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ED > SEC Filings for ED > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for CONSOLIDATED EDISON INC

Form 10-K for CONSOLIDATED EDISON INC


21-Feb-2014

Annual Report


Item 7: 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 included in this report of two separate registrants: Con Edison and CECONY and should be read in conjunction with the financial statements and the notes thereto. As used in this report, the term the "Companies" refers to Con Edison and CECONY. CECONY is a subsidiary of Con Edison and, as such, information in this management's discussion and analysis about CECONY applies to Con Edison.

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

Corporate Overview

Con Edison's principal business operations are those of the Utilities. Con
Edison also has competitive energy businesses. See "The Utilities" and
"Competitive Energy Businesses" in Item 1. Certain financial data of Con
Edison's businesses is presented below:



                                                                                         At
                                          Twelve months ended                       December 31,
                                           December 31, 2013                            2013
  (Millions of Dollars,            Operating             Net Income for
  except percentages)              Revenues               Common Stock                 Assets
  CECONY                      $ 10,430         84 %    $  1,020         96 %     $ 36,258        89 %
  O&R                              833          7 %          65          6 %        2,545         6 %
  Total Utilities               11,263         91 %       1,085        102 %       38,803        95 %
  Con Edison Solutions(a)        1,006          8 %          40          4 %          289         1 %
  Con Edison Energy                 62          1 %           5          - %           64         - %
  Con Edison Development(b)         34          - %         (68 )       (6 )%         904         2 %
  Other(c)                         (11 )        - %           -          - %          587         2 %
  Total Con Edison            $ 12,354        100 %    $  1,062        100 %     $ 40,647       100 %

(a) Net income from the competitive energy businesses for the twelve months ended December 31, 2013 includes $45 million of net after-tax mark-to-market gains (Con Edison Solutions, $45 million).

(b) Includes an after-tax charge of $95 million relating to the lease in/lease out (LILO) transactions for the twelve months ended December 31, 2013 (see "Lease In/Lease Out Transactions" in Note J to the financial statements in Item 8) and a tax benefit of $15 million resulting from the acceptance by the Internal Revenue Service (IRS) of the company's claim for manufacturing tax deductions for the twelve months ended December 31, 2013.

(c) Other includes parent company expenses, primarily interest, and consolidation adjustments. See "Results of Operations," below.

Con Edison's net income for common stock in 2013 was $1,062 million or $3.62 a share ($3.61 on a diluted basis). Net income for common stock in 2012 and 2011 was $1,138 million or $3.88 a share (3.86 on a diluted basis) and $1,051 million or $3.59 a share ($3.57 on a diluted basis), respectively. See "Results of Operations - Summary," below. For segment financial information, see Note N to the financial statements in Item 8 and "Results of Operations," below.

Results of Operations-Summary

Net income for common stock for the years ended December 31, 2013, 2012 and 2011 was as follows:

          (Millions of Dollars)               2013         2012         2011
          CECONY                             $ 1,020      $ 1,014      $   978
          O&R                                     65           64           53
          Competitive energy businesses(a)       (23 )         76           32
          Other(b)                                 -          (16 )        (12 )
          Con Edison                         $ 1,062      $ 1,138      $ 1,051

(a) Includes an after-tax charge of $95 million relating to the LILO transactions (see "Lease In/Lease Out Transactions" in Note J to the financial statements in Item 8) and a tax benefit of $15 million resulting from the acceptance by the IRS of the company's claim for manufacturing tax deductions in 2013. Also includes $45 million, $40 million and $(13) million of net after-tax mark-to-market (losses)/gains in 2013, 2012 and 2011, respectively.

(b) Other includes parent company expenses, primarily interest, and consolidation adjustments. For 2013, also includes $16 million of certain income tax benefits and related interest.

The Companies' results of operations for 2013, as compared with 2012, reflect changes in the rate plans and other regulatory matters of Con Edison's utility subsidiaries, the weather impact on steam revenues, decreases in certain operations and maintenance expenses, increases in depreciation and amortization reflecting the impact of higher utility plant balances, and the net mark-to-market effects of the competitive energy businesses.

40 CON EDISON ANNUAL REPORT


Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

The following table presents the estimated effect on earnings per share and net income for common stock for 2013 as compared with 2012, and 2012 as compared with 2011, resulting from these and other major factors:

                                               2013 vs. 2012                              2012 vs. 2011
                                                           Net Income                                 Net Income
                                                           for Common                                 for Common
                                                              Stock                                     Stock
                                     Earnings per         (Millions of         Earnings per          (Millions of
                                         Share              Dollars)               Share               Dollars)
CECONY(a)
Rate plans and other regulatory
matters                              $       (0.07 )      $         (21 )      $        0.90        $          263
Weather impact on steam revenues              0.10                   30                (0.07 )                 (20 )
Operations and maintenance
expenses                                      0.11                   32                (0.47 )                (137 )
Depreciation and amortization                (0.11 )                (31 )              (0.19 )                 (57 )
Other (includes dilutive effect
of new stock issuances)                      (0.01 )                 (4 )              (0.05 )                 (13 )
Total CECONY                                  0.02                    6                 0.12                    36
O&R(a)                                           -                    1                 0.04                    11
Competitive energy businesses(b)             (0.34 )                (99 )               0.15                    44
Other, including parent company
expenses(c)                                   0.06                   16                (0.02 )                  (4 )
Total variations                     $       (0.26 )      $         (76 )      $        0.29        $           87

(a) Under the revenue decoupling mechanisms in the Utilities' New York electric and gas rate plans and the weather-normalization clause applicable to their gas businesses, revenues are generally not affected by changes in delivery volumes from levels assumed when rates were approved. Under the rate plans, pension and other postretirement costs and certain other costs are reconciled to amounts reflected in rates for such costs. For information about the rate plans and other regulatory matters, see Note B to the financial statements in Item 8.

(b) The variation for the year ended December 31, 2013, as compared to the 2012 period, includes an after-tax charge in 2013 of $95 million or $0.32 a share relating to the LILO transactions (see "Lease In/Lease Out Transactions" in Note J to the financial statements in Item 8) and a tax benefit in 2013 of $15 million or $0.05 a share resulting from the acceptance by the IRS of the company's claim for manufacturing tax deductions. These variations also reflect after-tax net mark-to-market gains/(losses) of $45 million or $0.14 a share, $40 million or $0.13 a share and $(13) million or $(0.05) a share for the years ended December 31, 2013, 2012 and 2011, respectively.

(c) The variation for the year ended December 31, 2013, as compared to the 2012 period, reflects certain income tax benefits and related interest in 2013 for Con Edison (parent company), $16 million or $0.06 a share.

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

CON EDISON ANNUAL REPORT 41


Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Risk Factors

The Companies' businesses are influenced by many factors that are difficult to predict, and that involve uncertainties that may materially affect actual operating results, cash flows and financial condition. See "Risk Factors" in Item 1A.

Application of Critical Accounting Policies

The Companies' financial statements reflect the application of their accounting policies, which conform to accounting principles generally accepted in the United States of America. The Companies' critical accounting policies include industry-specific accounting applicable to regulated public utilities and accounting for pensions and other postretirement benefits, contingencies, long-lived assets, derivative instruments, goodwill and leases.

Accounting for Regulated Public Utilities

The Utilities are subject to the accounting rules for regulated operations and the accounting requirements of the FERC and the state public utility regulatory commissions having jurisdiction.

The accounting rules for regulated operations specify the economic effects that result from the causal relationship of costs and revenues in the rate-regulated environment and how these effects are to be accounted for by a regulated enterprise. Revenues intended to cover some costs may be recorded either before or after the costs are incurred. If regulation provides assurance that incurred costs will be recovered in the future, these costs would be recorded as deferred charges or "regulatory assets" under the accounting rules for regulated operations. If revenues are recorded for costs that are expected to be incurred in the future, these revenues would be recorded as deferred credits or "regulatory liabilities" under the accounting rules for regulated operations.

The Utilities' principal regulatory assets and liabilities are listed in Note B to the financial statements in Item 8. The Utilities are each receiving or being credited with a return on all regulatory assets for which a cash outflow has been made. The Utilities are each paying or being charged with a return on all regulatory liabilities for which a cash inflow has been received. The regulatory assets and liabilities will be recovered from customers, or applied for customer benefit, in accordance with rate provisions approved by the applicable public utility regulatory commission.

In the event that regulatory assets of the Utilities were no longer probable of recovery, as required by the accounting rules for regulated operations, these regulatory assets would be charged to earnings. At December 31, 2013, the regulatory assets for Con Edison and CECONY were $7,230 million and $6,665 million, respectively.

Accounting for Pensions and Other Postretirement Benefits

The Utilities provide pensions and other postretirement benefits to substantially all of their employees and retirees. Con Edison's competitive energy businesses also provide such benefits to certain of their employees. The Companies account for these benefits in accordance with the accounting rules for retirement benefits. In addition, the Utilities apply the accounting rules for regulated operations to account for the regulatory treatment of these obligations (which, as described in Note B to the financial statements in Item 8, reconciles the amounts reflected in rates for the costs of the benefit to the costs actually incurred). In applying these accounting policies, the Companies have made critical estimates related to actuarial assumptions, including assumptions of expected returns on plan assets, discount rates, health care cost trends and future compensation. See Notes A, E and F to the financial statements in Item 8 for information about the Companies' pension and other postretirement benefits, the actuarial assumptions, actual performance, amortization of investment and other actuarial gains and losses and calculated plan costs for 2013, 2012 and 2011.

The discount rate for determining the present value of future period benefit payments is determined using a model to match the durations of highly-rated (Aa or higher by either Moody's or S&P) corporate bonds with the projected stream of benefit payments.

In determining the health care cost trend rate, the Companies review actual recent cost trends and projected future trends.

The cost of pension and other postretirement benefits in future periods will depend on actual returns on plan assets, assumptions for future periods, contributions and benefit experience. Con Edison's and CECONY's current estimates for 2014 are decreases, compared with 2013, in their pension and other postretirement benefits costs of $300 million and $280 million, respectively.

42 CON EDISON ANNUAL REPORT


Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

The following table illustrates the effect on 2014 pension and other postretirement costs of changing the critical actuarial assumptions, while holding all other actuarial assumptions constant:

                                                                              Other
Actuarial                      Change in                                  Postretirement
Assumption                     Assumption              Pension               Benefits               Total
                                                                     (Millions of Dollars)
Increase in accounting cost:

Discount rate
Con Edison                           (0.25 %)         $      42          $              4           $   46
CECONY                               (0.25 %)         $      39          $              3           $   42
Expected return on
plan assets
Con Edison                           (0.25 %)         $      24          $              1           $   25
CECONY                               (0.25 %)         $      23          $              1           $   24
Health care trend rate
Con Edison                            1.00 %          $       -          $             (6 )         $   (6 )
CECONY                                1.00 %          $       -          $             (9 )         $   (9 )
Increase in projected
benefit obligation:
Discount rate
Con Edison                           (0.25 %)         $     423          $             37           $  460
CECONY                               (0.25 %)         $     399          $             30           $  429
Health care trend rate
Con Edison                            1.00 %          $       -          $            (35 )         $  (35 )
CECONY                                1.00 %          $       -          $            (53 )         $  (53 )

A 5.0 percentage point variation in the actual annual return in 2014, as compared with the expected annual asset return of 8.00 percent, would change pension and other postretirement benefit costs for both Con Edison and CECONY by approximately $32 million and $30 million, respectively, in 2015.

Pension benefits are provided through a pension plan maintained by Con Edison to which CECONY, O&R and the competitive energy businesses make contributions for their participating employees. Pension accounting by the Utilities includes an allocation of plan assets.

The Companies' policy is to fund their pension and other postretirement benefit accounting costs to the extent tax deductible, and for the Utilities, to the extent these costs are recovered under their rate plans. The Companies were not required to make cash contributions to the pension plan in 2013 under funding regulations and tax laws. However, CECONY and O&R made discretionary contributions to the pension plan in 2013 of $819 million and $60 million, respectively. In 2014, CECONY and O&R expect to make contributions to the pension plan of $543 million and $39 million, respectively. See "Expected Contributions" in Notes E and F to the financial statements in Item 8.

Accounting for Contingencies

The accounting rules for contingencies apply to an existing condition, situation or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur. Known material contingencies, which are described in the notes to the financial statements, include certain regulatory matters (Note B), the Utilities' responsibility for hazardous substances, such as asbestos, PCBs and coal tar that have been used or generated in the course of operations (Note G); and other contingencies (Note H). In accordance with the accounting rules, the Companies have accrued estimates of losses relating to the contingencies as to which loss is probable and can be reasonably estimated and no liability has been accrued for contingencies as to which loss is not probable or cannot be reasonably estimated.

The Utilities generally recover costs for asbestos lawsuits, workers' compensation and environmental remediation pursuant to their current rate plans. Changes during the terms of the rate plans to the amounts accrued for these contingencies would not impact earnings.

Accounting for Long-Lived Assets

The accounting rules for property, plant and equipment require that certain long-lived assets must be tested for recoverability whenever events or changes in circumstances indicate their carrying amounts may not be recoverable. The carrying amount of a long-lived asset is deemed not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Under the accounting rules, an impairment loss is recognized if the carrying amount is not recoverable from such cash flows, and exceeds its fair value, which approximates market value.

Accounting for Goodwill

In accordance with the accounting rules for goodwill and intangible assets, Con Edison is required to test goodwill for impairment annually. See Note K to the financial statements in Item 8. Goodwill is tested for impairment using a two-step approach. The first step of the goodwill impairment test compares the estimated fair value of a reporting unit with its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is considered not impaired. If the carrying value exceeds the estimated fair value of the reporting unit, the second step is performed to measure the amount of impairment loss, if any. The second step requires a calculation of the implied fair value of goodwill.

Goodwill was $429 million at December 31, 2013. The most recent test, which was performed during 2013 did not require

CON EDISON ANNUAL REPORT 43


Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

any second-step assessment and did not result in any impairment. The company's most significant assumptions surrounding the goodwill impairment test relate to the estimates of reporting unit fair values. The company estimated fair values based primarily on discounted cash flows and on market values for a proxy group of companies.

Accounting for Derivative Instruments

The Companies apply the accounting rules for derivatives and hedging to their derivative financial instruments. The Companies use derivative financial instruments to hedge market price fluctuations in related underlying transactions for the physical purchase and sale of electricity and gas and interest rate risk on certain debt securities. The Utilities are permitted by their respective regulators to reflect in rates all reasonably incurred gains and losses on these instruments. See "Financial and Commodity Market Risks," below and Note O to the financial statements in Item 8.

Where the Companies are required to make mark-to-market estimates pursuant to the accounting rules, the estimates of gains and losses at a particular period end do not reflect the end results of particular transactions, and will most likely not reflect the actual gain or loss at the conclusion of a transaction. Substantially all of the estimated gains or losses are based on prices supplied by external sources such as the fair value of exchange-traded futures and options and the fair value of positions for which price quotations are available through or derived from brokers or other market sources.

Accounting for Leases

The Companies apply the accounting rules for leases and other related pronouncements to their leasing transactions. In accordance with the accounting rules, Con Edison accounted for Con Edison Development's two "Lease In/Lease Out" or LILO transactions as leveraged leases. At December 31, 2012, the company's investment in these leases, net of non-recourse debt, was carried as a single amount in Con Edison's consolidated balance sheet included in Item 8. In 2013, a court disallowed tax losses claimed by Con Edison relating to Con Edison Development's LILO transactions and the company subsequently terminated the transactions, resulting in a charge to earnings in 2013 of $95 million (after taxes of $63 million). The transactions did not impact earnings in either 2012 or 2011. See Notes J and L to the financial statements in Item 8.

Liquidity and Capital Resources

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

The principal factors affecting Con Edison's liquidity are its investments in the Utilities, the dividends it pays to its shareholders and the dividends it receives from the Utilities and cash flows from financing activities discussed below.

The principal factors affecting CECONY's liquidity are its cash flows from operating activities, cash used in investing activities (including construction expenditures), the dividends it pays to Con Edison and cash flows from financing activities discussed below.

The Companies generally maintain minimal cash balances and use short-term borrowings to meet their working capital needs and other cash requirements. The Companies repay their short-term borrowings using funds from long-term financings and operating activities. The Utilities' cost of capital, including working capital, is reflected in the rates they charge to their customers.

Each of the Companies believes that it will be able to meet its reasonably likely short-term and long-term cash requirements. See "The Companies Require Access to Capital Markets to Satisfy Funding Requirements" and "The Companies Also Face Other Risks That Are Beyond Their Control" in Item 1A, and "Capital Requirements and Resources" in Item 1.

Changes in the Companies' cash and temporary cash investments resulting from operating, investing and financing activities for the years ended December 31, 2013, 2012 and 2011 are summarized as follows:

Con Edison



                                                                    Variance                          Variance
                                                                      2013                              2012
(Millions of Dollars)                2013            2012           vs. 2012           2011           vs. 2011
Operating activities               $  2,552        $  2,599        $      (47 )      $  3,137        $     (538 )
Investing activities                 (2,659 )        (2,523 )            (136 )        (2,150 )            (373 )
Financing activities                    387            (330 )             717            (677 )             347
Net change                              280            (254 )             534             310              (564 )
Balance at beginning of period          394             648              (254 )           338               310
Balance at end of period           $    674        $    394        $      280        $    648        $     (254 )

CECONY



                                                                    Variance                          Variance
                                                                      2013                              2012
(Millions of Dollars)                2013            2012           vs. 2012           2011           vs. 2011
Operating activities               $  2,643        $  2,346        $      297        $  2,933        $     (587 )
Investing activities                 (2,417 )        (1,958 )            (459 )        (1,947 )             (11 )
Financing activities                     54            (407 )             461            (692 )             285
Net change                              280             (19 )             299             294              (313 )
Balance at beginning of period          353             372               (19 )            78               294
Balance at end of period           $    633        $    353        $      280        $    372        $      (19 )

44 CON EDISON ANNUAL REPORT


Table of Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued

Cash Flows from Operating Activities

The Utilities' cash flows from operating activities reflect principally their energy sales and deliveries and cost of operations. The volume of energy sales and deliveries is dependent primarily on factors external to the Utilities, such as growth of customer demand, weather, market prices for energy, economic conditions and measures that promote energy efficiency. Under the revenue decoupling mechanisms in CECONY's electric and gas rate plans and O&R's New York electric and gas rate plans, changes in delivery volumes from levels assumed when rates were approved may affect the timing of cash flows but not net income. See Note B to the financial statements in Item 8. The prices at which the . . .

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