Edgar Filing: CONSOLIDATED EDISON CO OF NEW YORK INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013

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

For the transition period from to


Commission File Number	Exact name of registrant as specified in its charter and principal office address and telephone number	State of Incorporation	I.R.S. Employer ID. Number
1-14514	Consolidated Edison, Inc.	New York	13-3965100
	4 Irving Place, New York, New York 10003
	(212) 460-4600

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

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


Consolidated Edison, Inc. (Con Edison)	Yes x	No ¨

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

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


Con Edison	Yes x	No ¨

CECONY	Yes x	No ¨

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


Con Edison

Large accelerated filer x	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨

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

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


Con Edison	Yes ¨	No x

CECONY	Yes ¨	No x

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

Filing Format

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

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


2


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


					3

TABLE OF CONTENTS


		PAGE
PART I—Financial Information
ITEM 1	Financial Statements (Unaudited)
	Con Edison
	Consolidated Income Statement		6
	Consolidated Statement of Comprehensive Income		7
	Consolidated Statement of Cash Flows		8
	Consolidated Balance Sheet		9
	Consolidated Statement of Common Shareholders’ Equity		11
	CECONY
	Consolidated Income Statement		12
	Consolidated Statement of Comprehensive Income		13
	Consolidated Statement of Cash Flows		14
	Consolidated Balance Sheet		15
	Consolidated Statement of Common Shareholder’s Equity		17
	Notes to Financial Statements (Unaudited)		18
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
ITEM 3	Quantitative and Qualitative Disclosures About Market Risk		53
ITEM 4	Controls and Procedures		53
PART II—Other Information
ITEM 1	Legal Proceedings		54
ITEM 1A	Risk Factors		54
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds		54
ITEM 6	Exhibits		55
	Signatures		56


4

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.


					5


Consolidated Edison, Inc.

CONSOLIDATED INCOME STATEMENT (UNAUDITED)


	For the Three Months Ended March 31,
	2013			2012
	(Millions of Dollars/ Except Share Data)
OPERATING REVENUES
Electric		$1,958			$1,862
Gas		742			645
Steam		332			263
Non-utility		152			308
TOTAL OPERATING REVENUES		3,184			3,078
OPERATING EXPENSES
Purchased power		707			781
Fuel		147			108
Gas purchased for resale		250			196
Other operations and maintenance		830			749
Depreciation and amortization		251			233
Taxes, other than income taxes		473			450
TOTAL OPERATING EXPENSES		2,658			2,517
OPERATING INCOME		526			561
OTHER INCOME (DEDUCTIONS)
Investment and other income		4			7
Allowance for equity funds used during construction		1			—
Other deductions		(3	)		(4	)
TOTAL OTHER INCOME (DEDUCTIONS)		2			3
INCOME BEFORE INTEREST AND INCOME TAX EXPENSE		528			564
INTEREST EXPENSE
Interest on long-term debt		143			145
Other interest		136			5
NET INTEREST EXPENSE		279			150
INCOME BEFORE INCOME TAX EXPENSE		249			414
INCOME TAX EXPENSE		57			134
NET INCOME		192			280
Preferred stock dividend requirements of subsidiary		—			(3	)
NET INCOME FOR COMMON STOCK		$192			$277
Net income for common stock per common share—basic		$0.66			$0.95
Net income for common stock per common share—diluted		$0.65			$0.94
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK		$0.615			$0.605
AVERAGE NUMBER OF SHARES OUTSTANDING—BASIC (IN MILLIONS)		292.9			292.9
AVERAGE NUMBER OF SHARES OUTSTANDING—DILUTED (IN MILLIONS)		294.2			294.5

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


6


Consolidated Edison, Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Months Ended March 31,
	2013		2012
	*(Millions of Dollars)*
NET INCOME		$192		$280
OTHER COMPREHENSIVE INCOME, NET OF TAXES
Pension plan liability adjustments, net of $2 and $5 taxes in 2013 and 2012, respectively		3		7
TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAXES		3		7
COMPREHENSIVE INCOME		195		287
Preferred stock dividend requirements of subsidiary		—		(3	)
COMPREHENSIVE INCOME FOR COMMON STOCK		$195		$284

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


					7

Consolidated Edison, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)


	For the Three Months Ended March 31,
	2013			2012
	*(Millions of Dollars)*
OPERATING ACTIVITIES
Net Income		$ 192			$ 280
PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME
Depreciation and amortization		251			233
Deferred income taxes		(87	)		68
Rate case amortization and accruals		10			31
Common equity component of allowance for funds used during construction		(1	)		—
Net derivative (gains)/losses		(45	)		31
Other non-cash items (net)		147			64
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable – customers, less allowance for uncollectibles		(135	)		54
Special deposits		(438	)		—
Materials and supplies, including fuel oil and gas in storage		60			31
Other receivables and other current assets		85			(2	)
Prepayments		(263	)		(286	)
Accounts payable		(84	)		(78	)
Pensions and retiree benefits obligations		270			253
Pensions and retiree benefits contributions		(235	)		(184	)
Accrued taxes		(18	)		41
Accrued interest		174			52
Deferred charges, noncurrent assets and other regulatory assets		37			(255	)
Deferred credits and other regulatory liabilities		(5	)		117
Other assets		10			—
Other liabilities		(9	)		(48	)
NET CASH FLOWS (USED IN)/FROM OPERATING ACTIVITIES		(84	)		402
INVESTING ACTIVITIES
Utility construction expenditures		(538	)		(471	)
Cost of removal less salvage		(47	)		(43	)
Non-utility construction expenditures		(91	)		(9	)
Proceeds from grants related to renewable energy investments		13			6
Net investment in Pilesgrove solar project and other		—			27
NET CASH FLOWS USED IN INVESTING ACTIVITIES		(663	)		(490	)
FINANCING ACTIVITIES
Net proceeds of short-term debt		482			—
Issuance of long-term debt		700			400
Retirement of long-term debt		(509	)		(1	)
Issuance of common shares for stock plans, net of repurchases		(1	)		(8	)
Debt issuance costs		(7	)		(4	)
Common stock dividends		(180	)		(175	)
Preferred stock dividends		—			(3	)
NET CASH FLOWS FROM FINANCING ACTIVITIES		485			209
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD		(262	)		121
BALANCE AT BEGINNING OF PERIOD		394			648
BALANCE AT END OF PERIOD		$ 132			$ 769
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest		$ 90			$ 89
Income taxes		$ 24			—

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


8


Consolidated Edison, Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)


	March 31, 2013		December 31, 2012
	*(Millions of Dollars)*
ASSETS
CURRENT ASSETS
Cash and temporary cash investments		$ 132		$ 394
Special deposits		508		70
Accounts receivable – customers, less allowance for uncollectible accounts of $94 in 2013 and 2012		1,357		1,222
Accrued unbilled revenue		399		516
Other receivables, less allowance for uncollectible accounts of $10 in 2013 and 2012		213		228
Fuel oil, gas in storage, materials and supplies, at average cost		270		330
Prepayments		422		159
Deferred tax assets – current		440		296
Regulatory assets		32		74
Other current assets		161		162
TOTAL CURRENT ASSETS		3,934		3,451
INVESTMENTS		351		467
UTILITY PLANT, AT ORIGINAL COST
Electric		22,547		22,376
Gas		5,197		5,120
Steam		2,068		2,049
General		2,291		2,302
TOTAL		32,103		31,847
Less: Accumulated depreciation		6,716		6,573
Net		25,387		25,274
Construction work in progress		1,209		1,027
NET UTILITY PLANT		26,596		26,301
NON-UTILITY PLANT
Non-utility property, less accumulated depreciation of $73 and $68 in 2013 and 2012, respectively		527		555
Construction work in progress		160		83
NET PLANT		27,283		26,939
OTHER NONCURRENT ASSETS
Goodwill		429		429
Intangible assets, less accumulated amortization of $4 in 2013 and 2012		2		2
Regulatory assets		9,484		9,705
Other deferred charges and noncurrent assets		253		216
TOTAL OTHER NONCURRENT ASSETS		10,168		10,352
TOTAL ASSETS		$41,736		$41,209

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


					9


Consolidated Edison, Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)


	March 31, 2013		December 31, 2012
	*(Millions of Dollars)*
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Long-term debt due within one year		$ 405		$ 706
Notes payable		1,021		539
Accounts payable		1,065		1,215
Customer deposits		307		304
Accrued taxes		144		162
Accrued interest		327		153
Accrued wages		93		94
Fair value of derivative liabilities		15		47
Regulatory liabilities		132		183
Uncertain income tax liabilities		251		44
Other current liabilities		483		498
TOTAL CURRENT LIABILITIES		4,243		3,945
NONCURRENT LIABILITIES
Obligations under capital leases		2		2
Provision for injuries and damages		152		149
Pensions and retiree benefits		4,438		4,678
Superfund and other environmental costs		536		545
Asset retirement obligations		160		159
Fair value of derivative liabilities		26		31
Other noncurrent liabilities		125		125
TOTAL NONCURRENT LIABILITIES		5,439		5,689
DEFERRED CREDITS AND REGULATORY LIABILITIES
Deferred income taxes and investment tax credits		8,316		8,372
Regulatory liabilities		1,234		1,202
Other deferred credits		61		70
TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES		9,611		9,644
LONG-TERM DEBT		10,554		10,062
COMMON SHAREHOLDERS’ EQUITY (See Statement of Common Shareholders’ Equity)		11,889		11,869
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$41,736		$41,209

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


10


Consolidated Edison, Inc.

CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS’ EQUITY (UNAUDITED)


*(Millions of Dollars/Except Share Data)*	Common Stock					Additional Paid-In Capital			Retained Earnings			Treasury Stock						Capital Stock Expense			Accumulated Other Comprehensive Income/(Loss)
*(Millions of Dollars/Except Share Data)*	Shares			Amount		Additional Paid-In Capital			Retained Earnings			Shares			Amount			Capital Stock Expense						Total
BALANCE AS OF DECEMBER 31, 2011		292,888,521			$32		$4,991			$7,568			23,194,075			$(1,033	)		$(64	)		$(58	)		$11,436
Net income for common stock										277															277
Common stock dividends										(177	)														(177	)
Issuance of common shares for stock plans, net of repurchases		(7,225	)										7,225			(2	)								(2	)
Preferred stock redemption																			4						4
Other comprehensive income																						7			7
BALANCE AS OF MARCH 31, 2012		292,881,296			$32		$4,991			$7,668			23,201,300			$(1,035	)		$(60	)		$(51	)		$11,545
BALANCE AS OF DECEMBER 31, 2012		292,871,896			$32		$4,991			$7,997			23,210,700			$(1,037	)		$(61	)		$(53	)		$11,869
Net income for common stock										192															192
Common stock dividends										(180	)														(180	)
Issuance of common shares for stock plans, net of repurchases		95,468					(2	)					(95,468	)		7									5
Other comprehensive income																						3			3
BALANCE AS OF MARCH 31, 2013		292,967,364			$32		$4,989			$8,009			23,115,232			$(1,030	)		$(61	)		$(50	)		$11,889

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


					11


Consolidated Edison Company of New York, Inc.

CONSOLIDATED INCOME STATEMENT (UNAUDITED)


	For the Three Months Ended March 31,
	2013			2012
	*(Millions of Dollars)*
OPERATING REVENUES
Electric		$1,814			$1,735
Gas		660			563
Steam		332			263
TOTAL OPERATING REVENUES		2,806			2,561
OPERATING EXPENSES
Purchased power		455			447
Fuel		147			108
Gas purchased for resale		219			169
Other operations and maintenance		741			645
Depreciation and amortization		233			218
Taxes, other than income taxes		451			430
TOTAL OPERATING EXPENSES		2,246			2,017
OPERATING INCOME		560			544
OTHER INCOME (DEDUCTIONS)
Investment and other income		3			5
Other deductions		(2	)		(3	)
TOTAL OTHER INCOME (DEDUCTIONS)		1			2
INCOME BEFORE INTEREST AND INCOME TAX EXPENSE		561			546
INTEREST EXPENSE
Interest on long-term debt		127			131
Other interest		5			5
NET INTEREST EXPENSE		132			136
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES		429			410
INCOME TAX EXPENSE		152			134
NET INCOME		277			276
Preferred stock dividend requirements		—			(3	)
NET INCOME FOR COMMON STOCK		$277			$273

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


12


Consolidated Edison Company of New York, Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)


	For the Three Month Ended March 31,
	2013		2012
	*(Millions of Dollars)*
NET INCOME		$277		$276
OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAXES
Pension plan liability adjustments, net of $- taxes in 2013 and 2012		—		—
TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAXES		—		—
COMPREHENSIVE INCOME		$277		$276

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


					13

Consolidated Edison Company of New York, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)


	For the Three Months Ended March 31,
	2013			2012
	*(Millions of Dollars)*
OPERATING ACTIVITIES
Net income		$277			$276
PRINCIPAL NON-CASH CHARGES/(CREDITS) TO INCOME
Depreciation and amortization		233			218
Deferred income taxes		241			66
Rate case amortization and accruals		10			31
Other non-cash items (net)		(10	)		15
CHANGES IN ASSETS AND LIABILITIES
Accounts receivable—customers, less allowance for uncollectibles		(102	)		43
Materials and supplies, including fuel oil and gas in storage		49			22
Other receivables and other current assets		(15	)		16
Prepayments		(310	)		(287	)
Accounts payable		(58	)		(48	)
Pensions and retiree benefits obligations		250			209
Pensions and retiree benefits contributions		(235	)		(184	)
Superfund and environmental remediation costs (net)		—			(1	)
Accrued taxes		(79	)		57
Accrued interest		46			42
Deferred charges, noncurrent assets and other regulatory assets		28			(179	)
Deferred credits and other regulatory liabilities		(14	)		108
Other liabilities		39			(36	)
NET CASH FLOWS FROM OPERATING ACTIVITIES		350			368
INVESTING ACTIVITIES
Utility construction expenditures		(515	)		(446	)
Cost of removal less salvage		(47	)		(41	)
NET CASH FLOWS USED IN INVESTING ACTIVITIES		(562	)		(487	)
FINANCING ACTIVITIES
Net payments of short-term debt		(108	)		—
Issuance of long-term debt		700			400
Retirement of long-term debt		(505	)		—
Debt issuance costs		(7	)		(4	)
Dividend to parent		(182	)		(171	)
Preferred stock dividends		—			(3	)
NET CASH FLOWS (USED IN)/FROM FINANCING ACTIVITIES		(102	)		222
CASH AND TEMPORARY CASH INVESTMENTS:
NET CHANGE FOR THE PERIOD		(314	)		103
BALANCE AT BEGINNING OF PERIOD		353			372
BALANCE AT END OF PERIOD		$39			$475
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid/(refunded) during the period for:
Interest		$84			$83
Income taxes		$45			$(20	)

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


14


Consolidated Edison Company of New York, Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)


	March 31, 2013		December 31, 2012
	*(Millions of Dollars)*
ASSETS
CURRENT ASSETS
Cash and temporary cash investments		$ 39		$ 353
Special deposits		57		65
Accounts receivable – customers, less allowance for uncollectible accounts of $87 in 2013 and 2012		1,210		1,108
Other receivables, less allowance for uncollectible accounts of $8 and $9 in 2013 and 2012, respectively		86		106
Accrued unbilled revenue		304		406
Accounts receivable from affiliated companies		143		61
Fuel oil, gas in storage, materials and supplies, at average cost		236		285
Prepayments		391		81
Regulatory assets		28		60
Deferred tax assets – current		176		193
Other current assets		35		69
TOTAL CURRENT ASSETS		2,705		2,787
INVESTMENTS		215		207
UTILITY PLANT AT ORIGINAL COST
Electric		21,240		21,079
Gas		4,619		4,547
Steam		2,068		2,049
General		2,115		2,126
TOTAL		30,042		29,801
Less: Accumulated depreciation		6,142		6,009
Net		23,900		23,792
Construction work in progress		1,127		947
NET UTILITY PLANT		25,027		24,739
NON-UTILITY PROPERTY
Non-utility property, less accumulated depreciation of $25 in 2013 and 2012		5		6
NET PLANT		25,032		24,745
OTHER NONCURRENT ASSETS
Regulatory assets		8,774		8,972
Other deferred charges and noncurrent assets		188		174
TOTAL OTHER NONCURRENT ASSETS		8,962		9,146
TOTAL ASSETS		$36,914		$36,885

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


					15

Consolidated Edison Company of New York, Inc.

CONSOLIDATED BALANCE SHEET (UNAUDITED)


	March 31, 2013		December 31, 2012
	*(Millions of Dollars)*
LIABILITIES AND SHAREHOLDER’S EQUITY
CURRENT LIABILITIES
Long-term debt due within one year		$400		$700
Notes payable		313		421
Accounts payable		890		989
Accounts payable to affiliated companies		16		22
Customer deposits		295		292
Accrued taxes		21		37
Accrued taxes to affiliated companies		152		215
Accrued interest		179		133
Accrued wages		84		84
Fair value of derivative liabilities		9		28
Uncertain income tax liabilities		7		36
Regulatory liabilities		98		145
Other current liabilities		421		410
TOTAL CURRENT LIABILITIES		2,885		3,512
NONCURRENT LIABILITIES
Obligations under capital leases		2		2
Provision for injuries and damages		145		141
Pensions and retiree benefits		3,985		4,220
Superfund and other environmental costs		425		433
Asset retirement obligations		160		158
Fair value of derivative liabilities		8		11
Other noncurrent liabilities		116		115
TOTAL NONCURRENT LIABILITIES		4,841		5,080
DEFERRED CREDITS AND REGULATORY LIABILITIES
Deferred income taxes and investment tax credits		7,734		7,452
Regulatory liabilities		1,110		1,077
Other deferred credits		57		67
TOTAL DEFERRED CREDITS AND REGULATORY LIABILITIES		8,901		8,596
LONG-TERM DEBT		9,640		9,145
COMMON SHAREHOLDER’S EQUITY (See Statement of Common Shareholder’s Equity)		10,647		10,552
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY		$36,914		$36,885

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


16

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		Additional Paid-In Capital		Retained Earnings			Repurchased Con Edison Stock		Capital Stock Expense			Accumulated Other Comprehensive Income/(Loss)			Total
BALANCE AS OF DECEMBER 31, 2011		235,488,094		$589		$4,234		$6,429			$(962)		$(64	)		$ (8	)		$10,218
Net income								276											276
Common stock dividend to parent								(171	)										(171	)
Cumulative preferred dividends								(3	)										(3	)
Preferred stock redemption													4						4
Other comprehensive income																—			—
BALANCE AS OF MARCH 31, 2012		235,488,094		$589		$4,234		$6,531			$(962)		$(60	)		$ (8	)		$10,324
BALANCE AS OF DECEMBER 31, 2012		235,488,094		$589		$4,234		$6,761			$(962)		$(61	)		$ (9	)		$10,552
Net income								277											277
Common stock dividend to parent								(182	)										(182	)
Other comprehensive income																—			—
BALANCE AS OF MARCH 31, 2013		235,488,094		$589		$4,234		$6,856			$(962)		$(61	)		$ (9	)		$10,647

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


					17

NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)

General

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

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

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

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


18

Note A — Summary of Significant Accounting Policies

Earnings Per Common Share

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


*(Millions of Dollars, except per share amounts/Shares in Millions)*	2013		2012
Net income for common stock		$ 192		$ 277
Weighted average common shares outstanding – basic		292.9		292.9
Add: Incremental shares attributable to effect of potentially dilutive securities		1.3		1.6
Adjusted weighted average common shares outstanding – diluted		294.2		294.5
Net Income for common stock per common share – basic		$0.66		$0.95
Net Income for common stock per common share – diluted		$0.65		$0.94

Changes in Accumulated Other Comprehensive Income by Component

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


*(Millions of Dollars)*	Con Edison			CECONY
Accumulated OCI at December 31, 2012		$(53	)		$ (9)
OCI before reclassifications		1			—
Amounts reclassified from accumulated OCI related to pension plan liabilities, net of tax of $1 and $- for Con Edison and CECONY, respectively (a)(b)		2			—
Net OCI at March 31, 2013		$ 3			$ —
Accumulated OCI, net of taxes, at March 31, 2013 (b)		$(50	)		$ (9	)

(a)

For the portion of unrecognized pension and other postretirement benefit costs relating to the regulated Utilities, costs are recorded into, and amortized out of, regulatory assets instead of OCI. The net actuarial losses and prior service costs recognized during the period are included in the computation of net periodic pension and other postretirement benefit cost. See Notes E and F.

(b)	Tax reclassified from accumulated OCI is reported in the income tax expense line item of the income statement.

Note B — Regulatory Matters

Other Regulatory Matters

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


					19

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

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

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


20

Regulatory Assets and Liabilities

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


	Con Edison				CECONY
*(Millions of Dollars)*	2013		2012		2013		2012
Regulatory assets
Unrecognized pension and other postretirement costs		$5,443		$5,677		$5,191		$5,407
Future income tax		1,952		1,922		1,851		1,831
Environmental remediation costs		721		730		607		615
Deferred storm costs		443		432		330		309
Revenue taxes		179		176		172		170
Pension and other postretirement benefits deferrals		161		183		131		154
Surcharge for New York State assessment		117		73		111		68
Net electric deferrals		97		102		97		102
Unamortized loss on reacquired debt		71		74		68		70
O&R transition bond charges		37		39		—		—
Deferred derivative losses – long-term		32		40		14		20
Preferred stock redemption		29		29		29		29
Workers’ compensation		20		19		20		19
Property tax reconciliation		16		16		—		—
Recoverable energy costs – long-term		—		23		—		23
Other		166		170		153		155
Regulatory assets – long-term		9,484		9,705		8,774		8,972
Deferred derivative losses – current		31		69		28		60
Recoverable energy costs – current		1		5		—		—
Regulatory assets – current		32		74		28		60
Total Regulatory Assets		$9,516		$9,779		$8,802		$9,032
Regulatory liabilities
Allowance for cost of removal less salvage		$ 508		$ 503		$ 424		$ 420
Property tax reconciliation		237		187		237		187
Long-term interest rate reconciliation		77		62		77		62
Net unbilled revenue deferrals		64		136		64		136
World Trade Center settlement proceeds		62		62		62		62
Carrying charges on T&D net plant – electric and steam		25		31		10		13
Expenditure prudence proceeding		15		14		15		14
Gas line losses		14		14		14		14
Energy efficiency programs		6		5		6		6
Other		226		188		201		163
Regulatory liabilities – long-term		1,234		1,202		1,110		1,077
Refundable energy costs – current		100		82		70		48
Revenue decoupling mechanism		23		72		20		68
Deferred derivative gains – current		9		—		8		—
Electric surcharge offset		—		29		—		29
Regulatory liabilities – current		132		183		98		145
Total Regulatory Liabilities		$1,366		$1,385		$1,208		$1,222

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

Note C — Capitalization

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


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


*(Millions of Dollars)*	March 31, 2013				December 31, 2012
Long-Term Debt (including current portion)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Con Edison		$10,959		$12,963		$10,768		$12,935
CECONY		$10,040		$11,792		$ 9,845		$11,751

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

Note D — Short-Term Borrowing

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

Note E — Pension Benefits

Net Periodic Benefit Cost

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


	Con Edison						CECONY
*(Millions of Dollars)*	2013			2012			2013			2012
Service cost – including administrative expenses		$ 67			$ 59			$ 62			$ 55
Interest cost on projected benefit obligation		134			137			126			128
Expected return on plan assets		(187	)		(176	)		(178	)		(168	)
Recognition of net actuarial loss		208			177			197			168
Recognition of prior service costs		1			2			1			2
NET PERIODIC BENEFIT COST		$ 223			$ 199			$ 208			$ 185
Cost capitalized		(82	)		(64	)		(79	)		(63	)
Reconciliation to rate level		11			(37	)		13			(38	)
Cost charged to operating expenses		$ 152			$ 98			$ 142			$ 84

Expected Contributions

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


22

Note F — Other Postretirement Benefits

Net Periodic Benefit Cost

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


	Con Edison						CECONY
*(Millions of Dollars)*	2013			2012			2013			2012
Service cost		$ 6			$ 7			$ 5			$ 5
Interest cost on accumulated other postretirement benefit obligation		14			18			12			16
Expected return on plan assets		(19	)		(21	)		(17	)		(18	)
Recognition of net actuarial loss		16			25			14			22
Recognition of prior service cost		(7	)		(5	)		(6	)		(4	)
NET PERIODIC POSTRETIREMENT BENEFIT COST		$ 10			$ 24			$ 8			$ 21
Cost capitalized		(3	)		(8	)		(2	)		(7	)
Reconciliation to rate level		12			7			11			4
Cost charged to operating expenses		$ 19			$ 23			$ 17			$ 18

Expected Contributions

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

Note G — Environmental Matters

Superfund Sites

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

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

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


					23

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


	Con Edison				CECONY
*(Millions of Dollars)*	2013		2012		2013		2012
Accrued Liabilities:
Manufactured gas plant sites		$457		$462		$348		$351
Other Superfund Sites		79		83		77		82
Total		$536		$545		$425		$433
Regulatory assets		$721		$730		$607		$615

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

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


	Con Edison				CECONY
*(Millions of Dollars)*	2013		2012		2013		2012
Remediation costs incurred		$10		$7		$7		$7
Insurance recoveries received		—		—		—		—

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

Asbestos Proceedings

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


	Con Edison				CECONY
*(Millions of Dollars)*	2013		2012		2013		2012
Accrued liability – asbestos suits		$10		$10		$10		$10
Regulatory assets – asbestos suits		$10		$10		$10		$10
Accrued liability – workers’ compensation		$95		$94		$90		$89
Regulatory assets – workers’ compensation		$20		$19		$20		$19


24

Note H — Other Material Contingencies

Manhattan Steam Main Rupture

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

Lease In/Lease Out Transactions

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

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

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


					25

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


*(Millions of Dollars)*	2013
Reduction to non-utility operating revenues		$121
Increase to other interest expense		131
Income tax expense		(102	)
Total reduction in net income		$150

The transactions did not impact earnings in 2012.

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

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

Other Contingencies

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

Guarantees

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

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


Guarantee Type	0 – 3 years		4 – 10 years		> 10 years		Total
	*(Millions of Dollars)*
Energy transactions		$763		$31		$32		$826
Intra-company guarantees		16		—		—		16
Other guarantees		36		—		—		36
Total		$815		$31		$32		$878

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

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

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

•

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

•

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

•

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

•

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

Note I — Income Tax

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


26

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

Uncertain Tax Positions

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

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

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

Note J — Financial Information by Business Segment

The financial data for the business segments are as follows:


	For the Three Months Ended March 31,
	Operating revenues						Inter-segment revenues						Depreciation and amortization				Operating income
*(Millions of Dollars)*	2013			2012			2013			2012			2013		2012		2013			2012
CECONY
Electric		$1,814			$1,735			$ 4			$ 3			$185		$173		$189			$224
Gas		660			563			1			1			32		29		242			221
Steam		332			263			19			19			16		16		129			99
Consolidation adjustments		—			—			(24	)		(23	)		—		—		—			—
Total CECONY		$2,806			$2,561			$—			$—			$233		$218		$560			$544
O&R
Electric		$ 145			$ 128			$—			$—			$ 10		$ 9		$ 20			$ 8
Gas		82			82			—			—			4		4		27			30
Total O&R		$ 227			$ 210			$—			$—			$ 14		$ 13		$ 47			$ 38
Competitive energy businesses		$ 152			$ 310			$ 2			$ 2			$ 4		$ 2		$ (82	)		$ (20	)
Other*		(1	)		(3	)		(2	)		(2	)		—		—		1			(1	)
Total Con Edison		$3,184			$3,078			$—			$—			$251		$233		$526			$561

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


					27

Note K — Derivative Instruments and Hedging Activities

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

Energy Price Hedging

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

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

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

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


*(Millions of Dollars)*
Commodity Derivatives	Gross Amounts of Recognized Assets/(Liabilities)			Gross Amounts Offset in the Statement of Financial Position			Net Amounts of Assets/(Liabilities) Presented in the Statement of Financial Position			Gross Amounts Not Offset in the Statement of Financial Position				Net Amount
										Financial instruments		Cash collateral received
Con Edison
Derivative assets		$ 121			$(64	)		$ 57	(a)		$—		$—		$57	(a)
Derivative liabilities		(114	)		78			(36	)		—		—		(36	)
Net derivative assets/(liabilities)		$ 7			$ 14			$ 21	(a)		$—		$—		$21	(a)
CECONY
Derivative assets		$ 40			$(19	)		$ 21	(a)		$—		$—		$21	(a)
Derivative liabilities		(51	)		34			(17	)		—		—		(17	)
Net derivative assets/(liabilities)		$ (11	)		$ 15			$ 4	(a)		$—		$—		$ 4	(a)

(a)

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


28

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


*(Millions of Dollars)*
Commodity Derivatives	Gross Amounts of Recognized Assets/ (Liabilities)			Gross Amounts Offset in the Statement of Financial Position			Net Amounts of Assets/ (Liabilities) Presented in the Statement of Financial Position			Gross Amounts Not Offset in the Statement of Financial Position				Net Amount
										Financial instruments		Cash collateral received
Con Edison
Derivative assets		$ 86			$ (57	)		$ 29	(a)		$ —		$ —		$ 29	(a)
Derivative liabilities		(176	)		104			(72	)		—		—		(72	)
Net derivative assets/(liabilities)		$ (90	)		$ 47			$ (43	)(a)		$ —		$ —		$ (43	)(a)
CECONY
Derivative assets		$ 27			$ (15	)		$ 12	(a)		$ —		$ —		$ 12	(a)
Derivative liabilities		(83	)		44			(39	)		—		—		(39	)
Net derivative assets/(liabilities)		$ (56	)		$ 29			$ (27	)(a)		$ —		$ —		$ (27	)(a)

(a)

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

Credit Exposure

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

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

Economic Hedges

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


					29

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



*(Millions of Dollars)*	Fair Value of Commodity Derivatives(a) Balance Sheet Location	Con Edison			CECONY
Derivative Assets
Current	Other current assets		$ 92			$ 30
Long-term	Other deferred charges and noncurrent assets		29			10
Total derivative assets			$ 121			$ 40
Impact of netting			(31	)		(5	)
Net derivative assets			$ 90			$ 35
Derivative Liabilities
Current	Fair value of derivative liabilities		$ 71			$ 32
Long-term	Fair value of derivative liabilities		43			19
Total derivative liabilities			$ 114			$ 51
Impact of netting			(78	)		(34	)
Net derivative liabilities			$ 36			$ 17

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

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


*(Millions of Dollars)*	Fair Value of Commodity Derivatives(a) Balance Sheet Location	Con Edison			CECONY
Derivative Assets
Current	Other current assets		$ 64			$ 18
Long-term	Other deferred charges and noncurrent assets		22			9
Total derivative assets			$ 86			$ 27
Impact of netting			(20	)		3
Net derivative assets			$ 66			$ 30
Derivative Liabilities
Current	Fair value of derivative liabilities		$122			$ 58
Long-term	Fair value of derivative liabilities		54			25
Total derivative liabilities			$176			$ 83
Impact of netting			(104	)		(44	)
Net derivative liabilities			$ 72			$ 39

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

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


30

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


Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a) Deferred or Recognized in Income for the Three Months Ended March 31, 2013
*(Millions of Dollars)*	Balance Sheet Location	Con Edison			CECONY
Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:
Current	Deferred derivative gains		$ 9			$ 8
Long-term	Regulatory liabilities		2			1
Total deferred gains/(losses)			$ 11			$ 9
Current	Deferred derivative losses		$ 38			$ 32
Current	Recoverable energy costs		11			10
Long-term	Deferred derivative losses		7			6
Total deferred gains/(losses)			$ 56			$ 48
Net deferred gains/(losses)			$ 67			$ 57
	Income Statement Location
Pre-tax gain/(loss) recognized in income
	Purchased power expense		$ 67	(b)		$ —
	Gas purchased for resale		(4	)		—
	Non-utility revenue		(1	)(b)		—
Total pre-tax gain/(loss) recognized in income			$ 62			$ —

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

(b)	For the three months ended March 31, 2013, Con Edison recorded in non-utility operating revenues and purchased power expense an unrealized pre-tax gain of $1 million and $45 million, respectively.

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


Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a) Deferred or Recognized in Income for the Three Months Ended March 31, 2012
*(Millions of Dollars)*	Balance Sheet Location	Con Edison			CECONY
Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:
Current	Deferred derivative gains		$ 1			$ 1
Total deferred gains/(losses)			$ 1			$ 1
Current	Deferred derivative losses		$ (28	)		$(19	)
Current	Recoverable energy costs		(74	)		(56	)
Long-term	Deferred derivative losses		(18	)		(17	)
Total deferred gains/(losses)			$(120	)		$(92	)
Net deferred gains/(losses)			$(119	)		$(91	)
	Income Statement Location
Pre-tax gain/(loss) recognized in income
	Purchased power expense		$ (86	)(b)		$ —
	Gas purchased for resale		(1	)		—
	Non-utility revenue		(3	)(b)		—
Total pre-tax gain/(loss) recognized in income			$ (90	)		$ —

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

(b)	For the three months ended March 31, 2012, Con Edison recorded in non-utility operating revenues and purchased power expense an unrealized pre-tax loss of $(4) million and $(27) million, respectively.


					31

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


	Electric Derivatives								Gas Derivatives
	Number of Energy Contracts (a)		MWHs (b)		Number of Capacity Contracts (a)		MWs (b)		Number of Contracts (a)		Dths (b)		Total Number Of Contracts (a)
Con Edison		493		15,267,685		70		10,750		533		79,064,410		1,096
CECONY		101		3,844,000		—		—		452		74,340,000		553

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

(b)	Volumes are reported net of long and short positions.

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

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

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


*(Millions of Dollars)*	Con Edison (a)			CECONY (a)
Aggregate fair value – net liabilities		$19			$14
Collateral posted		$ —			$ —
Additional collateral (b) (downgrade one level from current ratings)		$ —			$ —
Additional collateral (b) (downgrade to below investment grade from current ratings)		$22	(c)		$15	(c)

(a)

Non-derivative transactions for the purchase and sale of electricity and gas and qualifying derivative instruments, which have been designated as normal purchases or normal sales, are excluded from the table. These transactions primarily include purchases of electricity from independent system operators. In the event the Utilities and Con Edison’s competitive energy businesses were no longer extended unsecured credit for such purchases, the Companies would be required to post collateral, which at March 31, 2013, would have amounted to an estimated $32 million for Con Edison, including $15 million for CECONY. For certain other such non-derivative transactions, the Companies could be required to post collateral under certain circumstances, including in the event counterparties had reasonable grounds for insecurity.

(b)

The Companies measure the collateral requirements by taking into consideration the fair value amounts of derivative instruments that contain credit-risk-related contingent features that are in a net liabilities position plus amounts owed to counterparties for settled transactions and amounts required by counterparties for minimum financial security. The fair value amounts represent unrealized losses, net of any unrealized gains where the Companies have a legally enforceable right of setoff.

(c)	Derivative instruments that are net assets have been excluded from the table. At March 31, 2013, if Con Edison had been downgraded to below investment grade, it would have been required to post additional collateral for such derivative instruments of $38 million, including $1 million for CECONY.

Interest Rate Swap

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


32

Note L — Fair Value Measurements

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

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

•

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

•

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

•

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


					33

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


	Level 1				Level 2				Level 3				Netting Adjustments(d)						Total(e)
*(Millions of Dollars)*	Con Edison		CECONY		Con Edison		CECONY		Con Edison		CECONY		Con Edison			CECONY			Con Edison		CECONY
Derivative assets:
Commodity (a)(e)		$ 2		$ 2		$ 71		$ 19		$36		$11		$(20	)		$ 2			$ 89		$ 34
Other assets (c)(e)		109		102		112		103		—		—		—			—			221		205
Total		$111		$104		$183		$122		$36		$11		$(20	)		$ 2			$310		$239
Derivative liabilities:
Commodity (a)(e)		$ 8		$ 8		$ 72		$ 35		$22		$ —		$(67	)		$(27	)		$ 35		$ 16
Interest rate contract (b)(e)		—		—		5		—		—		—		—			—			5		—
Total		$ 8		$ 8		$ 77		$ 35		$22		$ —		$(67	)		$(27	)		$ 40		$ 16

(a)	A portion of the commodity derivatives categorized in Level 3 is valued using an internally developed model with observable inputs. The models also include some less readily observable inputs resulting in the classification of the entire contract as Level 3. See Note K.

(b)	See Note K.

(c)	Other assets are comprised of assets such as life insurance contracts within the deferred compensation plan and non-qualified retirement plans.

(d)	Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.

(e)	The Companies’ policy is to recognize transfers into and transfers out of the levels at the end of the reporting period. There were no transfers between levels 1, 2, and 3 for the three months ended March 31, 2013.

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


	Level 1				Level 2				Level 3				Netting Adjustments(d)						Total(e)
*(Millions of Dollars)*	Con Edison		CECONY		Con Edison		CECONY		Con Edison		CECONY		Con Edison			CECONY			Con Edison		CECONY
Derivative assets:
Commodity (a)(e)		$ —		$ —		$ 43		$ 8		$33		$10		$(10	)		$ 12			$ 66		$ 30
Other assets (c)(e)(f)		106		99		107		98		—		—		—			—			213		197
Total		$106		$99		$150		$106		$33		$10		$(10	)		$ 12			$279		$227
Derivative liabilities:
Commodity (a)(e)(h)		$ 12		$12		$116		$ 62		$38		$ —		$(94	)		$(35	)		$ 72		$ 39
Interest rate contract (b)(e)(g)		—		—		6		—		—		—		—			—			6		—
Total		$ 12		$12		$122		$ 62		$38		$ —		$(94	)		$(35	)		$ 78		$ 39

(a)

A significant portion of the commodity derivative contracts categorized in Level 3 is valued using either an industry acceptable model or an internally developed model with observable inputs. The models also include some less readily observable inputs resulting in the classification of the entire contract as Level 3. See Note K.

(b)	See Note K.

(c)	Other assets are comprised of assets such as life insurance contracts within the deferred compensation plan and non-qualified retirement plans.

(d)	Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.

(e)	The Companies’ policy is to recognize transfers into and transfers out of the levels at the end of the reporting period.

(f)	On March 31, 2012, other assets of $105 million for Con Edison and $95 million for CECONY were transferred from Level 3 to Level 2 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall as of March 31, 2012.

(g)	On March 31, 2012, interest rate contract of $8 million was transferred from Level 3 to Level 2 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall.

(h)

During 2012, Con Edison transferred commodity derivate contract liabilities of $2 million from Level 1 to Level 2, $9 million from Level 2 to Level 1, $2 million from Level 2 to Level 3, and $11 million from Level 3 to Level 2 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall.


34

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

Fair Value of
Level 3 at
March 31, 2013

(Millions of Dollars)

Valuation

Techniques

Unobservable Inputs

Range

Con Edison—Commodity

Electricity

Discounted Cash Flow

Forward energy prices (a)

Forward capacity prices

$28-$116 per MWH

$1.50-$14.20 KW- month

Electricity Wholesale Contract

Discounted Cash Flow

Forward energy prices (b)

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

$33-$49 per MWH

$2.50-$110 per SREC

Standard Offer Capacity Agreements

(12

)

Discounted Cash Flow

Forward capacity prices (a)

Forward price escalator (a)

Present value factor (a)

$166 MW-day

0%-3%

1.66%

Transmission Congestion Contracts / Financial

Discounted Cash Flow

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

17.5%-38%

Transmission Rights

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

8.5%-49%

Inter-zonal forward price curves and for historical zonal losses (b)

$0.11-$5.74

Total Con Edison—Commodity

CECONY—Commodity

Transmission Congestion Contracts

Discounted Cash Flow

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

17.5%-38%

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

8.5%-49%

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

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

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


	For Three Months Ended March 31, 2013
				Total Gains/(Losses)— Realized and Unrealized
*(Millions of Dollars)*	Beginning Balance as of January 1, 2013			Included in Earnings		Included in Regulatory Assets and Liabilities		Purchases		Issuances		Sales		Settlements			Transfer In/Out of Level 3		Ending Balance as of March 31, 2013
Con Edison
Derivatives:
Commodity		$ (5	)		$31		$5		$4		$—		$—		$(21	)		$—		$14
CECONY
Derivatives:
Commodity		$10			$10		$1		$4		$—		$—		$(14	)		$—		$11


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	For Three Months Ended March 31, 2012
				Total Gains/(Losses)— Realized and Unrealized
*(Millions of Dollars)*	Beginning Balance as of January 1, 2012			Included in Earnings			Included in Regulatory Assets and Liabilities			Purchases		Issuances		Sales		Settlements		Transfer In/Out of Level 3			Ending Balance as of March 31, 2012
Con Edison
Derivatives:
Commodity		$(62	)		$(58	)		$(17	)		$6		$—		$—		$38		$ —			$(93	)
Interest rate contract		(8	)		(1	)		—			—		—		—		1		8			—
Other assets(a)		99			3			3			—		—		—		—		(105	)		—
Total		$ 29			$(56	)		$(14	)		$6		$—		$—		$39		$(97	)		$(93	)
CECONY
Derivatives:
Commodity		$ (7	)		$ (5	)		$ (7	)		$6		$—		$—		$ —		$ —			$(13	)
Other assets(a)		90			3			2			—		—		—		—		(95	)		—
Total		$ 83			$ (2	)		$ (5	)		$6		$—		$—		$ —		$(95	)		$(13	)

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

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

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

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

Note M — New Financial Accounting Standards

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


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

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


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

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

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

1-1217, the Form 10-K).

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

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

LOGO

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

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

CECONY

Electric

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

Gas

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


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Steam

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

O&R

Electric

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

Gas

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

Competitive Energy Businesses

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

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

Three months ended March 31, 2013

At March 31, 2013

(Millions of Dollars, except percentages)

Operating Revenues

Net Income for
Common Stock

Assets

CECONY

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