contributions

    (821     (579

Accrued taxes

    (80     76   

Accrued interest

    46        57   

Superfund and environmental remediation costs (net)

    7          

Deferred charges, noncurrent assets and other regulatory assets

    183        92   

Deferred credits and other regulatory liabilities

    83        158   

Other liabilities

    16        10   

NET CASH FLOWS FROM OPERATING ACTIVITIES

    1,638        2,161   

INVESTING ACTIVITIES

   

Utility construction expenditures

    (1,450     (1,404

Cost of removal less salvage

    (118     (123

Non-utility construction expenditures

    (68     (57

Acquisition of Alpaugh solar energy projects

    (286       

Proceeds from grants related to renewable energy investments

    27        4   

Net investment in Pilesgrove solar project and other

    28        (31

NET CASH FLOWS USED IN INVESTING ACTIVITIES

    (1,867     (1,611

FINANCING ACTIVITIES

   

Net proceeds from short-term debt

    340          

Preferred stock redemption

    (239       

Retirement of long-term debt

    (304     (3

Issuance of long-term debt

    400          

Issuance of common shares for stock plans, net of repurchases

    (16     41   

Debt issuance costs

    (4       

Common stock dividends

    (524     (519

Preferred stock dividends

    (3     (9

NET CASH FLOWS USED IN FINANCING ACTIVITIES

    (350     (490

CASH AND TEMPORARY CASH INVESTMENTS:

   

NET CHANGE FOR THE PERIOD

    (579     60   

BALANCE AT BEGINNING OF PERIOD

    648        338   

BALANCE AT END OF PERIOD

    $      69        $    398   

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

   

Cash paid/(refunded) during the period for:

   

Interest

    $    379        $    371   

Income taxes

    $      46        $  (132

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

 

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Consolidated Edison, Inc.   

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

     September 30,
2012
    December 31,
2011
 
    (Millions of Dollars)  

ASSETS

   

CURRENT ASSETS

   

Cash and temporary cash investments

    $       69        $     648   

Accounts receivable – customers, less allowance for uncollectible accounts of $85 and $87 in 2012 and 2011, respectively

    1,319        1,123   

Accrued unbilled revenue

    451        474   

Other receivables, less allowance for uncollectible accounts of $10 in 2012 and 2011

    216        303   

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

    355        356   

Prepayments

    433        145   

Deferred tax assets – current

    113        266   

Regulatory assets

    77        164   

Other current assets

    207        159   

TOTAL CURRENT ASSETS

    3,240        3,638   

INVESTMENTS

    462        455   

UTILITY PLANT, AT ORIGINAL COST

   

Electric

    22,019        21,114   

Gas

    5,009        4,734   

Steam

    2,034        1,983   

General

    2,253        1,944   

TOTAL

    31,315        29,775   

Less: Accumulated depreciation

    6,388        6,051   

Net

    24,927        23,724   

Construction work in progress

    898        1,241   

NET UTILITY PLANT

    25,825        24,965   

NON-UTILITY PLANT

   

Non-utility property, less accumulated depreciation of $66 and $59 in 2012 and 2011, respectively

    99        89   

Construction work in progress

    400        39   

NET PLANT

    26,324        25,093   

OTHER NONCURRENT ASSETS

   

Goodwill

    429        429   

Intangible assets, less accumulated amortization of $3 in 2012 and 2011

    3        3   

Regulatory assets

    8,897        9,337   

Other deferred charges and noncurrent assets

    278        259   

TOTAL OTHER NONCURRENT ASSETS

    9,607        10,028   

TOTAL ASSETS

    $39,633        $39,214   

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

 

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Consolidated Edison, Inc.   

CONSOLIDATED BALANCE SHEET (UNAUDITED)

 

 

     September 30,
2012
    December 31,
2011
 
    (Millions of Dollars)  

LIABILITIES AND SHAREHOLDERS’ EQUITY

   

CURRENT LIABILITIES

   

Long-term debt due within one year

    $     930        $     530   

Notes payable

    340          

Accounts payable

    968        955   

Customer deposits

    308        303   

Accrued taxes

    108        188   

Accrued interest

    206        160   

Accrued wages

    88        91   

Fair value of derivative liabilities

    56        169   

Regulatory liabilities

    231        118   

Other current liabilities

    489        473   

TOTAL CURRENT LIABILITIES

    3,724        2,987   

NONCURRENT LIABILITIES

   

Obligations under capital leases

    2        2   

Provision for injuries and damages

    145        181   

Pensions and retiree benefits

    4,039        4,835   

Superfund and other environmental costs

    537        489   

Asset retirement obligations

    149        145   

Fair value of derivative liabilities

    34        48   

Other noncurrent liabilities

    124        131   

TOTAL NONCURRENT LIABILITIES

    5,030        5,831   

DEFERRED CREDITS AND REGULATORY LIABILITIES

   

Deferred income taxes and investment tax credits

    8,026        7,563   

Regulatory liabilities

    1,102        977   

Other deferred credits

    70        64   

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES

    9,198        8,604   

LONG-TERM DEBT

    9,839        10,143   

SHAREHOLDERS’ EQUITY

   

Common shareholders’ equity (See Statement of Common Shareholders’ Equity)

    11,842        11,436   

Preferred stock of subsidiary

           213   

TOTAL SHAREHOLDERS’ EQUITY

    11,842        11,649   

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

    $39,633        $39,214   

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

 

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Consolidated Edison, Inc.   

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS’ EQUITY (UNAUDITED)

 

 

   

Common Stock

   

Additional
Paid-In
Capital

   

Retained
Earnings

   

Treasury Stock

   

Capital
Stock
Expense

    Accumulated
Other
Comprehensive
Income/(Loss)
   

Total

 
             
               
(Millions of Dollars/Except Share Data)   Shares     Amount         Shares     Amount        

BALANCE AS OF DECEMBER 31, 2010

    291,616,334        $31        $4,915        $7,220        23,210,700        $(1,001     $(64     $(40     $11,061   

Net income for common stock

          311                311   

Common stock dividends

          (175             (175

Issuance of common shares – dividend reinvestment and employee stock plans

    656,049        1        30                  31   

Other comprehensive income

                                                            3        3   

BALANCE AS OF MARCH 31, 2011

    292,272,383        $32        $4,945        $7,356        23,210,700        $(1,001     $(64     $(37     $11,231   

Net income for common stock

          165                165   

Common stock dividends

          (175             (175

Issuance of common shares – dividend reinvestment and employee stock plans

    603,513          32          (182,942     5            37   

Common stock repurchases

            178,942        (9         (9

Other comprehensive income

                                                            2        2   

BALANCE AS OF JUNE 30, 2011

    292,875,896        $32        $4,977        $7,346        23,206,700        $(1,005     $(64     $(35     $11,251   

Net income for common stock

          383                383   

Common stock dividends

          (176             (176

Issuance of common shares – dividend reinvestment and employee stock plans

    8,000          6          (554,356     19            25   

Common stock repurchases

            546,356        (31         (31

Other comprehensive income

                                                            2        2   

BALANCE AS OF SEPTEMBER 30, 2011

    292,883,896        $32        $4,983        $7,553        23,198,700        $(1,017     $(64     $(33     $11,454   

BALANCE AS OF DECEMBER 31, 2011

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

Net income for common stock

          277                277   

Common stock dividends

          (177             (177

Issuance of common shares for stock plans, net of repurchases

    (7,225           7,225        (2         (2

Preferred stock redemption

                4          4   

Other comprehensive income

                                                            7        7   

BALANCE AS OF MARCH 31, 2012

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

Net income for common stock

          214                214   

Common stock dividends

          (178             (178

Issuance of common shares for stock plans, net of repurchases

    1,700                   (1,700            (1       (1

Other comprehensive loss

                                                            (1     (1

BALANCE AS OF JUNE 30, 2012

    292,882,996        $32        $4,991        $7,704        23,199,600        $(1,035     $(61     $(52     $11,579   

Net income for common stock

          440                440   

Common stock dividends

          (177             (177

Issuance of common shares for stock plans, net of repurchases

    (11,100                11,100        (2              (2

Other comprehensive income

                                                            2        2   

BALANCE AS OF September 30, 2012

    292,871,896        $32        $4,991        $7,967        23,210,700        $(1,037     $(61     $(50     $11,842   

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

 

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Consolidated Edison Company of New York, Inc.   

CONSOLIDATED INCOME STATEMENT (UNAUDITED)

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
     2012     2011     2012     2011  
    (Millions of Dollars)  

OPERATING REVENUES

       

Electric

    $2,611        $2,644        $6,307        $6,378   

Gas

    189        197        1,017        1,156   

Steam

    68        76        414        508   

TOTAL OPERATING REVENUES

    2,868        2,917        7,738        8,042   

OPERATING EXPENSES

       

Purchased power

    604        736        1,554        1,840   

Fuel

    59        73        213        317   

Gas purchased for resale

    45        57        264        412   

Other operations and maintenance

    725        678        2,065        1,906   

Depreciation and amortization

    225        209        664        618   

Taxes, other than income taxes

    456        462        1,300        1,330   

TOTAL OPERATING EXPENSES

    2,114        2,215        6,060        6,423   

OPERATING INCOME

    754        702        1,678        1,619   

OTHER INCOME (DEDUCTIONS)

       

Investment and other income

    2        (6     6        3   

Allowance for equity funds used during construction

           1        2        6   

Other deductions

    (2     (3     (10     (12

TOTAL OTHER INCOME (DEDUCTIONS)

           (8     (2     (3

INCOME BEFORE INTEREST AND INCOME TAX EXPENSE

    754        694        1,676        1,616   

INTEREST EXPENSE

       

Interest on long-term debt

    130        130        395        393   

Other interest

    8        4        19        13   

Allowance for borrowed funds used during construction

           (1     (1     (3

NET INTEREST EXPENSE

    138        133        413        403   

INCOME BEFORE INCOME TAX EXPENSE

    616        561        1,263        1,213   

INCOME TAX EXPENSE

    227        205        436        425   

NET INCOME

    389        356        827        788   

Preferred stock dividend requirements

           (3     (3     (9

NET INCOME FOR COMMON STOCK

    $389        $353        $824        $779   

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

 

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Consolidated Edison Company of New York, Inc.   

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 

     For the Three Month
Ended September 30,
    For the Nine Month
Ended September 30,
 
     2012     2011     2012     2011  
    (Millions of Dollars)  

NET INCOME

    $389        $356        $827        $788   

OTHER COMPREHENSIVE LOSS, NET OF TAXES

       

Pension plan liability adjustments, net of $(1) taxes in 2012

                  (2       

TOTAL OTHER COMPREHENSIVE LOSS, NET OF TAXES

                  (2       

COMPREHENSIVE INCOME

    $389        $356        $825        $788   

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

 

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Consolidated Edison Company of New York, Inc.   

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 

     For the Nine Months
Ended September 30,
 
     2012     2011  
    (Millions of Dollars)  

OPERATING ACTIVITIES

   

Net income

    $    827        $    788   

PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME

   

Depreciation and amortization

    664        618   

Deferred income taxes

    220        309   

Rate case amortization and accruals

    32        38   

Common equity component of allowance for funds used during construction

    (2     (6

Other non-cash items (net)

    84        60   

CHANGES IN ASSETS AND LIABILITIES

   

Accounts receivable – customers, less allowance for uncollectibles

    (197     3   

Materials and supplies, including fuel oil and gas in storage

    12        2   

Other receivables and other current assets

    (41     243   

Prepayments

    (308     (303

Accounts payable

    50        (45

Pensions and retiree obligations

    639        527   

Pensions and retiree contributions

    (761     (532

Accrued taxes

    40        (7

Accrued interest

    46        46   

Superfund and environmental remediation costs (net)

    7          

Deferred charges, deferred derivative losses, noncurrent assets and other regulatory assets

    84        33   

Deferred credits and other regulatory liabilities

    88        167   

Other liabilities

    (21     19   

NET CASH FLOWS FROM OPERATING ACTIVITIES

    1,463        1,960   

INVESTING ACTIVITIES

   

Utility construction expenditures

    (1,368     (1,332

Cost of removal less salvage

    (115     (118

NET CASH FLOWS USED IN INVESTING ACTIVITIES

    (1,483     (1,450

FINANCING ACTIVITIES

   

Net proceeds from short-term debt

    332          

Preferred stock redemption

    (239       

Retirement of long-term debt

    (300  

Issuance of long-term debt

    400          

Debt issuance costs

    (4       

Dividend to parent

    (512     (509

Preferred stock dividends

    (3     (9

NET CASH FLOWS USED IN FINANCING ACTIVITIES

    (326     (518

CASH AND TEMPORARY CASH INVESTMENTS:

   

NET CHANGE FOR THE PERIOD

    (346     (8

BALANCE AT BEGINNING OF PERIOD

    372        78   

BALANCE AT END OF PERIOD

    $26        $70   

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

   

Cash paid/(refunded) during the period for:

   

Interest

    $    344        $    336   

Income taxes

    $      50        $   (103

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

 

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Consolidated Edison Company of New York, Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

  

 

     September 30,
2012
    December 31,
2011
 
    (Millions of Dollars)  

ASSETS

   

CURRENT ASSETS

   

Cash and temporary cash investments

    $       26        $     372   

Accounts receivable – customers, less allowance for uncollectible accounts of $79 in 2012 and 2011

    1,174        977   

Other receivables, less allowance for uncollectible accounts of $9 in 2012 and 2011

    103        102   

Accrued unbilled revenue

    347        366   

Accounts receivable from affiliated companies

    82        54   

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

    296        308   

Prepayments

    393        85   

Regulatory assets

    62        140   

Deferred tax assets – current

    62        157   

Other current assets

    114        100   

TOTAL CURRENT ASSETS

    2,659        2,661   

INVESTMENTS

    203        177   

UTILITY PLANT AT ORIGINAL COST

   

Electric

    20,728        19,886   

Gas

    4,448        4,200   

Steam

    2,034        1,983   

General

    2,081        1,785   

TOTAL

    29,291        27,854   

Less: Accumulated depreciation

    5,834        5,523   

Net

    23,457        22,331   

Construction work in progress

    850        1,165   

NET UTILITY PLANT

    24,307        23,496   

NON-UTILITY PROPERTY

   

Non-utility property, less accumulated depreciation of $25 and $24 in 2012 and 2011, respectively

    4        6   

NET PLANT

    24,311        23,502   

OTHER NONCURRENT ASSETS

   

Regulatory assets

    8,285        8,661   

Other deferred charges and noncurrent assets

    241        217   

TOTAL OTHER NONCURRENT ASSETS

    8,526        8,878   

TOTAL ASSETS

    $35,699        $35,218   

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

 

 

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Consolidated Edison Company of New York, Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

  

 

 

     September 30,
2012
    December 31,
2011
 
    (Millions of Dollars)  

LIABILITIES AND SHAREHOLDER’S EQUITY

   

CURRENT LIABILITIES

   

Long-term debt due within one year

    $     925        $     525   

Notes payable

    332          

Accounts payable

    772        774   

Accounts payable to affiliated companies

    22        16   

Customer deposits

    295        290   

Accrued taxes

    33        32   

Accrued taxes to affiliated companies

    165        126   

Accrued interest

    179        133   

Accrued wages

    83        81   

Fair value of derivative liabilities

    30        98   

Regulatory liabilities

    199        79   

Other current liabilities

    400        396   

TOTAL CURRENT LIABILITIES

    3,435        2,550   

NONCURRENT LIABILITIES

   

Obligations under capital leases

    2        2   

Provision for injuries and damages

    138        173   

Pensions and retiree benefits

    3,627        4,337   

Superfund and other environmental costs

    423        373   

Asset retirement obligations

    148        145   

Fair value of derivative liabilities

    12        24   

Other noncurrent liabilities

    116        120   

TOTAL NONCURRENT LIABILITIES

    4,466        5,174   

DEFERRED CREDITS AND REGULATORY LIABILITIES

   

Deferred income taxes and investment tax credits

    7,301        6,921   

Regulatory liabilities

    978        861   

Other deferred credits

    67        61   

TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES

    8,346        7,843   

LONG-TERM DEBT

    8,920        9,220   

SHAREHOLDER’S EQUITY

   

Common shareholder’s equity (See Statement of Common Shareholder’s Equity)

    10,532        10,218   

Preferred stock

           213   

TOTAL SHAREHOLDER’S EQUITY

    10,532        10,431   

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY

    $35,699        $35,218   

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

 

 

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Consolidated Edison Company of New York, Inc.

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDER’S EQUITY (UNAUDITED)

  

 

    Common Stock     Additional
Paid-In
Capital
    Retained
Earnings
    Repurchased
Con Edison
Stock
    Capital
Stock
Expense
    Accumulated
Other
Comprehensive
Income/(Loss)
    Total  
(Millions of Dollars/Except Share Data)   Shares     Amount              

BALANCE AS OF DECEMBER 31, 2010

    235,488,094        $589        $4,234        $6,132        $(962     $(64     $  (6     $  9,923   

Net income

          271              271   

Common stock dividend to parent

          (170           (170

Cumulative preferred dividends

          (3           (3

Other comprehensive income

                                                             

BALANCE AS OF MARCH 31, 2011

    235,488,094        $589        $4,234        $6,230        $(962     $(64     $  (6     $10,021   

Net income

          160              160   

Common stock dividend to parent

          (170           (170

Cumulative preferred dividends

          (3           (3

Other comprehensive income

                                                             

BALANCE AS OF JUNE 30, 2011

    235,488,094        $589        $4,234        $6,217        $(962     $(64     $  (6     $10,008   

Net income

          356              356   

Common stock dividend to parent

          (169           (169

Cumulative preferred dividends

          (3           (3

Other comprehensive income

                                                             

BALANCE AS OF SEPTEMBER 30, 2011

    235,488,094        $589        $4,234        $6,401        $(962     $(64     $  (6     $10,192   

BALANCE AS OF DECEMBER 31, 2011

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

Net income

          276              276   

Common stock dividend to parent

          (171           (171

Cumulative preferred dividends

          (3           (3

Preferred stock redemption

              4          4   

Other comprehensive income

                                                             

BALANCE AS OF MARCH 31, 2012

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

Net income

          163              163   

Common stock dividend to parent

          (171           (171

Other comprehensive loss

                                                    (2     (2

BALANCE AS OF JUNE 30, 2012

    235,488,094        $589        $4,234        $6,523        $(962     $(60     $(10     $10,314   

Net income

          389              389   

Common stock dividend to parent

          (171           (171

Other comprehensive loss

                                                             

BALANCE AS OF SEPTEMBER 30, 2012

    235,488,094        $589        $4,234        $6,741        $(962     $(60     $(10     $10,532   

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

 

 

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NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)

 

General

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

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

The separate interim consolidated financial statements of each of the Companies are unaudited but, in the opinion of their respective managements, reflect all adjustments (which include only normally recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The Companies’ separate interim consolidated financial statements should be read together with their separate audited financial statements (including the combined notes thereto) included in Item 8 of their combined Annual Report on Form 10-K for the year ended December 31, 2011 and their separate unaudited financial statements (including the combined notes thereto) included in Part I, Item 1 of their combined Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2012 and June 30, 2012. Certain prior period amounts have been reclassified to conform to the current period presentation.

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

 

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Note A — Summary of Significant Accounting Policies

Earnings Per Common Share

For the three and nine months ended September 30, 2012 and 2011, basic and diluted EPS for Con Edison are calculated as follows:

 

     For the Three Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
(Millions of Dollars, except per share amounts/Shares in Millions)   2012     2011     2012     2011  

Net income for common stock

    $   440        $   383        $   931        $   860   

Weighted average common shares outstanding – basic

    292.9        292.9        292.9        292.5   

Add: Incremental shares attributable to effect of potentially dilutive securities

    1.7        1.7        1.7        1.7   

Adjusted weighted average common shares outstanding – diluted

    294.6        294.6        294.6        294.2   

Net income for common stock per common share – basic

    $  1.50        $  1.31        $  3.18        $  2.94   

Net income for common stock per common share – diluted

    $  1.49        $  1.30        $  3.16        $  2.92   

 

Note B — Regulatory Matters

Rate Agreements

CECONY — Electric

In March 2012, the NYSPSC issued an order requiring that the $134 million surcharge that was to have been collected from customers during the rate year ending March 2013 instead be offset using certain CECONY regulatory liabilities that would have otherwise been refundable to or applied for the benefit of customers after the rate year.

O&R — Electric

On February 24, 2012, O&R, the staff of the NYSPSC and the Utility Intervention Unit of New York State’s Division of Consumer Protection entered into a Joint Proposal with respect to the company’s rates for electric delivery service rendered in New York. The Joint Proposal, which the NYSPSC approved in June 2012, covers the three-year period from July 2012 through June 2015. The Joint Proposal provides for electric base rate increases of $19.4 million, $8.8 million and $15.2 million, effective July 2012, 2013 and 2014, respectively, which is being implemented, at the NYSPSC’s option, with increases of $15.2 million effective July 2012 and 2013 and an increase of $13.1 million, together with a surcharge of $2.1 million, effective July 2014. The Joint Proposal reflects the following major items:

 

   

a weighted average cost of capital of 7.61 percent, 7.65 percent and 7.48 percent for the rate years ending June 30, 2013, 2014 and 2015, respectively, reflecting:

 

   

a return on common equity of 9.4 percent, 9.5 percent and 9.6 percent for the rate years ending June 30, 2013, 2014 and 2015, respectively;

 

   

cost of long-term debt of 6.07 percent for each of the rate years ending June 30, 2013 and 2014 and 5.64 percent for the rate year ending June 30, 2015;

 

   

common equity ratio of 48 percent for each of the rate years ending June 30, 2013, 2014 and 2015; and

 

   

average rate base of $671 million, $708 million and $759 million for the rate years ending June 30, 2013, 2014 and 2015, respectively;

 

   

sharing with electric customers of any actual earnings, excluding the effects of any penalties and certain other items, above specified percentage returns on common equity (based on the actual average common equity ratio, subject to a 50 percent maximum):

 

   

the company will allocate to customers the revenue requirement equivalent of 50 percent, 75 percent and 90 percent of any such earnings for each rate year in excess of 80 basis points, 180 basis points and 280 basis points, respectively, above the return on common equity for that rate year indicated above; and

 

   

the earnings sharing allocation between the company and customers will be on a cumulative basis at the end of rate year three;

 

   

continuation of a revenue decoupling mechanism;

 

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continuation of a provision which defers as a regulatory liability for the benefit of customers or, subject to certain limitations, a regulatory asset for recovery from customers, as the case may be, the revenue requirement impact of the amount by which actual average net utility plant for each rate year is different than the average net utility plant reflected in rates ($678 million, $704 million and $753 million for the rate years ending June 30, 2013, 2014 and 2015, respectively);

 

   

continuation of the rate provisions pursuant to which the company recovers its purchased power costs from customers;

 

   

continuation of rate provisions under which pension and other post-retirement benefit expenses, environmental remediation expenses, tax-exempt debt costs, property taxes and certain other expenses are reconciled to amounts for those expenses reflected in rates; and

 

   

continuation of provisions for potential operations penalties of up to $3 million annually if certain customer service and system reliability performance targets are not met.

Other Regulatory Matters

In February 2009, the NYSPSC commenced a proceeding to examine the prudence of certain CECONY expenditures (see “Investigations of Vendor Payments” in Note H). 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. At September 30, 2012, the company had collected an estimated $1,031 million from customers subject to potential refund in connection with this proceeding. In October 2010, a NYSPSC consultant reported its $21 million provisional assessment, which the company has disputed, of potential overcharges for construction work. These estimated potential overcharges related to transactions that involved certain employees who were arrested and a contractor that performed work for the company. The company expects that the NYSPSC’s consultant will be reporting an estimate of potential overcharges with respect to a substantial portion of the company’s construction expenditures from January 2000 to January 2009, including expenditures for transactions that did not involve the arrested employees and contractor. The NYSPSC consultant’s estimate is expected to be materially higher than its $21 million provisional assessment. The NYSPSC’s consultant is developing its estimate based on its review of a selection of the construction expenditures and its extrapolation of the results of its review (which the company is disputing). The NYSPSC’s consultant is expected to continue to review the company’s expenditures. At September 30, 2012, the company had a $15 million regulatory liability relating to this matter. The company is unable to estimate the amount, if any, by which any refund required by the NYSPSC may exceed this regulatory liability.

In February 2011, the NYSPSC initiated a proceeding to examine the existing mechanisms pursuant to which utilities recover site investigation and remediation costs and possible alternatives. See Note G.

 

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Regulatory Assets and Liabilities

Regulatory assets and liabilities at September 30, 2012 and December 31, 2011 were comprised of the following items:

 

     Con Edison     CECONY  
(Millions of Dollars)   2012     2011     2012     2011  

Regulatory assets

       

Unrecognized pension and other postretirement costs

    $5,211        $5,852        $4,972        $5,554   

Future income tax

    1,888        1,798        1,810        1,724   

Environmental remediation costs

    722        681        607        564   

Pension and other post retirement benefits deferrals

    205        198        174        157   

Revenue taxes

    177        163        171        158   

Surcharge for New York State assessment

    135        90        125        82   

Deferred storm costs

    120        128        78        80   

Net electric deferrals

    107        121        107        121   

Deferred derivative losses – long-term

    47        60        25        44   

O&R transition bond charges

    40        44                 

Preferred stock redemption

    29               29          

Workers’ compensation

    19        23        19        23   

Property tax reconciliation

    15        13                 

Recoverable energy costs – long-term

    1        14        1        14   

Other

    181        152        167        140   

Regulatory assets – long-term

    8,897        9,337        8,285        8,661   

Deferred derivative losses – current

    75        164        62        140   

Recoverable energy costs – current

    2                        

Regulatory assets – current

    77        164        62        140   

Total Regulatory Assets

    $8,974        $9,501        $8,347        $8,801   

Regulatory liabilities

       

Allowance for cost of removal less salvage

    $   488        $   448        $   407        $   372   

Property tax reconciliation

    137        35        137        35   

Net unbilled revenue deferrals

    121        104        121        104   

World Trade Center settlement proceeds

    62        62        62        62   

Long-term interest rate reconciliation

    54        30        54        30   

Carrying charges on transmission and distribution net plant

    36        38        16        14   

Expenditure prudence proceeding

    15        11        15        11   

Gas line losses

    14        21        14        21   

Energy efficiency programs

    5        22        5        20   

Other

    170        206        147        192   

Regulatory liabilities – long-term

    1,102        977        978        861   

Revenue decoupling mechanism

    107        66        103        66   

Electric surcharge offset

    60               60          

Refundable energy costs – current

    58        51        30        12   

Deferred derivative gains – current

    6        1        6        1   

Regulatory liabilities – current

    231        118        199        79   

Total Regulatory Liabilities

    $1,333        $1,095        $1,177        $   940   

 

Note C — Capitalization

In March 2012, CECONY issued $400 million of 4.20 percent 30-year debentures, $239 million of the net proceeds from the sale of which were used to redeem on May 1, 2012 all outstanding shares of its $5 Cumulative Preferred Stock and Cumulative Preferred Stock ($100 par value). In November 2012, CECONY purchased $225 million of its tax-exempt debt that was subject to mandatory tender.

 

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

 

(Millions of Dollars)   September 30, 2012     December 31, 2011  
Long-Term Debt (including current portion)  

Carrying

Amount

    Fair
Value
   

Carrying

Amount

    Fair
Value
 

Con Edison

    $10,769        $13,197        $10,673        $12,744   

CECONY

    $  9,845        $12,001        $  9,745        $11,593   

 

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Fair values of long-term debt have been estimated primarily using available market information. For Con Edison, $12,561 million and $636 million of the fair value of long-term debt at September 30, 2012 are classified as Level 2 and Level 3, respectively. For CECONY, $11,365 million and $636 million of the fair value of long-term debt at September 30, 2012 are classified as Level 2 and Level 3, respectively (see Note K). 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 September 30, 2012, Con Edison had $340 million of commercial paper outstanding, $332 million of which was outstanding under CECONY’s program. The weighted average interest rate was 0.3 percent for each of Con Edison and CECONY. The Companies have not borrowed under their October 2011 credit agreement. Con Edison had $207 million of letters of credit outstanding under the credit agreement (including $192 million for CECONY).

 

Note E — Pension Benefits

Net Periodic Benefit Cost

The components of the Companies’ net periodic benefit costs for the three and nine months ended September 30, 2012 and 2011 were as follows:

 

     For the Three Months Ended September 30,  
     Con Edison     CECONY  
(Millions of Dollars)   2012     2011     2012     2011  

Service cost – including administrative expenses

    $   59        $   48        $   55        $   45   

Interest cost on projected benefit obligation

    137        140        128        131   

Expected return on plan assets

    (176     (184     (168     (174

Amortization of net actuarial loss

    177        133        168        126   

Amortization of prior service costs

    2        2        2          

NET PERIODIC BENEFIT COST

    $ 199        $ 139        $ 185        $ 128   

Cost capitalized

    (64     (45     (60     (42

Reconciliation to rate level

           (11     (1     (11

Cost charged to operating expenses

    $ 135        $   83        $ 124        $   75   

 

     For the Nine Months Ended September 30,  
     Con Edison     CECONY  
(Millions of Dollars)   2012     2011     2012     2011  

Service cost – including administrative expenses

    $ 177        $ 142        $ 165        $ 133   

Interest cost on projected benefit obligation

    410        420        385        393   

Expected return on plan assets

    (528     (550     (503     (524

Amortization of net actuarial loss

    531        397        503        376   

Amortization of prior service costs

    6        6        4        4   

NET PERIODIC BENEFIT COST

    $ 596        $ 415        $ 554        $ 382   

Amortization of regulatory asset

    1        1        1        1   

TOTAL PERIODIC BENEFIT COST

    $ 597        $ 416        $ 555        $ 383   

Cost capitalized

    (200     (141     (186     (131

Reconciliation to rate level

    (37     (68     (36     (70

Cost charged to operating expenses

    $ 360        $ 207        $ 333        $ 182   

Expected Contributions

 

The Companies made contributions to the pension plan during 2012 of $775 million (of which $721 million was contributed by CECONY). The Companies’ policy is to fund their pension plan’s accounting cost to the extent tax deductible. During the first nine months of 2012, CECONY also funded $12 million for the non-qualified supplemental plan.

 

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Note F — Other Postretirement Benefits

Net Periodic Benefit Cost

The components of the Companies’ net periodic postretirement benefit costs for the three and nine months ended September 30, 2012 and 2011 were as follows:

 

     For the Three Months Ended September 30,  
     Con Edison     CECONY  
(Millions of Dollars)   2012     2011     2012     2011  

Service cost

    $   6        $   7        $   5        $   5   

Interest cost on accumulated other postretirement benefit obligation

    18        20        16        18   

Expected return on plan assets

    (21     (22     (19     (21

Amortization of net actuarial loss

    24        22        22        20   

Amortization of prior service cost

    (5     (3     (4     (3

Amortization of transition obligation

           1               1   

NET PERIODIC POSTRETIREMENT BENEFIT COST

    $ 22        $ 25        $ 20        $ 20   

Cost capitalized

    (8     (9     (7     (7

Reconciliation to rate level

    3        3        3        3   

Cost charged to operating expenses

    $ 17        $ 19        $ 16        $ 16   

 

     For the Nine Months Ended September 30,  
     Con Edison     CECONY  
(Millions of Dollars)   2012     2011     2012     2011  

Service cost

    $ 20        $ 19        $ 15        $ 15   

Interest cost on accumulated other postretirement benefit obligation

    55        62        48        54   

Expected return on plan assets

    (64     (66     (56     (59

Amortization of net actuarial loss

    73        66        65        60   

Amortization of prior service cost

    (16     (7     (13     (9

Amortization of transition obligation

    1        3        1        3   

NET PERIODIC POSTRETIREMENT BENEFIT COST

    $ 69        $ 77        $ 60        $ 64   

Cost capitalized

    (24     (27     (20     (22

Reconciliation to rate level

    15        12        12        10   

Cost charged to operating expenses

    $ 60        $ 62        $ 52        $ 52   

 

Expected Contributions

Con Edison expects to make a contribution of $83 million, including $71 million for CECONY, to the other postretirement benefit plans in 2012. During the first nine months of 2012, Con Edison contributed $34 million to the other postretirement benefit plans (of which $28 million was contributed by CECONY).

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.”

 

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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 September 30, 2012 and December 31, 2011 were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2012     2011     2012     2011  

Accrued Liabilities:

         

Manufactured gas plant sites

    $466        $422        $352        $307   

Other Superfund Sites

    71        67        71        66   

Total

    $537        $489        $423        $373   

Regulatory assets

    $722        $681        $607        $564   

Most of the accrued Superfund Site liability relates to sites that have been investigated, in whole or in part. However, for some of the sites, the extent and associated cost of the required remediation has not yet been determined. As investigations progress and information pertaining to the required remediation becomes available, the Utilities expect that additional liability may be accrued, the amount of which is not presently determinable but may be material. Under their current rate agreements, the Utilities are permitted to recover or defer as regulatory assets (for subsequent recovery through rates) certain site investigation and remediation costs. In February 2011, the NYSPSC initiated a proceeding to examine the existing mechanisms pursuant to which utilities recover such costs and possible alternatives.

Environmental remediation costs incurred and insurance recoveries received related to Superfund Sites for the three and nine months ended September 30, 2012 and 2011, were as follows:

 

     For the Three Months Ended September 30,  
     Con Edison     CECONY  
(Millions of Dollars)   2012     2011     2012     2011  

Remediation costs incurred

    $3        $9        $1        $9   

Insurance recoveries received

                           

 

     For the Nine Months Ended September 30,  
     Con Edison     CECONY  
(Millions of Dollars)   2012     2011     2012     2011  

Remediation costs incurred

    $18        $24        $15        $22   

Insurance recoveries received

                           

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

Asbestos Proceedings

Suits have been brought in New York State and federal courts against the Utilities and many other defendants, wherein a large number of plaintiffs sought large amounts of compensatory and punitive damages for deaths and injuries allegedly caused by exposure to asbestos at various premises of the Utilities. The suits that have been resolved, which are many, have been resolved without any payment by the Utilities, or for amounts that were not, in the aggregate, material to them. The amounts specified in all the remaining

 

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thousands of suits total billions of dollars; however, the Utilities believe that these amounts are greatly exaggerated, based on the disposition of previous claims. In 2010, CECONY estimated that its aggregate undiscounted potential liability for these suits and additional suits that may be brought over the next 15 years is $10 million. The estimate was based upon a combination of modeling, historical data analysis and risk factor assessment. Actual experience may be materially different. In addition, certain current and former employees have claimed or are claiming workers’ compensation benefits based on alleged disability from exposure to asbestos. Under its current rate agreements, CECONY is permitted to defer as regulatory assets (for subsequent recovery through rates) costs incurred for its asbestos lawsuits and workers’ compensation claims. The accrued liability for asbestos suits and workers’ compensation proceedings (including those related to asbestos exposure) and the amounts deferred as regulatory assets for the Companies at September 30, 2012 and December 31, 2011 were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2012     2011     2012     2011  

Accrued liability – asbestos suits

    $10        $10        $10        $10   

Regulatory assets – asbestos suits

    $10        $10        $10        $10   

Accrued liability – workers’ compensation

    $94        $98        $89        $93   

Regulatory assets – workers’ compensation

    $19        $23        $19        $23   

Note H — Other Material Contingencies

Manhattan Steam Main Rupture

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

Investigations of Vendor Payments

In January 2009, CECONY commenced an internal investigation relating to the arrests of certain employees and retired employees (all of whom have since been convicted) for accepting kickbacks from contractors that performed construction work for the company. The company has retained a law firm, which has retained an accounting firm, to assist in the company’s investigation. The company has provided information to governmental authorities, which consider the company to be a victim of unlawful conduct, in connection with their investigation of the arrested employees and contractors. The company has terminated its employment of the arrested employees and its contracts with the contractors. In February 2009, the NYSPSC commenced a proceeding that, among other things, will examine the prudence of certain of the company’s expenditures relating to the arrests and consider whether additional expenditures should also be examined (see “Other Regulatory Matters” in Note B).

CECONY is also investigating the September 2010 arrest of a retired employee (who has since been convicted of participating in a bribery scheme in which the employee received payments from two companies that supplied materials to the company) and the January 2011 arrest of an employee (for accepting kickbacks from an engineering firm that performed work for the company). CECONY has provided information to governmental authorities in connection with their ongoing investigations of these matters.

The company, based upon its evaluation of its internal controls for 2011 and previous years, believes that the controls were effective to provide reasonable assurance that its financial statements have been fairly presented, in all material respects, in conformity with generally accepted accounting principles. Because the company’s investigations are ongoing, the company is unable to predict the impact of any of the employees’ unlawful

 

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conduct on the company’s internal controls, business, results of operations or financial position.

Lease In/Lease Out Transactions

In each of 1997 and 1999, Con Edison Development entered into a transaction in which it leased property and then immediately subleased it back to the lessor (termed “Lease In/Lease Out,” or LILO transactions). The transactions respectively involve electric generating and gas distribution facilities in the Netherlands, with a total investment of $259 million. The transactions were financed with $93 million of equity and $166 million of non-recourse, long-term debt secured by the underlying assets. In accordance with the accounting rules for leases, Con Edison is accounting for the two LILO transactions as leveraged leases. Accordingly, the company’s investment in these leases, net of non-recourse debt, is carried as a single amount in Con Edison’s consolidated balance sheet and income is recognized pursuant to a method that incorporates a level rate of return for those years when net investment in the lease is positive, based upon the after-tax cash flows projected at the inception of the leveraged leases. The company’s investment in these leveraged leases was $(73) million at September 30, 2012 and $(55) million at December 31, 2011 and is comprised of a $228 million gross investment less $301 million of deferred tax liabilities at September 30, 2012 and $234 million gross investment less $289 million of deferred tax liabilities at December 31, 2011.

On audit of Con Edison’s tax return for 1997, the IRS disallowed the tax losses in connection with the 1997 LILO transaction. In December 2005, Con Edison paid a $0.3 million income tax deficiency asserted by the IRS for the tax year 1997 with respect to the 1997 LILO transaction. In April 2006, the company paid interest of $0.2 million associated with the deficiency and commenced an action in the United States Court of Federal Claims, entitled Consolidated Edison Company of New York, Inc. v. United States, to obtain a refund of this tax payment and interest. A trial was completed in November 2007. In October 2009, the court issued a decision in favor of the company concluding that the 1997 LILO transaction was, in substance, a true lease that possessed economic substance, the loans relating to the lease constituted bona fide indebtedness, and the deductions for the 1997 LILO transactions claimed by the company in its 1997 federal income tax return are allowable. The IRS appealed the decision in December 2011. Oral argument on the appeal is scheduled to be held in November 2012.

In connection with its audit of Con Edison’s federal income tax returns for 1998 through 2007, the IRS disallowed $416 million of net tax deductions taken with respect to both of the LILO transactions for the tax years. Con Edison is pursuing administrative appeals of these audit level disallowances. In connection with its audit of Con Edison’s federal income tax returns for 2011, 2010, 2009 and 2008, the IRS has disallowed $35 million, $40 million, $41 million and $42 million, respectively, of net tax deductions taken with respect to both of the LILO transactions. When these audit level disallowances become appealable, Con Edison intends to file an appeal of the disallowances.

Con Edison believes that its LILO transactions have been correctly reported, and has not recorded any reserve with respect to the disallowance of tax losses, or related interest, in connection with its LILO transactions. Con Edison’s estimated tax savings, reflected in its financial statements, from the two LILO transactions through September 30, 2012, in the aggregate, was $248 million. If Con Edison were required to repay all or a portion of these amounts, it would also be required to pay interest of up to $122 million net of tax at September 30, 2012.

Pursuant to the accounting rules for leveraged lease transactions, the expected timing of income tax cash flows generated by Con Edison’s LILO transactions are required to be reviewed at least annually. If the expected timing of the cash flows is revised, the rate of return and the allocation of income would be recalculated from the inception of the LILO transactions, and the company would be required to recalculate the accounting effect of the LILO transactions, which would result in a charge to earnings that could have a material adverse effect on the company’s results of operations.

 

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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 $823 million and $760 million at September 30, 2012 and December 31, 2011, respectively.

A summary, by type and term, of Con Edison’s total guarantees at September 30, 2012 is as follows:

 

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

Energy transactions

    $696        $2        $66        $764   

Intra-company guarantees

    15               1        16   

Other guarantees

    38        5               43   

TOTAL

    $749        $7        $67        $823   

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 and energy services. To the extent that liabilities exist under the contracts subject to these guarantees, such liabilities are included in Con Edison’s consolidated balance sheet.

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

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

 

   

$7 million relates to guarantees issued by Con Edison to CECONY covering a former Con Edison subsidiary’s lease payment to use CECONY’s conduit system in accordance with a tariff approved by the NYSPSC and a guarantee issued by Con Edison to a landlord to guarantee the former subsidiary’s obligations under a building lease. The former subsidiary is obligated to reimburse Con Edison for any payments made under these guarantees. This obligation is fully secured by letters of credit;

 

   

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

 

   

$11 million for guarantees provided by Con Edison Development to Travelers Insurance Company for indemnity agreements for surety bonds in connection with the construction and operation of solar facilities performed by its subsidiaries; and

 

   

Con Edison, on behalf of Con Edison Solutions, as a retail electric provider, issued a guarantee to the Public Utility Commission of Texas with no specified limitation on the amount guaranteed, covering the payment of all obligations of a retail electric provider. Con Edison’s estimate of the maximum potential obligation is $5 million as of September 30, 2012.

 

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Note I — Financial Information by Business Segment

The financial data for the business segments are as follows:

 

     For the Three Months Ended September 30,  
    

Operating

revenues

    Inter-segment
revenues
    Depreciation and
amortization
   

Operating

income

 
(Millions of Dollars)   2012     2011     2012     2011     2012     2011     2012     2011  

CECONY

               

Electric

    $2,611        $2,644        $    4        $    3        $179        $166        $812        $758   

Gas

    189        197        1        1        31        28        (21     (23

Steam

    68        76        20        20        15        15        (37     (33

Consolidation adjustments

                  (25     (24                            

Total CECONY

    $2,868        $2,917        $  —        $  —        $225        $209        $754        $702   

O&R

               

Electric

    $   199        $   217        $  —        $  —        $  10        $    9        $  50        $  44   

Gas

    27        24                      3        3        (6     (6

Total O&R

    $   226        $   241        $  —        $  —        $  13        $  12        $  44        $  38   

Competitive energy businesses

    $   344        $   472        $    2        $    3        $    2        $    1        $  53        $  16   

Other*

           (1     (2     (3                            

Total Con Edison

    $3,438        $3,629        $  —        $  —        $240        $222        $851        $756   

 

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

 

     For the Nine Months Ended September 30,  
    

Operating

revenues

    Inter-segment
revenues
    Depreciation and
amortization
   

Operating

income

 
(Millions of Dollars)   2012     2011     2012     2011     2012     2011     2012     2011  

CECONY

               

Electric

    $6,307        $6,378        $  11        $    9        $527        $489        $1,383        $1,326   

Gas

    1,017        1,156        4        4        89        82        255        212   

Steam

    414        508        58        59        48        47        40        81   

Consolidation adjustments

                  (73     (72                            

Total CECONY

    $7,738        $8,042        $  —        $  —        $664        $618        $1,678        $1,619   

O&R

               

Electric

    $   457        $   507        $  —        $  —        $  28        $  26        $     74        $     69   

Gas

    144        153                      11        10        26        22   

Total O&R

    $   601        $   660        $  —        $  —        $  39        $  36        $   100        $     91   

Competitive energy businesses

    $   954        $1,286        $    6        $    9        $    6        $    5        $   111        $     75   

Other*

    (6     (16     (6     (9                   (3     (4

Total Con Edison

    $9,287        $9,972        $  —        $  —        $709        $659        $1,886        $1,781   

 

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

 

In July 2012, Con Edison Development purchased a company that is developing 70 MW (AC) of solar energy projects in Alpaugh, California (Alpaugh). Electricity generated by the projects is to be purchased by Pacific Gas and Electric Company pursuant to long-term power purchase agreements (PPA). Alpaugh was purchased for $288 million, including contingent consideration of $2 million, of which $284 million has been allocated to construction work in progress and $4 million to deposits relating to the PPA and interconnection agreements. The total cost to acquire and construct these projects is estimated to be $350 million.

In October 2012, Con Edison Development purchased two companies that are developing 40 MW (AC) of solar energy projects in Tulare and Kings County, California. Electricity generated by the projects is to be purchased by Pacific Gas and Electric Company pursuant to long-term PPAs. The projects were purchased for approximately $51 million, of which $39 million has been allocated to construction work in progress and $12 million to deposits relating to the PPA and interconnection agreements. The total cost to acquire and construct these projects is estimated to be $200 million.

 

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Note J — 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 fair values of the Companies’ commodity derivatives at September 30, 2012 and December 31, 2011 were as follows:

 

     Con Edison     CECONY  
(Millions of Dollars)   2012     2011     2012     2011  

Fair value of net derivative assets/(liabilities) – gross

    $(92     $(249     $(48     $(144

Impact of netting of cash collateral

    59        110        33        46   

Fair value of net derivative assets/(liabilities) – net

    $(33     $(139     $(15     $  (98

Credit Exposure

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

At September 30, 2012, Con Edison and CECONY had $118 million and $13 million of credit exposure in connection with energy supply and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $44 million with investment-grade counterparties, $25 million with commodity exchange brokers, $47 million with independent system operators and $2 million with non-rated counterparties. CECONY’s net credit exposure consisted of $3 million with investment-grade counterparties and $10 million with commodity exchange brokers.

Economic Hedges

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

 

The fair values of the Companies’ commodity derivatives at September 30, 2012 were:

 

(Millions of Dollars)   Fair Value of Commodity Derivatives (a)
Balance Sheet Location
  Con
Edison
    CECONY  
Derivative Assets  

Current

  Other current assets     $   91        $ 30   

Long-term

  Other deferred charges and non-current assets     19        10   

Total derivative assets

    $ 110        $ 40   

Impact of netting

    (59     (13

Net derivative assets

    $   51        $ 27   

 

Derivative Liabilities  

Current

  Fair value of derivative liabilities     $ 149        $ 60   

Long-term

  Fair value of derivative liabilities     53        28   

Total derivative liabilities

    $ 202        $ 88   

Impact of netting

    (118     (46

Net derivative liabilities

    $   84        $ 42   

 

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

 

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The fair values of the Companies’ commodity derivatives at December 31, 2011 were:

 

(Millions of Dollars)   Fair Value of Commodity Derivatives (a)
Balance Sheet Location
  Con
Edison
    CECONY  
Derivative Assets  

Current

  Other current assets     $ 139        $  16   

Long-term

  Other deferred charges and non-current assets     26        14   

Total derivative assets

    $ 165        $  30   

Impact of netting

    (95     (6

Net derivative assets

    $   70        $  24   
Derivative Liabilities  

Current

  Fair value of derivative liabilities     $ 331        $127   

Long-term

  Fair value of derivative liabilities     83        48   

Total derivative liabilities

    $ 414        $175   

Impact of netting

    (205     (53

Net derivative liabilities

    $ 209        $122   

 

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

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

The following tables present the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the three and nine months ended September 30, 2012:

 

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

Deferred or Recognized in Income for the Three Months Ended September 30, 2012

 
(Millions of Dollars)   Balance Sheet Location   Con
Edison
    CECONY  

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

  

Current

  Deferred derivative gains     $   5        $   5   

Long-term

  Deferred derivative gains     1        1   

Total deferred gains/(losses)

        $   6        $   6   

Current

  Deferred derivative losses     $ 51        $ 42   

Current

  Recoverable energy costs     (60     (52

Long-term

  Deferred derivative losses     22        20   

Total deferred gains/(losses)

        $ 13        $ 10   

Net deferred gains/(losses)

        $ 19        $ 16   
    Income Statement Location                

Pre-tax gain/(loss) recognized in income

  

  Purchased power expense     $   9 (b)      $  —   
  Gas purchased for resale              
    Non-utility revenue     1 (b)        

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

        $ 10        $  —   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.
(b) For the three months ended September 30, 2012, Con Edison recorded in purchased power expense an unrealized pre-tax gain/(loss) of $30 million.

 

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

Deferred or Recognized in Income for the Nine Months Ended September 30, 2012

 
(Millions of Dollars)   Balance Sheet Location   Con
Edison
    CECONY  

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

  

Current

  Deferred derivative gains     $     5        $     5   

Long-term

  Deferred derivative gains     1        1   

Total deferred gains/(losses)

        $     6        $     6   

Current

  Deferred derivative losses     $   89        $   78   

Current

  Recoverable energy costs     (187     (164

Long-term

  Deferred derivative losses     13        19   

Total deferred gains/(losses)

        $  (85     $  (67

Net deferred gains/(losses)

        $  (79     $  (61
    Income Statement Location                

Pre-tax gain/(loss) recognized in income

  

  Purchased power expense     $  (49 )(b)      $    —   
  Gas purchased for resale     (2       
    Non-utility revenue     (11 )(b)        

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

        $  (62     $    —   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.
(b) For the nine months ended September 30, 2012, Con Edison recorded in non-utility revenues and purchased power expense an unrealized pre-tax gain/(loss) of $(13) million and $75 million, respectively.

The following tables present the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the three and nine months ended September 30, 2011:

 

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

Deferred or Recognized in Income for the Three Months Ended September 30, 2011

 
(Millions of Dollars)   Balance Sheet Location   Con
Edison
    CECONY  

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

  

Current

  Deferred derivative gains     $  (2     $  (1

Long-term

  Regulatory liabilities     1        1   

Total deferred gains/(losses)

        $  (1     $  —   

Current

  Deferred derivative losses     $ 12        $   7   

Current

  Recoverable energy costs     (75     (53

Long-term

  Regulatory assets     10        6   

Total deferred gains/(losses)

        $(53     $(40

Net deferred gains/(losses)

        $(54     $(40
    Income Statement Location                

Pre-tax gain/(loss) recognized in income

  

  Purchased power expense     $ 29 (b)      $  —   
  Gas purchased for resale     6          
    Non-utility revenue     5 (b)        

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

        $ 40        $  —   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.
(b) For the three months ended September 30, 2011, Con Edison recorded in non-utility revenues and purchased power expense an unrealized pre-tax gain/(loss) of $(10) million and $(1) million, respectively.

 

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

Deferred or Recognized in Income for the Nine Months Ended September 30, 2011

 
(Millions of Dollars)   Balance Sheet Location   Con
Edison
    CECONY  

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

  

Current

  Deferred derivative gains     $    —        $    —   

Long-term

  Regulatory liabilities     3        3   

Total deferred gains/(losses)

        $     3        $     3   

Current

  Deferred derivative losses     $   80        $   60   

Current

  Recoverable energy costs     (177     (134

Long-term

  Regulatory assets     38        27   

Total deferred gains/(losses)

        $  (59     $  (47

Net deferred gains/(losses)

        $  (56     $  (44
    Income Statement Location                

Pre-tax gain/(loss) recognized in income

  

  Purchased power expense     $   81 (b)      $    —   
  Gas purchased for resale     17          
    Non-utility revenue     22 (b)        

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

        $ 120        $    —   

 

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.
(b) For the nine months ended September 30, 2011, Con Edison recorded in non-utility revenues and purchased power expense an unrealized pre-tax gain/(loss) of $(35) million and $59 million, respectively.

As of September 30, 2012, Con Edison had 1,289 contracts, including 628 CECONY contracts, which were considered to be derivatives under the accounting rules for derivatives and hedging (excluding qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts). The following table presents the number of contracts by commodity type:

 

     Electric Derivatives           

Gas Derivatives

 
     Number of
Energy
Contracts (a)
    MWHs (b)     Number of
Capacity
Contracts (a)
    MW-Months (b)     Number of
Contracts (a)
    dths (b)     Total
Number of
Contracts (a)
 

Con Edison

    576        12,807,613        78        10,019        635        86,541,700        1,289   

CECONY

    113        3,271,000                      515        81,080,000        628   

 

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

 

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

The collateral requirements associated with the clearing 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.

 

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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 September 30, 2012, and the additional collateral that would have been required to be posted had the lowest applicable credit rating been reduced one level and to below investment grade were:

 

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

Aggregate fair value – net liabilities

    $62        $41   

Collateral posted

    $14        $  9   

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

    $ —        $ —   

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

    $85 (d)      $45 (d) 

 

(a) Non-derivative transactions for the purchase and sale of electricity and gas and qualifying derivative instruments, which have been designated as normal purchases or normal sales, are excluded from the table. These transactions primarily include purchases of electricity from independent system operators. In the event the Utilities and Con Edison’s competitive energy businesses were no longer extended unsecured credit for such purchases, the Companies would be required to post collateral, which at September 30, 2012, would have amounted to an estimated $25 million for Con Edison. For certain other such non-derivative transactions, the Companies could be required to post collateral under certain circumstances, including in the event counterparties had reasonable grounds for insecurity.
(b) The Companies measure the collateral requirements by taking into consideration the fair value amounts of derivative instruments that contain credit-risk-related contingent features that are in a net liabilities position plus amounts owed to counterparties for settled transactions and amounts required by counterparties for minimum financial security. The fair value amounts represent unrealized losses, net of any unrealized gains where the Companies have a legally enforceable right of setoff.
(c) The current ratings are Moody’s, S&P and Fitch long-term credit rating of, as applicable, Con Edison (Baa1/BBB+/BBB+), CECONY (A3/A-/A-) or O&R (Baa1/A-/A-). Credit ratings assigned by rating agencies are expressions of opinions that are subject to revision or withdrawal at any time by the assigning rating agency.
(d) Derivative instruments that are net assets have been excluded from the table. At September 30, 2012, if Con Edison had been downgraded to below investment grade, it would have been required to post additional collateral for such derivative instruments of $27 million.

 

Interest Rate Swap

O&R has an interest rate swap pursuant to which it pays a fixed-rate of 6.09 percent and receives a LIBOR-based variable rate. The fair value of this interest rate swap at September 30, 2012 was an unrealized loss of $6 million, which has been included in Con Edison’s consolidated balance sheet as a noncurrent liability/fair value of derivative liabilities and a regulatory asset. The increase in the fair value of the swap for the three and nine months ended September 30, 2012 was $1 million and $2 million, respectively. 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 K — 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.

 

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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.

Effective January 1, 2012, the Companies adopted Accounting Standards Update (ASU) No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments expand existing disclosure requirements for fair value measurements and make other amendments. For fair value measurements in Level 3, this update requires the Companies to provide a description of the valuation process in place, a quantitative disclosure of unobservable inputs and assumptions used in the measurement as well as a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs. The update also requires the Companies to disclose any transfers between Levels 1 and 2 of fair value hierarchy measurements and the reasons for the transfers.

 

Assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 are summarized below.

 

     Level 1     Level 2     Level 3    

Netting

Adjustments (4)

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

Derivative assets:

                   

Commodity (1)

    $    2        $  2        $  48        $  16        $   47        $ 12        $  (46     $  (3     $   51        $  27   

Transfer in (5) (6)

                  24                                           24          

Transfer out (5) (6)

                                (24                          (24       

Commodity Total

    $    2        $  2        $  72        $  16        $   23        $ 12        $  (46     $  (3     $ 51        $  27   

Other assets

    103        96               1        105        95                      208        192   

Transfer in (5) (6)

                  105        95                                    105        95   

Transfer out (5) (6)

                                (105     (95                   (105     (95

Other assets (3)

    $103        $96        $105        $  96        $    —        $  —        $    —        $  —        $ 208        $192   

Total

    $105        $98        $177        $112        $   23        $ 12        $  (46     $  (3     $ 259        $219   

Derivative liabilities:

                   

Commodity

    $    4        $  1        $114        $  68        $   71        $   9        $(105     $(36     $   84        $  42   

Transfer in (5) (6)

    7        7        50        12        3        3                      60        22   

Transfer out (5) (6)

    (2            (10     (10     (48     (12                   (60     (22

Commodity Total (1)

    $9        $  8        $154        $  70        $   26        $  —        $(105     $(36     $   84        $  42   

Interest rate contract

                  (2            8                             6          

Transfer in (5) (6)

                  8                                           8          

Transfer out (5) (6)

                                (8                          (8       

Interest rate contract (2)

    $   —        $ —        $    6        $ —        $    —        $  —        $    —        $  —        $     6        $   —   

Total

    $    9        $  8        $160        $70        $   26        $  —        $(105     $(36     $   90        $  42   

 

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(1) A portion of the commodity derivatives categorized in Level 3 is valued using an internally developed model with observable inputs. The models also include some less readily observable inputs resulting in the classification of the entire contract as Level 3. See Note J.
(2) See Note J.
(3) Other assets are comprised of assets such as life insurance contracts within the deferred compensation plan and non-qualified retirement plans.
(4) Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.
(5) The Companies’ policy is to recognize transfers into and transfers out of the levels at the end of the reporting period.
(6) Transferred between Level 3 and Levels 1 and 2 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall. Other assets and interest rate contract were transferred as of March 31, 2012.

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 are summarized below.

 

     Level 1     Level 2     Level 3    

Netting

Adjustments (4)

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

Derivative assets:

                   

Commodity (1)

    $  3        $ —        $  64        $    8        $  87        $  11        $  (84     $   5        $   70        $  24   

Other assets (3)

    76        76                      99        90                      175        166   

Total

    $79        $76        $  64        $    8        $186        $101        $  (84     $   5        $ 245        $190   

Derivative liabilities:

                   

Commodity

    $12        $  4        $222        $122        $169        $  37        $(194     $(41     $ 209        $122   

Transfer in (5) (6) (7)

                  26        25        6        6                      32        31   

Transfer out (5) (6) (7)

                  (6     (6     (26     (25                   (32     (31

Commodity (1)

    $12        $  4        $242        $141        $149        $  18        $(194     $(41     $ 209        $122   

Interest rate contract (2)

                                8                             8          

Total

    $12        $  4        $242        $141        $157        $  18        $(194     $(41     $ 217        $122   

 

(1) A portion of the commodity derivatives categorized in Level 3 is valued using an internally developed model with observable inputs. The models also include some less readily observable inputs resulting in the classification of the entire contract as Level 3. See Note J.
(2) See Note J.
(3) Other assets are comprised of assets such as life insurance contracts within the deferred compensation plan and non-qualified retirement plans.
(4) Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.
(5) The Companies’ policy is to recognize transfers into and transfers out of the levels at the end of the reporting period.
(6) Transferred from Level 2 to Level 3 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall.
(7) Transferred from Level 3 to Level 2 because of availability of observable market data due to decrease in the terms of certain contracts from beyond one year as of December 31, 2010 to less than one year as of December 31, 2011.

 

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

 

    

Fair Value of

Level 3 at
September 30,
2012

(Millions of Dollars)

   

Valuation

Techniques

  Unobservable Inputs   Range

Con Edison—Commodity

       

Electricity Swaps

  $ (9   Discounted Cash Flow   Forward prices (1)   $22-$64 per
MWH

Electricity Wholesale Contract

    4      Discounted Cash Flow  

Auction prices (2)

New Jersey solar renewable energy credit
(SREC) (2)

  $29-$52 per
MWH

$85 per SREC

Standard Offer Capacity Agreements

    (12   Discounted Cash Flow  

Forward capacity prices (1)

Forward price escalator (1)

Present value factor (1)

  $166 MW per day

0%-3%

1.66%

Transmission Congestion Contracts / Financial Transmission Rights

    14      Discounted Cash Flow  

Discount to adjust auction prices for inter-zonal forward price curves (2)

Discount to adjust auction prices for historical monthly realized settlements (2)
Historical line loss factor (1)

  17.5%-38%

(3)%-26.5%

8%

Total Con Edison—Commodity

  $ (3            

CECONY—Commodity

       

Transmission Congestion Contracts

  $ 12      Discounted Cash Flow  

Discount to adjust auction prices for inter-zonal forward price curves (2)

Discount to adjust auction prices for historical monthly realized settlements (2)

 

17.5%-38%

(3)%- 26.5%

 

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

 

The table listed below provides a reconciliation of the beginning and ending net balances for assets and liabilities measured at fair value for the three and nine months ended September 30, 2012 and classified as Level 3 in the fair value hierarchy:

 

     For the Three Months Ended September 30, 2012  
           

Total Gains/(Losses)—

Realized and Unrealized

                                           
(Millions of Dollars)   Beginning
Balance as of
July 1, 2012
    Included in
Earnings
    Included in
Regulatory Assets
and Liabilities
    Purchases     Issuances     Sales     Settlements    

Transfer
In/Out of

Level 3

   

Ending

Balance as of

September 30,

2012

 

Con Edison

                 

Derivatives:

                 

Commodity

    $(61     $(15     $19        $7        $—        $—        $25        $22        $  (3

CECONY

                 

Derivatives:

                 

Commodity

    $(10     $  (9     $  8        $7        $—        $—        $  5        $11        $ 12   

 

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     For the Nine Months Ended September 30, 2012  
           

Total Gains/(Losses)—

Realized and Unrealized

                                           
(Millions of Dollars)   Beginning
Balance as of
January 1, 2012
   

Included in

Earnings

   

Included in

Regulatory Assets

and Liabilities

    Purchases     Issuances     Sales     Settlements    

Transfer
In/Out of

Level 3

   

Ending

Balance as of

September 30,

2012

 

Con Edison

                 

Derivatives:

                 

Commodity

    $(62)        $(97)        $11        $18        $—        $—        $106        $     21        $ (3)   

Interest rate contract

    (8)        (1)                                    1        8(2       

Other assets (1)

    99        3        3                                    (105 )(2)        

Total

    $  29        $(95)        $14        $18        $—        $—        $107        $   (76)        $ (3)   

CECONY

                 

Derivatives:

                 

Commodity

    $  (7)        $(25)        $  8        $15        $—        $—        $  12        $    9(2     $ 12   

Other assets (1)

    90        3        2                                    (95 )(2)        

Total

    $  83        $(22)        $10        $15        $—        $—        $  12        $   (86)        $ 12   

 

(1) Amounts included in earnings are reported in investment and other income on the consolidated income statement.
(2) Other assets and interest rate contract were transferred as of March 31, 2012.

The table listed below provides a reconciliation of the beginning and ending net balances for assets and liabilities measured at fair value for the three and nine months ended September 30, 2011 and classified as Level 3 in the fair value hierarchy:

 

     For the Three Months Ended September 30, 2011  
           

Total Gains/(Losses)—

Realized and Unrealized

                                           
(Millions of Dollars)  

Beginning

Balance as of

July 1, 2011

    Included in
Earnings
   

Included in
Regulatory Assets

and Liabilities

    Purchases     Issuances     Sales     Settlements    

Transfer

In/Out of

Level 3

   

Ending

Balance as of

September 30,

2011

 

Con Edison

                 

Derivatives:

                 

Commodity

    $ (25     $(37     $ 9        $8        $—        $—        $14        $24        $    (7

Interest rate contract

    (10     (1     1                             1               (9

Other assets (1)

    106        (3     (3                                        100   

Total

    $  71        $(41     $ 7        $8        $—        $—        $15        $24        $   84   

CECONY

                 

Derivatives:

                 

Commodity

    $   —        $  (8     $ 1        $8        $—        $—        $  3        $  9        $   13   

Other assets (1)

    96        (3     (2                                        91   

Total

    $  96        $(11     $(1     $8        $—        $—        $  3        $  9        $ 104   

 

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

 

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     For the Nine Months Ended September 30, 2011  
            Total Gains/(Losses)—
Realized and Unrealized
                                           
(Millions of Dollars)  

Beginning

Balance as of

January 1, 2011

   

Included in

Earnings

   

Included in

Regulatory Assets

and Liabilities

    Purchases     Issuances     Sales     Settlements    

Transfer
In/Out of

Level 3

   

Ending

Balance as of
September 30,

2011

 

Con Edison

                 

Derivatives:

                 

Commodity

    $ (88     $(59     $54        $22        $—        $—        $35        $29        $    (7

Interest rate contract

    (10     (3     1                             3               (9

Other assets (1)

    101               (1                                        100   

Total

    $    3        $(62     $54        $22        $—        $—        $38        $29        $   84   

CECONY

                 

Derivatives:

                 

Commodity

    $ (26     $(11     $22        $18        $—        $—        $ (4     $14        $   13   

Other assets (1)

    92               (1                                        91   

Total

    $  66        $(11     $21        $18        $—        $—        $ (4     $14        $ 104   

 

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

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

For the competitive energy businesses, realized and unrealized gains and losses on Level 3 commodity derivative assets and liabilities are reported in non-utility revenues ($2 million loss and $10 million loss) and purchased power costs ($2 million gain and $12 million loss) on the consolidated income statement for the three months ended September 30, 2012 and 2011, respectively. Realized and unrealized gains and losses on Level 3 commodity derivative assets and liabilities are reported in non-utility revenues ($11 million loss and $35 million loss), and purchased power costs ($42 million loss and $6 million gain) on the consolidated income statement for the nine months ended September 30, 2012 and 2011, respectively. The change in fair value relating to Level 3 commodity derivative assets held at September 30, 2012 and 2011 is included in non-utility revenues ($2 million loss and $10 million loss), and purchased power costs ($16 million gain and $5 million loss) on the consolidated income statement for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, the change in fair value relating to Level 3 commodity derivative assets and liabilities included in non-utility revenues ($11 million loss and $35 million loss), and purchased power costs ($40 million gain and $31 million gain) on the consolidated income statement, 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 September 30, 2012, the Companies determined that nonperformance risk would have no material impact on their financial position or results of operations. To assess nonperformance risk, the Companies considered information such as collateral requirements, master netting arrangements, letters of credit and parent company guarantees, and applied a market-based method by using the counterparty (for an asset) or the Companies’ (for a liability) credit default swaps rates.

 

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Note L — Hurricane Sandy

In late October 2012, Hurricane Sandy caused extensive damage to the Utilities’ electric distribution system and interrupted service to approximately 950,000 CECONY customers and approximately 250,000 O&R customers. Hurricane Sandy also damaged CECONY’s steam system and interrupted service to many of its steam customers. To restore service to their customers and repair their energy systems, the Utilities are incurring substantial operating costs and making substantial capital expenditures, the amount of which the Utilities are unable to estimate at this time. The Utilities’ rate plans provide for operating costs and capital expenditures under different provisions. The Utilities expect that most of their operating expenses attributable to Hurricane Sandy will be deferred for recovery as a regulatory asset under their electric rate plans. The Utilities’ capital expenditures, up to specified levels, are reflected in rates under their rate plans. In addition CECONY’s rate plans provide that it may request in its next base rate filings to recover additional capital expenditures (provided the company can justify the need for and reasonableness of, and its inability to reasonably avoid, such additional capital expenditures). Under its New York electric rate plan and subject to certain limitations, O&R defers as a regulatory asset the revenue requirement impact of the amount by which actual average net utility plant is different than the average net utility plant reflected in rates. Under the New York rate plans, the Utilities also may petition the NYSPSC for authorization to defer extraordinary expenditures not otherwise addressed in their rate plans. The Utilities’ New York electric rate plans include provisions for revenue decoupling, as a result of which delivery revenues generally are not affected by changes in delivery volumes from levels assumed when rates were approved. The provisions of the Utilities’ New York electric plans that impose penalties for operating performance provide for exceptions for major storms and catastrophic events beyond the control of the companies, including natural disasters such as hurricanes and floods. The Utilities expect the NYSPSC to investigate the preparation and performance of New York utilities in connection with Hurricane Sandy.

 

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

 

This combined management’s discussion and analysis of financial condition and results of operations (MD&A) relates to the consolidated financial statements (the Third Quarter Financial Statements) included in this report of two separate registrants: Consolidated Edison, Inc. (Con Edison) and Consolidated Edison Company of New York, Inc. (CECONY). This MD&A 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 Third 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, 2011 (File Nos. 1-14514 and 1-1217, the Form 10-K) and the MD&A in Part 1, Item 2 of the Companies’ combined Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2012 and June 30, 2012 (File Nos. 1-14514 and 1-1217).

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

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

 

LOGO

 

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

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

In the late October 2012, Hurricane Sandy caused extensive damage to the Utilities’ electric distribution system and interrupted service to approximately 950,000 CECONY customers and approximately 250,000 O&R customers. See Note L to the Third Quarter Financial Statements.

 

 

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CECONY

Electric

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

Gas

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

In June 2012, the company increased its forecast of average annual growth of the peak gas demand in its service area over the next five years at design conditions from approximately 3.5 percent to 4.3 percent, reflecting, among other things, oil to gas conversions anticipated to result from changes to New York City regulations that will phase out the use of certain types of heating oil and the relative prices of oil and natural gas.

Steam

CECONY operates the largest steam distribution system in the United States by producing and delivering more than 22,000 MMlbs of steam annually to approximately 1,735 customers in parts of Manhattan.

Collective Bargaining Agreement

In July 2012, CECONY reached a four-year collective bargaining agreement covering approximately 8,000 employees (which was ratified in August 2012 by the employees) ending a 26-day work stoppage involving those employees. During the work stoppage, the company operated its electric, gas and steam businesses with approximately 5,500 employees and additional resources.

O&R

Electric

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

Gas

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

Competitive Energy Businesses

Con Edison pursues competitive energy opportunities through three wholly-owned subsidiaries: Con Edison Solutions, Con Edison Energy and Con Edison Development. These businesses include the sales and related hedging of electricity to retail and wholesale customers, sales of certain energy-related products and services, and participation in energy infrastructure projects. At September 30, 2012, Con Edison’s equity investment in its competitive energy businesses was $514 million and their assets amounted to $1,021 million. For information about purchases of solar energy companies during 2012, see “Liquidity and Capital Resources – Capital Requirements and Resources,” below.

 

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

 

     Three Months Ended September 30, 2012     Nine Months Ended September 30, 2012     At September 30, 2012  
(Millions of Dollars, except
percentages)
  Operating Revenues     Net Income for
Common Stock
    Operating Revenues     Net Income for
Common Stock
   

Assets

 

CECONY

    $2,868        83%        $389        88%        $7,738        83%        $824        88%        $35,699        90%   

O&R

    226        7%        24        6%        601        7%        54        6%        2,474        6%   

Total Utilities

    3,094        90%        413        94%        8,339        90%        878        94%        38,173        96%   

Con Edison Solutions (a)

    321        9%        28        6%        874        9%        60        6%        304        1%   

Con Edison Energy (a)

    20        1%        1        —%        69        1%               —%        65        —%   

Con Edison Development

    5        —%        2        1%        17        —%        5        1%        676        2%   

Other (b)

    (2)        —%        (4)        (1)%        (12)        —%        (12)        (1)%        415        1%   

Total Con Edison

    $3,438        100     $440        100     $9,287        100     $931        100     $39,633        100

 

(a) Net income from the competitive energy businesses for the three and nine months ended September 30, 2012 includes $17 million and $35 million, respectively, of net after-tax mark-to-market gains/(losses) (Con Edison Solutions, $17 million and $37 million and Con Edison Energy, $0 million and $(2) million)).
(b) Represents inter-company and parent company accounting. See “Results of Operations,” below.

 

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Con Edison’s net income for common stock for the three months ended September 30, 2012 was $440 million or $1.50 a share ($1.49 on a diluted basis) compared with $383 million or $1.31 a share ($1.30 on a diluted basis) for the three months ended September 30, 2011. Net income for common stock for the nine months ended September 30, 2012 was $931 million or $3.18 a share ($3.16 on a diluted basis) compared with earnings of $860 million or $2.94 a share ($2.92 on a diluted basis) for the nine months ended September 30, 2011. See “Results of Operations – Summary,” below. For segment financial information, see Note I to the Third Quarter Financial Statements and “Results of Operations,” below.

 

Results of Operations — Summary

Net income for common stock for the three and nine months ended September 30, 2012 and 2011 was as follows:

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
(millions of dollars)   2012     2011     2012     2011  

CECONY

    $389        $353        $824        $779   

O&R

    24        20        54        44   

Competitive energy businesses (a)

    31        10        65        46   

Other (b)

    (4            (12     (9

Con Edison

    $440        $383        $931        $860   

 

(a) Includes $17 million and $(7) million of net after-tax mark-to-market gains/(losses) for the three months ended September 30, 2012 and 2011, respectively. Includes $35 million and $14 million of net after-tax mark-to-market gains for the nine months ended September 30, 2012 and 2011, respectively.
(b) Consists of inter-company and parent company accounting.

 

The Companies’ results of operations for the three and nine months ended September 30, 2012, as compared with the 2011 periods, reflect changes in the Utilities’ rate plans and the effects of the milder winter weather on steam revenues. These rate plans provide for additional revenues to cover expected increases in certain operations and maintenance expenses, and depreciation. The results of operations include the operating results of the competitive energy businesses, including net mark-to-market effects.

Operations and maintenance expenses were higher in the 2012 periods due to pension costs and the support and maintenance of company underground facilities to accommodate municipal projects. Depreciation was higher in the 2012 periods reflecting the impact of higher utility plant balances.

 

The following table presents the estimated effect on earnings per share and net income for common stock for the three and nine months ended 2012 as compared with the 2011 period, resulting from these and other major factors:

 

     Three Months Variation     Nine Months Variation  
     Earnings
per Share
    Net Income
(millions of
dollars)
    Earnings
per Share
    Net Income
(millions of
dollars)
 

CECONY

       

Rate plans, primarily to recover increases in certain costs

    $0.24        $71        $0.65        $192   

Weather impact on steam revenues

                  (0.10     (28

Operations and maintenance expenses

    (0.10     (31     (0.33     (98

Depreciation

    (0.03     (10     (0.09     (27

Other

    0.01        6        0.02        6   

Total CECONY

    0.12        36        0.15        45   

O&R

    0.01        4        0.04        11   

Competitive energy businesses (a)

    0.08        21        0.06        19   

Other, including parent company expenses

    (0.02     (4     (0.01     (4

Total variations

    $0.19        $57        $0.24        $71   

 

(a) These variations reflect after-tax net mark-to-market gains/(losses) of $17 million or $0.06 a share and $(7) million or $(0.02) a share for the three months ended September 30, 2012 and 2011, respectively, and after-tax net mark-to-market gains of $35 million or $0.12 a share and $14 million or $0.05 a share for the nine months ended September 30, 2012 and 2011, respectively.

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

 

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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 nine months ended September 30, 2012 and 2011 are summarized as follows:

Con Edison

 

     Con Edison     CECONY  
(millions of dollars)   2012     2011     Variance     2012     2011     Variance  

Operating activities

    $ 1,638        $ 2,161        $(523     $ 1,463        $ 1,960        $(497

Investing activities

    (1,867     (1,611     (256     (1,483     (1,450     (33

Financing activities

    (350     (490     140        (326     (518     192   

Net change

    (579     60        (639     (346     (8     (338

Balance at beginning of period

    648        338        310        372        78        294   

Balance at end of period

    $      69        $    398        $(329     $      26        $      70        $  (44

Cash Flows from Operating Activities

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

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

Net cash flows from operating activities for the nine months ended September 30, 2012 for Con Edison and CECONY were $523 million and $497 million lower, respectively, compared with the 2011 period. The decrease in net cash flows reflects primarily the increased pension contributions in 2012 ($243 million for Con Edison and $231 million for CECONY). The Companies contributed $787 million and $544 million (of which $733 million and $502 million was contributed by CECONY) to the pension plan during 2012 and 2011, respectively. The decrease in net cash flows is also due to higher estimated income tax payments, net of refunds received, in 2012 ($178 million for Con Edison and $153 million for CECONY) and lower cash flows associated with collateral paid to brokers and counterparties in the 2012 period ($53 million for Con Edison and $50 million for CECONY).

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. See Note B to the Third Quarter Financial Statements.

Cash Flows Used in Investing Activities

Net cash flows used in investing activities for Con Edison and CECONY were $256 million and

 

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$33 million higher for the nine months ended September 30, 2012 compared with the 2011 period. The changes for Con Edison and CECONY reflect increased utility construction expenditures in 2012. In addition, for Con Edison, the change reflects capital expenditures for Alpaugh and other solar energy projects (see “Capital Requirements and Resources,” below), return of investment resulting from the receipt of government grant proceeds at the Pilesgrove solar project and proceeds from grants related to other renewable investments.

Cash Flows from Financing Activities

Net cash flows from financing activities for Con Edison and CECONY were $140 million and $192 million higher, respectively, in the nine months ended September 30, 2012 compared with the 2011 period.

In March 2012, CECONY issued $400 million of 4.20 percent 30-year debentures, $239 million of the net proceeds from the sale of which were used to redeem on May 1, 2012 all outstanding shares of its $5 Cumulative Preferred Stock and Cumulative Preferred Stock ($100 par value). In July 2012, CECONY redeemed at maturity $300 million 5.625 percent 10-year debentures. The Companies had no issuances of long-term debt in 2011.

 

Cash flows from financing activities of the Companies also reflect commercial paper issuances (included on the consolidated balance sheets as “Notes payable”). The commercial paper amounts outstanding at September 30, 2012 and 2011 and the average daily balances for the nine months ended September 30, 2012 and 2011 for Con Edison and CECONY were as follows:

 

     2012     2011  
(millions of dollars, except Weighted Average Yield)   Outstanding
at September 30
    Daily
average
    Outstanding
at September 30
    Daily
average
 

Con Edison

    $340        $116        $—        $110   

CECONY

    $332        $112        $—        $110   

Weighted average yield

    0.3     0.3         0.3

Other Changes in Assets and Liabilities

The following table shows changes in certain assets and liabilities at September 30, 2012, compared with December 31, 2011.

 

     Con Edison     CECONY  
(millions of dollars)  

2012 vs. 2011

Variance

   

2012 vs. 2011

Variance

 

Assets

   

Regulatory asset – Unrecognized pension and other postretirement costs

    $(641     $(582

Non-utility plant – Construction work in progress

    361          

Prepayments

    288        308   

Liabilities

   

Pensions and retiree benefits

    (796     (710

Deferred income taxes and investment tax credits

    463        380   

 

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

The decrease in the regulatory asset for unrecognized pension and other postretirement costs and the noncurrent liability for pension and retiree benefits reflects the final actuarial valuation of the pension and other retiree benefit plans as measured at December 31, 2011 in accordance with the accounting rules for retirement benefits. The change in the regulatory asset also reflects the year’s amortization of accounting costs. The decrease in the noncurrent liability for pension and retiree benefits reflects in part contributions to the plans made by the Utilities in 2012. See Notes B, E and F to the Third Quarter Financial Statements.

 

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Non-Utility Plant – Construction Work in Progress

The increase in non-utility plant – construction work in progress for Con Edison reflects the Alpaugh and other solar energy projects. See Note I to the Third Quarter Financial Statements.

Prepayments

The increase in prepayments for Con Edison and CECONY reflects the portion allocable to the 2012 fourth quarter of CECONY’s July 2012 payment of its New York City semi-annual property taxes.

Deferred Income Taxes and Investment Tax Credits

The increase in the liability for deferred income taxes and investment tax credits reflects the timing of the deduction of expenditures for utility plant which resulted in amounts being collected from customers to pay income taxes in advance of when the income tax payments will be required. See “Cash Flows from Operating Activities,” above.

Capital Requirements and Resources

As of September 30, 2012, there was no material change in the Companies’ capital requirements, contractual obligations and capital resources compared to those disclosed under “Capital Requirements and Resources” in Item 1 of the Form 10-K other than as described below and in Note C to the Third Quarter Financial Statements.

In July 2012, Con Edison Development purchased a company that is developing 70 MW (AC) of solar energy projects in Alpaugh, California. In October 2012, Con Edison Development purchased two companies that are developing 40 MW (AC) of solar energy projects in Tulare and Kings County, California. Electricity generated by the projects is to be purchased by Pacific Gas and Electric Company pursuant to long-term power purchase agreements. See Note I to the Third Quarter Financial Statements.

Con Edison has increased its estimate of capital expenditures in 2012 by its competitive energy businesses from $119 million to approximately $500 million and in 2013 from $86 million to approximately $240 million to reflect the costs to purchase the solar energy companies and complete the projects. The acquisitions of the solar energy companies were funded at the closing with available cash balances and commercial paper issuances. Con Edison is evaluating long-term financing for the projects. Con Edison expects to receive investment tax credits or grants for the projects.

 

For each of the Companies, the ratio of earnings to fixed charges (Securities and Exchange Commission basis) for the nine months ended September 30, 2012 and 2011 and the twelve months ended December 31, 2011 was:

 

     Ratio of Earnings to Fixed Charges  
     For the Nine Months Ended
September 30, 2012
    For the Twelve Months Ended
December 31, 2011
    For the Nine Months Ended
September 30, 2011
 

Con Edison

    3.9        3.6        3.8   

CECONY

    3.9        3.8        3.9   

 

For each of the Companies, the common equity ratio at September 30, 2012 and December 31, 2011 was:

 

    

Common Equity Ratio

(Percent of total capitalization)

 
     September 30, 2012     December 31, 2011  

Con Edison

    54.6        52.5   

CECONY

    54.1        52.0   

Regulatory Matters

CECONY’s current electric rate plan covers the three-year period ending March 31, 2013. Either the company or the New York State Public Service Commission (NYSPSC) can initiate a proceeding for a new rate plan. A new rate plan filed by the company would take effect automatically in approximately 11 months unless prior to such time the NYSPSC adopts a rate plan. CECONY understands that the base rates determined pursuant to the current rate plan and the other provisions of the current rate plan would continue in effect after March 31, 2013 until a new rate plan is effective. The company is preparing to

 

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file a new rate plan with the NYSPSC in November 2012. A new rate plan is expected to be effective in October 2013.

CECONY’s current gas and steam rate agreements cover the three-year period ending September 30, 2013. The company is preparing to file new gas and steam rate plans with the NYSPSC in November 2012. New gas and steam rate plans are expected to be effective in October 2013.

For information about a March 2012 NYSPSC order relating to a surcharge that CECONY was to have collected from customers and O&R’s February 2012 Joint Proposal (which was adopted by the NYSPSC in June 2012) with respect to its rates for electric service rendered in New York, see Note B to the Third Quarter Financial Statements.

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 September 30, 2012, a 10 percent variation in interest rates applicable to its variable rate debt would not result in a material change in annual interest expense. Under CECONY’s current gas, steam and electric rate plans, variations in actual long-term debt interest rates are reconciled to levels reflected in rates. Under O&R’s current New York rate plans, variations in actual tax-exempt (and under the gas rate plan, taxable) long-term debt interest expense are reconciled to the level set in rates.

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

Con Edison estimates that, as of September 30, 2012, 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 $43 million is for CECONY and $11 million is for O&R. Con Edison expects that any such change in fair value would be largely offset by directionally opposite changes in the cost of the electricity and gas purchased. In accordance with provisions approved by state regulators, the Utilities generally recover from customers the costs they incur for energy purchased for their customers, including gains and losses on certain derivative instruments used to hedge energy purchased and related costs.

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

 

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and commodity contracts, assuming a one-day holding period, for the nine months ended September 30, 2012 and the year ended December 31, 2011, respectively, was as follows:

 

95% Confidence

Level, One-Day

Holding Period

  September 30, 2012     December 31, 2011  
    (millions of dollars)  

Average for the period

    $1        $1   

High

    1        1   

Low

             

Credit Risk

The Companies are exposed to credit risk related to transactions entered into primarily for the various energy supply and hedging activities by the Utilities and the competitive energy businesses. Credit risk relates to the loss that may result from a counterparty’s nonperformance. The Companies use credit policies to manage this risk, including an established credit approval process, monitoring of counterparty limits, netting provisions within agreements and collateral or prepayment arrangements, credit insurance and credit default swaps. The Companies measure credit risk exposure as the replacement cost for open energy commodity and derivative positions plus amounts owed from counterparties for settled transactions. The replacement cost of open positions represents unrealized gains, net of any unrealized losses where the Companies have a legally enforceable right of setoff. See “Credit Exposure” in Note J to the Third 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 September 30, 2012, the pension plan investments consisted of 62 percent equity and 38 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 Third 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. Delivery revenues for CECONY’s steam business and O&R’s businesses in New Jersey and Pennsylvania are affected by changes in delivery volumes resulting from weather, economic conditions and other factors. See Note B to the Third Quarter Financial Statements.

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 and nine months ended September 30, 2012 and 2011 follows. For additional business segment financial information, see Note I to the Third Quarter Financial Statements.

 

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Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011

The Companies’ results of operations (which were discussed above under “Results of Operations – Summary”) in 2012 compared with 2011 were:

 

     CECONY     O&R     Competitive Energy
Businesses and Other (a)
    Con Edison (b)  
(millions of dollars)   Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
 

Operating revenues

    $  (49     (1.7 )%      $(15     (6.2 )%      $(127     (27.0 )%      $(191     (5.3 )% 

Purchased power

    (132     (17.9     (25     (26.3     (152     (37.3     (309     (24.9

Fuel

    (14     (19.2                                 (14     (19.2

Gas purchased for resale

    (12     (21.1     2        22.2        (7     Large        (17     (23.3

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

    109        5.3        8        5.8        32        57.1        149        6.6   

Operations and maintenance

    47        6.9        1        1.4        (5     (14.7     43        5.5   

Depreciation and amortization

    16        7.7        1        8.3        1        Large        18        8.1   

Taxes, other than income taxes

    (6     (1.3                   (1     (20.0     (7     (1.4

Operating income

    52        7.4        6        15.8        37        Large        95        12.6   

Other income less deductions

    8        Large        (1     Large        (4     (66.7     3        Large   

Net interest expense

    5        3.8                      3        60.0        8        5.6   

Income before income tax expense

    55        9.8        5        15.2        30        Large        90        14.7   

Income tax expense

    22        10.7        1        7.7        13        Large        36        16.0   

Net income

    33        9.3        4        20.0        17        Large        54        14.0   

Preferred stock dividend requirements

    (3     Large                                    (3     Large   

Net income for common stock

    $   36        10.2     $   4        20.0     $   17        Large        $   57        14.9

 

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

CECONY

 

     Three Months Ended
September 30, 2012
           Three Months Ended
September 30, 2011
               
(millions of dollars)   Electric     Gas     Steam     2012
Total
    Electric     Gas     Steam     2011
Total
    2012-2011
Variation
 

Operating revenues

    $2,611        $189        $ 68        $2,868        $2,644        $197        $ 76        $2,917        $  (49

Purchased power

    597               7        604        726               10        736        (132

Fuel

    42               17        59        51               22        73        (14

Gas purchased for resale

           45               45               57               57        (12

Net revenues

    1,972        144        44        2,160        1,867        140        44        2,051        109   

Operations and maintenance

    601        81        43        725        559        82        37        678        47   

Depreciation and amortization

    179        31        15        225        166        28        15        209        16   

Taxes, other than income taxes

    380        53        23        456        384        53        25        462        (6

Operating income

    $    812        $ (21     $(37     $    754        $    758        $ (23     $(33     $    702        $    52   

 

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Electric

CECONY’s results of electric operations for the three months ended September 30, 2012 compared with the 2011 period is as follows:

 

     Three Months Ended         
(millions of dollars)   September 30,
2012
    September 30,
2011
    Variation  

Operating revenues

    $2,611        $2,644        $  (33

Purchased power

    597        726        (129

Fuel

    42        51        (9

Net revenues

    1,972        1,867        105   

Operations and maintenance

    601        559        42   

Depreciation and amortization

    179        166        13   

Taxes, other than income taxes

    380        384        (4

Electric operating income

    $   812        $   758        $   54   

CECONY’s electric sales and deliveries, excluding off-system sales, for the three months ended September 30, 2012 compared with the 2011 period were:

 

     Millions of kWhs Delivered     Revenues in Millions  
     Three Months Ended            Three Months Ended         
Description   September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
    September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
 

Residential/Religious (a)

    3,735        3,808        (73     (1.9 )%    $ 959      $ 999      $ (40     (4.0 )% 

Commercial/Industrial

    2,908        3,165        (257     (8.1     616        705        (89     (12.6

Retail access customers

    7,874        7,151        723        10.1        894        766        128        16.7   

NYPA, Municipal Agency and other sales

    2,957        3,103        (146     (4.7     202        192        10        5.2   

Other operating revenues

                                (60     (18     (42     Large   

Total

    17,474        17,227        247        1.4   $ 2,611      $ 2,644      $ (33     (1.2 )% 

 

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

 

CECONY’s electric operating revenues decreased $33 million in the three months ended September 30, 2012 compared with the 2011 period due primarily to lower purchased power ($129 million) and fuel costs ($9 million), offset in part by higher revenues from the electric rate plan ($112 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 plan.

Electric delivery volumes in CECONY’s service area increased 1.4 percent in the three months ended September 30, 2012 compared with the 2011 period. After adjusting for variations, principally weather and billing days, electric delivery volumes in CECONY’s service area increased 2.0 percent in the three months ended September 30, 2012 compared with the 2011 period reflecting higher average use per customer.

CECONY’s electric purchased power costs decreased $129 million in the three months ended September 30, 2012 compared with the 2011 period due to a decrease in purchased volumes ($88 million) and unit costs ($41 million). Electric fuel costs decreased $9 million in the three months ended September 30, 2012 compared with the 2011 period due to lower unit costs ($16 million), offset by higher sendout volumes from the company’s electric generating facilities ($7 million).

CECONY’s electric operating income increased $54 million in the three months ended September 30, 2012 compared with the 2011 period. The increase reflects primarily higher net revenues ($105 million, due

 

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primarily to the electric rate plan) and lower taxes, other than income taxes ($4 million, principally property taxes), offset by higher operations and maintenance costs ($42 million) and higher depreciation and amortization ($13 million). The increase in operations and maintenance costs of $42 million is due primarily to higher pension expense ($40 million) and higher support and maintenance of company underground facilities to accommodate municipal projects ($2 million).

Gas

CECONY’s results of gas operations for the three months ended September 30, 2012 compared with the 2011 period is as follows:

 

     Three Months Ended         
(millions of dollars)   September 30,
2012
    September 30,
2011
    Variation  

Operating revenues

  $ 189      $ 197      $ (8

Gas purchased for resale

    45        57        (12

Net revenues

    144        140        4   

Operations and maintenance

    81        82        (1

Depreciation and amortization

    31        28        3   

Taxes, other than income taxes

    53        53          

Gas operating income

  $ (21   $ (23   $ 2   

 

CECONY’s gas sales and deliveries, excluding off-system sales, for the three months ended September 30, 2012 compared with the 2011 period were:

 

     Thousands of dths Delivered     Revenues in Millions  
     Three Months Ended            Three Months Ended         
Description   September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
    September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
 

Residential

    2,971        2,984        (13     (0.4 )%    $ 75      $ 82      $ (7     (8.5 )% 

General

    3,415        3,453        (38     (1.1     38        45        (7     (15.6

Firm transportation

    6,752        6,751        1               47        45        2        4.4   

Total firm sales and transportation

    13,138        13,188        (50     (0.4     160        172        (12     (7.0

Interruptible sales (a)

    1,217        2,020        (803     (39.8            9        (9     Large   

NYPA

    13,716        13,401        315        2.4        1        1                 

Generation plants

    29,644        26,501        3,143        11.9        10        9        1        11.1   

Other

    4,791        4,425        366        8.3        9        7        2        28.6   

Other operating revenues

                                9        (1     10        Large   

Total

    62,506        59,535        2,971        5.0   $ 189      $ 197      $ (8     (4.1 )% 

 

(a) Includes 2,801 mdths and 1,138 mdths for the three months ended September 30, 2012 and 2011, respectively, which are also reflected in firm transportation and other.

 

CECONY’s gas operating revenues decreased $8 million in the three months ended September 30, 2012 compared with the 2011 period due primarily to a decrease in gas purchased for resale costs ($12 million). CECONY’s revenues from gas sales 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. Other gas operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plan.

CECONY’s sales and transportation volumes for firm customers decreased 0.4 percent in the three months ended September 30, 2012 compared with the 2011 period. After adjusting for variations, principally weather and billing days, firm gas sales and transportation volumes in the company’s service area decreased 1.0 percent in the three months ended September 30, 2012.

CECONY’s purchased gas cost decreased $12 million in the three months ended September 30, 2012 compared with the 2011 period due to lower unit costs ($18 million), offset by higher sendout volumes ($6 million).

CECONY’s gas operating income increased $2 million in the three months ended September 30, 2012 compared with the 2011 period. The increase reflects primarily higher net revenues ($4 million) and lower operations and maintenance costs ($1 million), offset by higher depreciation ($3 million).

 

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Steam

CECONY’s results of steam operations for the three months ended September 30, 2012 compared with the 2011 period is as follows:

 

     Three Months Ended         
(millions of dollars)   September 30,
2012
    September 30,
2011
    Variation  

Operating revenues

  $  68      $  76      $ (8

Purchased power

    7        10        (3

Fuel

    17        22        (5

Net revenues

    44        44          

Operations and maintenance

    43        37        6   

Depreciation and amortization

    15        15          

Taxes, other than income taxes

    23        25        (2

Steam operating income

  $ (37   $ (33   $ (4

 

CECONY’s steam sales and deliveries for the three months ended September 30, 2012 compared with the 2011 period were:

 

     Millions of Pounds Delivered     Revenues in Millions  
     Three Months Ended            Three Months Ended         
Description   September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
    September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
 

General

    15        15                 $ 2      $ 2      $       

Apartment house

    816        799        17        2.1        17        17                 

Annual power

    3,487        3,440        47        1.4        59        58        1        1.7   

Other operating revenues

                                (10     (1     (9     Large   

Total

    4,318        4,254        64        1.5   $ 68      $ 76      $ (8     (10.5 )% 

 

CECONY’s steam operating revenues decreased $8 million in the three months ended September 30, 2012 compared with the 2011 period due primarily to lower fuel ($5 million) and purchased power costs ($3 million). Other steam operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plan.

Steam sales and delivery volumes increased 1.5 percent in the three months ended September 30, 2012 compared with the 2011 period. After adjusting for variations, principally weather and billing days, steam sales and deliveries increased 1.9 percent in the three months ended September 30, 2012, reflecting higher average normalized use per customer.

 

CECONY’s steam fuel costs decreased $5 million in the three months ended September 30, 2012 compared with the 2011 period due to lower unit costs ($5 million). Steam purchased power costs decreased $3 million in the three months ended September 30, 2012 compared with the 2011 period due to a decrease in unit costs ($3 million).

Steam operating income decreased $4 million in the three months ended September 30, 2012 compared with the 2011 period. The decrease reflects primarily higher operations and maintenance costs ($6 million, due primarily to higher pension expense ($8 million)), offset by lower taxes, other than income taxes ($2 million, principally property taxes).

 

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Net Interest Expense

Net interest expense increased $5 million in the three months ended September 30, 2012 compared with the 2011 period due primarily to the issuance by CECONY in March 2012 of $400 million of 4.20 percent 30-year debentures.

O&R

 

     Three Months Ended
September 30, 2012
           Three Months Ended
September 30, 2011
               
(millions of dollars)   Electric     Gas     2012
Total
    Electric     Gas     2011
Total
    2012-2011
Variation
 

Operating revenues

  $ 199      $ 27      $ 226      $ 217      $ 24      $ 241      $ (15

Purchased power

    70               70        95               95        (25

Gas purchased for resale

           11        11               9        9        2   

Net revenues

    129        16        145        122        15        137        8   

Operations and maintenance

    57        15        72        56        15        71        1   

Depreciation and amortization

    10        3        13        9        3        12        1   

Taxes, other than income taxes

    12        4        16        13        3        16          

Operating income

  $ 50      $ (6   $ 44      $ 44      $ (6   $ 38      $ 6   

Electric

O&R’s results of electric operations for the three months ended September 30, 2012 compared with the 2011 period is as follows:

 

     Three Months Ended         
(millions of dollars)  

September 30,

2012

   

September 30,

2011

    Variation  

Operating revenues

  $ 199      $ 217      $ (18

Purchased power

    70        95        (25

Net revenues

    129        122        7   

Operations and maintenance

    57        56        1   

Depreciation and amortization

    10        9        1   

Taxes, other than income taxes

    12        13        (1

Electric operating income

  $ 50      $ 44      $ 6   

O&R’s electric sales and deliveries, excluding off-system sales, for the three months ended September 30, 2012 compared with the 2011 period were:

 

     Millions of kWhs Delivered     Revenues in Millions  
     Three Months Ended            Three Months Ended         
Description   September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
    September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
 

Residential/Religious (a)

    550        578        (28     (4.8 )%    $ 97      $ 113      $ (16     (14.2 )% 

Commercial/Industrial

    247        315        (68     (21.6     38        49        (11     (22.4

Retail access customers

    885        789        96        12.2        59        53        6        11.3   

Public authorities

    32        33        (1     (3.0     3        3                 

Other operating revenues

                                2        (1     3        Large   

Total

    1,714        1,715        (1     (0.1 )%    $ 199      $ 217      $ (18     (8.3 )% 

 

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

 

O&R’s electric operating revenues decreased $18 million in the three months ended September 30, 2012 compared with the 2011 period due primarily to lower purchased power costs ($25 million), offset in part by higher revenues from the New York rate plan ($3 million). O&R’s New York electric delivery revenues

 

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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 such revenues. Other electric operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s electric rate plan. See “Rate Agreements – O&R – Electric” in Note B to the Second Quarter Financial Statements.

Electric delivery volumes in O&R’s service area decreased 0.1 percent in the three months ended September 30, 2012 compared with the 2011 period. After adjusting for weather and other variations, electric delivery volumes in O&R’s service area increased 2.7 percent in the three months ended September 30, 2012 compared with the 2011 period.

Electric operating income increased $6 million in the three months ended September 30, 2012 compared with the 2011 period. The increase reflects primarily higher net revenues ($7 million) and lower taxes, other than income taxes ($1 million), offset by higher operations and maintenance costs ($1 million), and depreciation and amortization ($1 million).

 

Gas

O&R’s results of gas operations for the three months ended September 30, 2012 compared with the 2011 period is as follows:

 

     Three Months Ended         
(millions of dollars)   September 30,
2012
    September 30,
2011
    Variation  

Operating revenues

  $ 27      $ 24      $ 3   

Gas purchased for resale

    11        9        2   

Net revenues

    16        15        1   

Operations and maintenance

    15        15          

Depreciation and amortization

    3        3          

Taxes, other than income taxes

    4        3        1   

Gas operating income

  $ (6   $ (6   $   

O&R’s gas sales and deliveries, excluding off-system sales, for the three months ended September 30, 2012 compared with the 2011 period were:

 

     Thousands of dths Delivered     Revenues in Millions  
     Three Months Ended            Three Months Ended         
Description   September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
    September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
 

Residential

    433        380        53        13.9   $ 8      $ 8      $       

General

    103        77        26        33.8        1        1                 

Firm transportation

    910        714        196        27.5        9        8        1        12.5   

Total firm sales and transportation

    1,446        1,171        275        23.5        18        17        1        5.9   

Interruptible sales

    995        907        88        9.7        1        1                 

Generation plants

    444        359        85        23.7                               

Other

    65        77        (12     (15.6                            

Other gas revenues

                                8        6        2        33.3   

Total

    2,950        2,514        436        17.3   $ 27      $ 24      $ 3        12.5

 

O&R’s gas operating revenues increased $3 million in the three months ended September 30, 2012 compared with the 2011 period due primarily to the increase in gas purchased for resale in 2012 ($2 million). O&R’s New York revenues from gas sales 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.

 

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Sales and transportation volumes for firm customers increased 23.5 percent in the three months ended September 30, 2012 compared with the 2011 period. After adjusting for weather and other variations, total firm sales and transportation volumes decreased 5.3 percent in the three months ended September 30, 2012 compared with the 2011 period.

Gas operating income was the same in the three months ended September 30, 2012 compared with the 2011 period.

 

Competitive Energy Businesses

The competitive energy businesses’ results of operations for the three months ended September 30, 2012 compared with the 2011 period is as follows:

 

     Three Months Ended         
(millions of dollars)   September 30,
2012
    September 30,
2011
    Variation  

Operating revenues

  $ 344      $ 472      $ (128

Purchased power

    256        408        (152

Gas purchased for resale

           6        (6

Net revenues

    88        58        30   

Operations and maintenance

    29        35        (6

Depreciation and amortization

    2        1        1   

Taxes, other than income taxes

    4        6        (2

Operating income

  $ 53      $ 16      $ 37   

 

The competitive energy businesses’ operating revenues decreased $128 million in the three months ended September 30, 2012 compared with the 2011 period, due primarily to lower electric retail and wholesale revenues. Electric wholesale revenues decreased $47 million in the three months ended September 30, 2012 as compared with the 2011 period, due to lower unit prices ($27 million) and sales volumes ($20 million). Electric retail revenues decreased $81 million, due to lower unit prices ($44 million) and sales volume ($37 million). Net mark-to-market values increased $41 million in the three months ended September 30, 2012 as compared with the 2011 period, of which $32 million in gains are reflected in purchased power costs and $9 million in gains are reflected in revenues. Other revenues decreased $9 million in the three months ended September 30, 2012 as compared with the 2011 period due primarily to lower other wholesale revenue.

Purchased power costs decreased $152 million in the three months ended September 30, 2012 compared with the 2011 period, due primarily to lower volumes ($69 million), lower unit prices ($51 million) and changes in mark-to-market values ($32 million). Operating income increased $37 million in the three months ended September 30, 2012 compared with the 2011 period due primarily to net mark-to-market effects ($41 million).

Other

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

 

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Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011

The Companies’ results of operations (which were discussed above under “Results of Operations – Summary”) in 2012 compared with 2011 were:

 

     CECONY     O&R     Competitive Energy
Businesses and Other (a)
    Con Edison (b)  
(millions of dollars)   Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
    Increases
(Decreases)
Amount
    Increases
(Decreases)
Percent
 

Operating revenues

  $ (304     (3.8 )%    $ (59     (8.9 )%    $ (322     (25.4 )%    $ (685     (6.9 )% 

Purchased power

    (286     (15.5     (68     (31.2     (330     (31.0     (684     (21.9

Fuel

    (104     (32.8                                 (104     (32.8

Gas purchased for resale

    (148     (35.9     (14     (22.6     (15     (88.2     (177     (36.0

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

    234        4.3        23        6.1        23        12.3        280        4.6   

Operations and maintenance

    159        8.3        7        3.3        (14     (14.7     152        6.9   

Depreciation and amortization

    46        7.4        3        8.3        1        20.0        50        7.6   

Taxes, other than income taxes

    (30     (2.3     4        9.8        (1     (6.3     (27     (1.9

Operating income

    59        3.6        9        9.9        37        52.1        105        5.9   

Other income less deductions

    1        33.3        (3     Large        (7     (53.8     (9     (69.2

Net interest expense

    10        2.5        (4     (15.4     1        5.3        7        1.6   

Income before income tax expense

    50        4.1        10        14.7        29        44.6        89        6.6   

Income tax expense

    11        2.6                      13        46.4        24        5.0   

Net income

    39        4.9        10        22.7        16        43.2        65        7.5   

Preferred stock dividend requirements

    (6     (66.7                                 (6     (66.7

Net income for common stock

  $ 45        5.8   $ 10        22.7   $ 16        43.2   $ 71        8.3

 

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

CECONY

 

    

Nine Months Ended

September 30, 2012

          

Nine Months Ended

September 30, 2011

               
(millions of dollars)   Electric     Gas     Steam     2012
Total
    Electric     Gas     Steam     2011
Total
    2012-2011
Variation
 

Operating revenues

  $ 6,307      $ 1,017      $ 414      $ 7,738      $ 6,378      $ 1,156      $ 508      $ 8,042      $ (304

Purchased power

    1,527               27        1,554        1,799               41        1,840        (286

Fuel

    122               91        213        167               150        317        (104

Gas purchased for resale

           264               264               412               412        (148

Net revenues

    4,658        753        296        5,707        4,412        744        317        5,473        234   

Operations and maintenance

    1,691        242        132        2,065        1,522        275        109        1,906        159   

Depreciation and amortization

    527        89        48        664        489        82        47        618        46   

Taxes, other than income taxes

    1,057        167        76        1,300        1,075        175        80        1,330        (30

Operating income

  $ 1,383      $ 255      $ 40      $ 1,678      $ 1,326      $ 212      $ 81      $ 1,619      $ 59   

 

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Electric

CECONY’s results of electric operations for the nine months ended September 30, 2012 compared with the 2011 period is as follows:

 

     Nine Months Ended         
(millions of dollars)   September 30,
2012
    September 30,
2011
    Variation  

Operating revenues

  $ 6,307      $ 6,378      $ (71

Purchased power

    1,527        1,799        (272

Fuel

    122        167        (45

Net revenues

    4,658        4,412        246   

Operations and maintenance

    1,691        1,522        169   

Depreciation and amortization

    527        489        38   

Taxes, other than income taxes

    1,057        1,075        (18

Electric operating income

  $ 1,383      $ 1,326      $ 57   

CECONY’s electric sales and deliveries, excluding off-system sales, for the nine months ended September 30, 2012 compared with the 2011 period were:

 

     Millions of kWhs Delivered     Revenues in Millions  
     Nine Months Ended            Nine Months Ended         
Description   September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
    September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
 

Residential/Religious (a)

    8,393        8,934        (541     (6.1 )%    $ 2,147      $ 2,299      $ (152     (6.6 )% 

Commercial/Industrial

    7,561        8,639        (1,078     (12.5     1,526        1,823        (297     (16.3

Retail access customers

    19,768        18,339        1,429        7.8        2,117        1,794        323        18.0   

NYPA, Municipal Agency and other sales

    8,233        8,407        (174     (2.1     477        448        29        6.5   

Other operating revenues

                                 40        14        26        Large   

Total

    43,955        44,319        (364     (0.8 )%    $ 6,307      $ 6,378      $ (71     (1.1 )% 

 

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

 

CECONY’s electric operating revenues decreased $71 million in the nine months ended September 30, 2012 compared with the 2011 period due primarily to lower purchased power ($272 million) and fuel costs ($45 million) offset in part by higher revenues from the electric rate plan ($270 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 plan.

Electric delivery volumes in CECONY’s service area decreased 0.8 percent in the nine months ended September 30, 2012 compared with the 2011 period. After adjusting for variations, principally weather and billing days, electric delivery volumes in CECONY’s service area increased 0.5 percent in the nine months ended September 30, 2012 compared with the 2011 period reflecting higher average use per customer.

CECONY’s electric purchased power costs decreased $272 million in the nine months ended September 30, 2012 compared with the 2011 period due to a decrease in purchased volumes ($224 million) and unit costs ($48 million). Electric fuel costs decreased $45 million in the nine months ended September 30, 2012 compared with the 2011 period due to lower unit costs ($51 million), offset by higher sendout volumes from the company’s electric generating facilities ($6 million).

CECONY’s electric operating income increased $57 million in the nine months ended September 30, 2012 compared with the 2011 period. The increase reflects primarily higher net revenues ($246 million, due primarily to the electric rate plan) and lower taxes,

 

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other than income taxes ($18 million, principally property taxes). The higher net revenues were offset by higher operations and maintenance costs ($169 million, due primarily to higher pension expense ($118 million), an increase in surcharges that are collected from customers ($35 million) and higher support and maintenance of company underground facilities to accommodate municipal projects ($11 million)) and higher depreciation and amortization ($38 million).

 

Gas

CECONY’s results of gas operations for the nine months ended September 30, 2012 compared with the 2011 period is as follows:

 

     Nine Months Ended         
(millions of dollars)   September 30,
2012
    September 30,
2011
    Variation  

Operating revenues

  $ 1,017      $ 1,156      $ (139

Gas purchased for resale

    264        412        (148

Net revenues

    753        744        9   

Operations and maintenance

    242        275        (33

Depreciation and amortization

    89        82        7   

Taxes, other than income taxes

    167        175        (8

Gas operating income

  $ 255      $ 212      $ 43   

CECONY’s gas sales and deliveries, excluding off-system sales, for the nine months ended September 30, 2012 compared with the 2011 period were:

 

     Thousands of dths Delivered     Revenues in Millions  
     Nine Months Ended            Nine Months Ended         
Description   September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
    September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
 

Residential

    24,590        30,384        (5,794     (19.1 )%    $ 450      $ 553      $ (103     (18.6 )% 

General

    18,012        20,896        (2,884     (13.8     211        269        (58     (21.6

Firm transportation

    38,620        41,859        (3,239     (7.7     284        263        21        8.0   

Total firm sales and transportation

    81,222        93,139        (11,917     (12.8     945        1,085        (140     (12.9

Interruptible sales (a)

    4,542        8,278        (3,736     (45.1     24        65        (41     (63.1

NYPA

    34,285        24,536        9,749        39.7        2        2                 

Generation plants

    63,161        60,706        2,455        4.0        23        25        (2     (8.0

Other

    17,128        17,245        (117     (0.7     30        40        (10     (25.0

Other operating revenues

                                (7     (61     54        88.5   

Total

    200,338        203,904        (3,566     (1.7 )%    $ 1,017      $ 1,156      $ (139     (12.0 )% 

 

(a) 

Includes 4,613 mdths and 3,214 mdths for the nine months ended September 30, 2012 and 2011, respectively, which are also reflected in firm transportation and other.

 

CECONY’s gas operating revenues decreased $139 million in the nine months ended September 30, 2012 compared with the 2011 period due primarily to a decrease in gas purchased for resale costs ($148 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 plan.

CECONY’s sales and transportation volumes for firm customers decreased 12.8 percent in the nine months ended September 30, 2012 compared with the 2011 period. After adjusting for variations, principally weather and billing days, firm gas sales and transportation volumes in the company’s service area increased 0.6 percent in the nine months ended September 30, 2012.

 

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CECONY’s purchased gas cost decreased $148 million in the nine months ended September 30, 2012 compared with the 2011 period due to lower unit costs ($111 million) and sendout volumes ($37 million).

CECONY’s gas operating income increased $43 million in the nine months ended September 30, 2012 compared with the 2011 period. The increase reflects primarily lower operations and maintenance costs ($33 million, due primarily to a decrease in the surcharges that are collected from customers ($19 million) and higher support and maintenance of company underground facilities to accommodate municipal projects ($6 million)), lower taxes, other than income taxes ($8 million, principally property taxes and local revenue taxes) and higher net revenues ($9 million), offset by higher depreciation ($7 million).

 

Steam

CECONY’s results of steam operations for the nine months ended September 30, 2012 compared with the 2011 period is as follows:

 

     Nine Months Ended         
(millions of dollars)   September 30,
2012
    September 30,
2011
    Variation  

Operating revenues

  $ 414      $ 508      $ (94

Purchased power

    27        41        (14

Fuel

    91        150        (59

Net revenues

    296        317        (21

Operations and maintenance

    132        109        23   

Depreciation and amortization

    48        47        1   

Taxes, other than income taxes

    76        80        (4

Steam operating income

  $ 40      $ 81      $ (41

CECONY’s steam sales and deliveries for the nine months ended September 30, 2012 compared with the 2011 period were:

 

     Millions of Pounds Delivered     Revenues in Millions  
     Nine Months Ended            Nine Months Ended         
Description   September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
    September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
 

General

    308        422        (114     (27.0 )%    $ 18      $ 22      $ (4     (18.2 )% 

Apartment house

    3,858        4,515        (657     (14.6     112        131        (19     (14.5

Annual power

    10,999        13,041        (2,042     (15.7     315        375        (60     (16.0

Other operating revenues

                                (31     (20     (11     (55.0

Total

    15,165        17,978        (2,813     (15.6 )%    $ 414      $ 508      $ (94     (18.5 )% 

 

CECONY’s steam operating revenues decreased $94 million in the nine months ended September 30, 2012 compared with the 2011 period due primarily to lower fuel ($59 million), the impact of milder weather ($47 million) and lower purchased power costs ($14 million), offset by the net change in rates under the steam rate plan ($29 million). Other steam operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s rate plan.

Steam sales and delivery volumes decreased 15.6 percent in the nine months ended September 30, 2012 compared with the 2011 period reflecting milder winter weather. After adjusting for variations, principally weather and billing days, steam sales and deliveries decreased 0.8 percent in the nine months ended September 30, 2012, reflecting lower average normalized use per customer.

CECONY’s steam fuel costs decreased $59 million in the nine months ended September 30, 2012 compared with the 2011 period due to lower unit costs ($44 million) and sendout volumes ($15 million). Steam purchased power costs decreased $14 million in the nine months ended September 30, 2012 compared with the 2011 period due to a decrease in unit costs ($38 million) offset by an increase in purchased volumes ($24 million).

 

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Steam operating income decreased $41 million in the nine months ended September 30, 2012 compared with the 2011 period. The decrease reflects primarily lower net revenues ($21 million), higher operations and maintenance costs ($23 million, due primarily to higher pension expense ($31 million)) and higher depreciation and amortization ($1 million), offset by lower taxes, other than income taxes ($4 million, principally property taxes and local revenue taxes).

Net Interest Expense

Net interest expense increased $10 million in the nine months ended September 30, 2012 compared with the 2011 period due primarily to the issuance by CECONY in March 2012 of $400 million of 4.20 percent 30-year debentures.

Income Taxes

Income taxes increased $11 million in the nine months ended September 30, 2012 compared with the 2011 period reflecting higher income before income tax expense, offset by higher deductions for injuries and damages payments in the 2012 period.

 

O&R

 

     Nine Months Ended
September 30, 2012
   

Nine Months Ended

September 30, 2011

        
(millions of dollars)   Electric     Gas     2012
Total
    Electric     Gas     2011
Total
    2012-2011
Variation
 

Operating revenues

  $ 457      $ 144      $ 601      $ 507      $ 153      $ 660      $ (59

Purchased power

    150               150        218               218        (68

Gas purchased for resale

           48        48               62        62        (14

Net revenues

    307        96        403        289        91        380        23   

Operations and maintenance

    171        48        219        164        48        212        7   

Depreciation and amortization

    28        11        39        26        10        36        3   

Taxes, other than income taxes

    34        11        45        30        11        41        4   

Operating income

  $ 74      $ 26      $ 100      $ 69      $ 22      $ 91      $ 9   

Electric

O&R’s results of electric operations for the nine months ended September 30, 2012 compared with the 2011 period is as follows:

 

     Nine Months Ended  
(millions of dollars)   September 30,
2012
    September 30,
2011
    Variation  

Operating revenues

  $ 457      $ 507      $ (50

Purchased power

    150        218        (68

Net revenues

    307        289        18   

Operations and maintenance

    171        164        7   

Depreciation and amortization

    28        26        2   

Taxes, other than income taxes

    34        30        4   

Electric operating income

  $ 74      $ 69      $ 5   

 

 

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O&R’s electric sales and deliveries, excluding off-system sales, for the nine months ended September 30, 2012 compared with the 2011 period were:

 

     Millions of kWhs Delivered     Revenues in Millions  
     Nine Months Ended            Nine Months Ended         
Description   September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
    September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
 

Residential/Religious (a)

    1,297        1,388        (91     (6.6 )%    $ 210      $ 253      $ (43     (17.0 )% 

Commercial/Industrial

    736        912        (176     (19.3     94        128        (34     (26.6

Retail access customers

    2,315        2,079        236        11.4        138        121        17        14.0   

Public authorities

    89        83        6        7.2        7        8        (1     (12.5

Other operating revenues

                                8        (3     11        Large   

Total

    4,437        4,462        (25     (0.6 )%    $ 457      $ 507      $ (50     (9.9 )% 

 

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

 

O&R’s electric operating revenues decreased $50 million in the nine months ended September 30, 2012 compared with the 2011 period due primarily to lower purchased power costs ($68 million), offset in part by higher revenues from the New York rate plan ($8 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 such revenues. Other electric operating revenues generally reflect changes in regulatory assets and liabilities in accordance with the company’s electric rate plan. See “Rate Agreements – O&R – Electric” in Note B to the Second Quarter Financial Statements.

Electric delivery volumes in O&R’s service area decreased 0.6 percent in the nine months ended September 30, 2012 compared with the 2011 period. After adjusting for weather and other variations, electric delivery volumes in O&R’s service area increased 1.8 percent in the nine months ended September 30, 2012 compared with the 2011 period.

Electric operating income increased $5 million in the nine months ended September 30, 2012 compared with the 2011 period. The increase reflects primarily higher net revenues ($18 million), offset by higher operations and maintenance costs ($7 million, due to higher pension and health care expense), taxes other than income taxes ($4 million, principally property taxes) and higher depreciation and amortization ($2 million).

 

Gas

O&R’s results of gas operations for the nine months ended September 30, 2012 compared with the 2011 period is as follows:

 

     Nine Months Ended         
(millions of dollars)   September 30,
2012
    September 30,
2011
    Variation  

Operating revenues

  $ 144      $ 153      $ (9

Gas purchased for resale

    48        62        (14

Net revenues

    96        91        5   

Operations and maintenance

    48        48          

Depreciation and amortization

    11        10        1   

Taxes, other than income taxes

    11        11          

Gas operating income

  $ 26      $ 22      $ 4   

 

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O&R’s gas sales and deliveries, excluding off-system sales, for the nine months ended September 30, 2012 compared with the 2011 period were:

 

     Thousands of dths Delivered     Revenues in Millions  
     Nine Months Ended            Nine Months Ended         
Description   September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
    September 30,
2012
    September 30,
2011
    Variation     Percent
Variation
 

Residential

    4,114        5,127        (1,013     (19.8 )%    $ 59      $ 76      $ (17     (22.4 )% 

General

    827        1,006        (179     (17.8     10        13        (3     (23.1

Firm transportation

    6,860        7,672        (812     (10.6     54        52        2        3.8   

Total firm sales and transportation

    11,801        13,805        (2,004     (14.5     123        141        (18     (12.8

Interruptible sales

    3,250        3,213        37        1.2        3        3                 

Generation plants

    444        1,109        (665     (60.0                            

Other

    506        612        (106     (17.3                            

Other gas revenues

                                18        9        9        Large   

Total

    16,001        18,739        (2,738     (14.6 )%    $ 144      $ 153      $ (9     (5.9 )% 

 

O&R’s gas operating revenues decreased $9 million in the nine months ended September 30, 2012 compared with the 2011 period due primarily to the decrease in gas purchased for resale in 2012 ($14 million). O&R’s New York 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.

Sales and transportation volumes for firm customers decreased 14.5 percent in the nine months ended September 30, 2012 compared with the 2011 period. After adjusting for weather and other variations, total firm sales and transportation volumes increased 0.6 percent in the nine months ended September 30, 2012 compared with the 2011 period.

Gas operating income increased $4 million in the nine months ended September 30, 2012 compared with the 2011 period. The increase reflects primarily higher net revenues ($5 million), offset by higher depreciation and amortization ($1 million).

 

Competitive Energy Businesses

The competitive energy businesses’ results of operations for the nine months ended September 30, 2012 compared with the 2011 period is as follows:

 

     Nine Months Ended         
(millions of dollars)   September 30,
2012
    September 30,
2011
    Variation  

Operating revenues

  $ 954      $ 1,286      $ (332

Purchased power

    736        1,076        (340

Gas purchased for resale

    2        17        (15

Net revenues

    216        193        23   

Operations and maintenance

    85        97        (12

Depreciation and amortization

    6        5        1   

Taxes, other than income taxes

    14        16        (2

Operating income

  $ 111      $ 75      $ 36   

 

The competitive energy businesses’ operating revenues decreased $332 million in the nine months ended September 30, 2012 compared with the 2011 period, due primarily to lower electric retail and wholesale revenues. Electric wholesale revenues decreased $122 million in the nine months ended September 30, 2012 as compared with the 2011 period, due to lower sales volumes ($93 million) and unit prices ($29 million). Electric retail revenues decreased $213 million, due to lower sales volume ($115 million) and unit prices ($98 million). Net mark-to-market values increased $37 million in the nine months ended September 30, 2012

 

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as compared with the 2011 period, of which $16 million in gains are reflected in purchased power costs and $21 million in gains are reflected in revenues. Other revenues decreased $18 million in the nine months ended September 30, 2012 as compared with the 2011 period due primarily to lower other wholesale revenue ($17 million) and energy services revenue ($16 million), offset by higher solar revenue ($14 million).

Purchased power costs decreased $340 million in the nine months ended September 30, 2012 compared with the 2011 period, due primarily to lower volumes ($175 million), lower unit prices ($149 million) and changes in mark-to-market values ($16 million). Operating income increased $36 million in the nine months ended September 30, 2012 compared with the 2011 due primarily to net mark-to-market effects ($37 million).

Other

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

 

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Item 3: Quantitative and Qualitative Disclosures About Market Risk

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

Item 4: Controls and Procedures

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

The Utilities have undertaken a project with the objective of improving business processes and information systems. The Utilities expect the project to reduce costs, improve support of operating activities, reduce financial reporting risks, and simplify compliance activities. The focus of the project is the new financial and supply chain enterprise resource planning information systems that the Utilities began to use in July 2012. The Utilities expect the project to enhance the processes used by employees to record financial transactions and analyze data; purchase materials and services and manage inventory; develop business plans and budgets and report financial and purchasing data. The project has materially affected the Companies’ internal control over financial reporting. There was no other change in the Companies’ internal control over financial reporting that occurred during the Companies’ most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companies’ internal control over financial reporting.

 

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Part II Other Information

 

Item 1: Legal Proceedings

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

Item 1A: Risk Factors

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

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

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period   Total
Number of
Shares (or
Units)
Purchased*
   

Average
Price
Paid

per

Share

(or

Unit)

    Total
Number of
Shares (or
Units)
Purchased
as Part of
Publicly
Announced
Plans or
Programs
    Maximum
Number (or
Appropriate
Dollar
Value) of
Shares (or
Units) that
May Yet Be
Purchased
Under the
Plans or
Programs
 

July 1, 2012 to July 31, 2012

    107,165        $62.91                 

August 1, 2012 to August 31, 2012

    46,777        63.88                 

September 1, 2012 to September 30, 2012

    49,752        59.66                 

Total

    203,694        $62.34                 

 

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

 

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Item 6: Exhibits

CON EDISON

Exhibit 12.1    Statement of computation of Con Edison’s ratio of earnings to fixed charges for the nine-month periods ended September 30, 2012 and 2011, and the 12-month period ended December 31, 2011.
Exhibit 31.1.1    Rule 13a-14(a)/15d-14(a) Certifications – Chief Executive Officer.
Exhibit 31.1.2    Rule 13a-14(a)/15d-14(a) Certifications – Chief Financial Officer.
Exhibit 32.1.1    Section 1350 Certifications – Chief Executive Officer.
Exhibit 32.1.2    Section 1350 Certifications – Chief Financial Officer.
Exhibit 101.INS    XBRL Instance Document.
Exhibit 101.SCH    XBRL Taxonomy Extension Schema.
Exhibit 101.CAL    XBRL Taxonomy Extension Calculation Linkbase.
Exhibit 101.DEF    XBRL Taxonomy Extension Definition Linkbase.
Exhibit 101.LAB    XBRL Taxonomy Extension Label Linkbase.
Exhibit 101.PRE    XBRL Taxonomy Extension Presentation Linkbase.

CECONY

 

Exhibit 12.2    Statement of computation of CECONY’s ratio of earnings to fixed charges for the nine-month periods ended September 30, 2012 and 2011, and the 12-month period ended December 31, 2011.
Exhibit 31.2.1    Rule 13a-14(a)/15d-14(a) Certifications – Chief Executive Officer.
Exhibit 31.2.2    Rule 13a-14(a)/15d-14(a) Certifications – Chief Financial Officer.
Exhibit 32.2.1    Section 1350 Certifications – Chief Executive Officer.
Exhibit 32.2.2    Section 1350 Certifications – Chief Financial Officer.
Exhibit 101.INS    XBRL Instance Document.
Exhibit 101.SCH    XBRL Taxonomy Extension Schema.
Exhibit 101.CAL    XBRL Taxonomy Extension Calculation Linkbase.
Exhibit 101.DEF    XBRL Taxonomy Extension Definition Linkbase.
Exhibit 101.LAB    XBRL Taxonomy Extension Label Linkbase.
Exhibit 101.PRE    XBRL Taxonomy Extension Presentation Linkbase.

 

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SIGNATURES

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

 

    CONSOLIDATED EDISON, INC.
    CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
DATE: November 5, 2012     By    /s/    Robert Hoglund        
     

Robert Hoglund

Senior Vice President, Chief

Financial Officer and Duly

Authorized Officer

 

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