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 Orange and Rockland Utilities, Inc. (O&R), Con Edison Clean Energy Businesses, Inc. (together with its subsidiaries, the Clean Energy Businesses) and Con Edison Transmission, Inc. (together with its subsidiaries, Con Edison Transmission) 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 statement 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, 2019. 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 subsidiary, provides electric service in southeastern New York and northern New Jersey and gas service in southeastern New York. Con Edison Clean Energy Businesses, Inc., through its subsidiaries, develops, owns and operates renewable and energy infrastructure projects and provides energy-related products and services to wholesale and retail customers. Con Edison Transmission, Inc. invests in electric transmission facilities through its subsidiary, Consolidated Edison Transmission, LLC (CET Electric), and invests in gas pipeline and storage facilities through its subsidiary Con Edison Gas Pipeline and Storage, LLC (CET Gas).
Note A – Summary of Significant Accounting Policies and Other Matters
Financial Instruments – Credit Losses
Adoption of New Standard
In January 2020, the Companies adopted ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (CECL). The amendments replace the incurred loss impairment methodology which involved delayed recognition of credit losses. The amendments introduce an expected credit loss impairment model which requires immediate recognition of anticipated losses over the instrument’s life. A broader range of reasonable and supportable information must be considered in developing the credit loss estimates. The Companies' financial instruments subject to the amendments are included in the lines “Accounts receivable – customers” and “Other receivables.” Substantially all of these in-scope financial instruments are expected to be collected within one year of billing.
The Companies adopted the amendments using the modified retrospective method for all financial instruments measured at amortized costs. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. No prior period adjustment or charge to retained earnings for cumulative impact was required as a result of the Companies’ adoption of the amendments.
The Utilities’ “Account receivable – customers” balance consists of utility bills due (bills are generally due the month following billing) from customers who have energy delivered, generated, or services provided by the Utilities. The balance also reflects the Utilities’ purchase of receivables from energy service companies to support the retail choice programs.
“Other receivables” balance generally reflects costs billed by the Utilities for goods and services provided to external parties, such as accommodation work for private parties and certain governmental entities, real estate rental and pole attachments.
The Clean Energy Businesses’ accounts receivable balance generally reflects bills related to the sale of energy from renewable electric production projects, the management of energy supply assets, energy-efficiency services to government and commercial customers, and the engineering, procurement, and construction services of renewable energy projects. The Clean Energy Businesses calculate an allowance for uncollectible accounts related to their energy services customers based on an aging and customer-specific analysis. The amount of such reserves was not material at March 31, 2020.
The Companies develop expected loss estimates using past events data and consider current conditions and future reasonable and supportable forecasts. Changes to the Utilities’ reserve balances which result in write-offs of customer accounts receivable balances above existing rate allowances are not reflected in rates during the term of the current rate plans and are considered in a future rate proceeding. For the Utilities’ customer accounts receivable allowance for uncollectible accounts, past events considered include write-offs relative to total customer accounts receivable; current conditions include macro-and micro-economic conditions related to trends in the local economy and bankruptcy rates, among other factors; and forecasts about the future include assumptions related to the level of write-offs and recoveries.
Other receivables allowance for uncollectible accounts is calculated based on a historical average of collections relative to total other receivables, including current receivables. Current macro- and micro-economic conditions are also considered when calculating the current reserve. Probable outcomes of pending litigation, whether favorable or unfavorable to the Companies, are also included in the consideration.
During the first quarter of 2020, the potential economic impact of the COVID-19 pandemic was also considered in forward looking projections related to write-off and recovery rates, and resulted in increases to the allowance for uncollectible accounts of $5 million for Con Edison, substantially all of which related to CECONY.
Customer accounts receivable and the associated allowance for uncollectible accounts are included in the line “Accounts receivable – customers” on the Companies’ consolidated balance sheets. Other receivables and the associated allowance for uncollectible accounts are included in “Other receivables” on the consolidated balance sheets.
The table below presents a rollforward by major portfolio segment type for the three months ended March 31, 2020:
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For the Three Months Ended March 31, 2020
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Con Edison
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CECONY
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|
(Millions of Dollars)
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Accounts receivable - customers
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Other receivables
|
Accounts receivable - customers
|
Other receivables
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|
Allowance for credit losses
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|
|
|
|
|
Beginning Balance at January 1, 2020
|
$70
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$4
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$65
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$3
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|
Recoveries
|
2
|
—
|
|
2
|
—
|
|
|
Write-offs
|
(18)
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—
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|
(18)
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—
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|
|
Reserve adjustments
|
21
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1
|
21
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—
|
|
|
Ending Balance March 31, 2020
|
$75
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$5
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$70
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$3
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General Utility Plant
General utility plant of Con Edison and CECONY included $91 million and $87 million, respectively, at March 31, 2020 and $93 million and $88 million, respectively, at December 31, 2019, related to a May 2018 acquisition of software licenses. The estimated aggregate annual amortization expense related to the software licenses for Con Edison and CECONY is $7 million. The accumulated amortization for Con Edison and CECONY was $12 million and $11 million, respectively at March 31, 2020 and was $10 million at December 31, 2019.
Goodwill
The Companies test goodwill for impairment at least annually or whenever there is a triggering event, and test long-lived and intangible assets for recoverability when events or changes in circumstances indicate that the carrying value of long-lived or intangible assets may not be recoverable. The Companies identified no triggering events or changes in circumstances related to the COVID-19 pandemic that would indicate that the carrying value of long-lived or intangible assets may not be recoverable at March 31, 2020.
Long-Lived and Intangible Assets
In January 2019, Pacific Gas and Electric Company (PG&E) filed in the United States Bankruptcy Court for the Northern District of California for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The output of certain of the Clean Energy Businesses' renewable electric production projects with an aggregate generating capacity of 680 MW (AC) (PG&E Projects) is sold to PG&E under long-term power purchase agreements (PG&E PPAs). Most of the PG&E PPAs have contract prices that are higher than estimated market prices. PG&E, as a debtor in possession, may assume or reject the PG&E PPAs, subject to review by the bankruptcy court.
In March 2020, PG&E and certain PG&E shareholders submitted a joint plan of reorganization to the bankruptcy court. The plan includes the assumption by PG&E of all of its power purchase agreements. The plan is subject to, among other things: confirmation by the bankruptcy court by June 30, 2020 (or any extension of the date by which PG&E’s bankruptcy must be resolved for PG&E to participate in the insurance fund described below); approval by the California Public Utilities Commission (CPUC) of PG&E’s implementation of the plan and participation in the insurance fund; PG&E obtaining funding for distributions under the plan; and the continuation in full force and effect of the September 2019 subrogation claims restructuring support agreement, the December 2019 tort claimants restructuring support agreement and the January 2020 noteholder restructuring support agreement. The plan is supported by the parties to these restructuring support agreements, subject to their terms, and includes the assumption by PG&E of all of its power purchase agreements. A plan of reorganization can be revoked, amended, withdrawn or delayed prior to its confirmation by the bankruptcy court. The bankruptcy court has authorized PG&E to send the plan to creditors for consideration, and the current deadline for creditors to return ballots is May 15, 2020. The hearing to consider confirmation of the plan is scheduled to commence later in May 2020.
In January and May 2019, FERC issued orders (which PG&E is challenging) affirming its jurisdiction to review and approve the modification or abrogation of wholesale power contracts that are the subject of rejection in bankruptcy. In June 2019, the bankruptcy court ruled that FERC does not have concurrent jurisdiction with it and that FERC’s January and May 2019 orders are of no force and effect in the bankruptcy proceeding. FERC and additional parties, including the Clean Energy Businesses, are challenging the bankruptcy court’s June 2019 ruling in appeals that are pending in the United States Court of Appeals for the Ninth Circuit.
In July 2019, California enacted a law addressing future California wildfires. The law includes provisions for the establishment of wildfire liquidity and insurance funds and possible limitation of future wildfire liabilities for California utilities. PG&E, Southern California Edison Company and San Diego Gas & Electric Company have agreed to participate in the insurance fund. PG&E’s participation will require bankruptcy court approval and is conditioned on, among other things, resolution of PG&E’s bankruptcy by June 30, 2020, and a determination by the CPUC that PG&E’s bankruptcy reorganization plan is consistent with the state’s climate goals as required under the California Renewables Portfolio Standard Program and related procurement requirements of the state. In April 2020, the CPUC issued for public comment a proposed decision that would approve with conditions PG&E’s proposed reorganization plan under the aforementioned law. The proposed decision is expected to be on the CPUC’s May 21, 2020 voting meeting agenda.
The PG&E bankruptcy is an event of default under the PG&E PPAs. Unless the lenders for the related project debt otherwise agree, distributions from the related projects to the Clean Energy Businesses will not be made during the pendency of the bankruptcy. See “Reconciliation of Cash, Temporary Cash Investments and Restricted Cash,” below.
At March 31, 2020 and December 31, 2019, Con Edison’s consolidated balance sheet included $802 million and $819 million of net non-utility plant relating to the PG&E Projects, $1,039 million and $1,057 million of intangible assets relating to the PG&E PPAs, $274 million and $282 million of net non-utility plant of additional projects that secure the related project debt and $980 million and $1,001 million of non-recourse related project debt, respectively. See "Long-term Debt" in Note C. Con Edison has tested whether its net non-utility plant relating to the PG&E Projects and intangible assets relating to the PG&E PPAs have been impaired. The projected future cash flows used in the test reflected Con Edison’s expectation that the PG&E PPAs are not likely to be rejected. Based on the test, Con Edison has determined that there was no impairment. If, in the future, one or more of the PG&E PPAs is rejected or any such rejection becomes likely, there will be an impairment of the related intangible assets and could be an impairment of the related non-utility plant. The amount of any such impairment could be material.
Earnings Per Common Share
Con Edison presents basic and diluted earnings per share (EPS) on the face of its consolidated income statement. Basic EPS is calculated by dividing earnings available to common shareholders (“Net income for common stock” on Con Edison’s consolidated income statement) by the weighted average number of Con Edison common shares outstanding during the period. In the calculation of diluted EPS, weighted average shares outstanding are increased for additional shares that would be outstanding if potentially dilutive securities were converted to common stock.
Potentially dilutive securities for Con Edison consist of restricted stock units and deferred stock units for which the average market price of the common shares for the period was greater than the exercise price.
For the three months ended March 31, 2020 and 2019, basic and diluted EPS for Con Edison are calculated as follows:
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For the Three Months Ended March 31,
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(Millions of Dollars, except per share amounts/Shares in Millions)
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2020
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2019
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Net income for common stock
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$375
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$424
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Weighted average common shares outstanding – basic
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333.6
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322.5
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Add: Incremental shares attributable to effect of potentially dilutive securities
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1.0
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0.9
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Adjusted weighted average common shares outstanding – diluted
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334.6
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323.4
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Net Income per common share – basic
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$1.13
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$1.31
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Net Income per common share – diluted
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$1.12
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$1.31
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The computation of diluted EPS for the three months ended March 31, 2020 and 2019 excludes immaterial amounts of performance share awards that were not included because of their anti-dilutive effect.
Changes in Accumulated Other Comprehensive Income/(Loss) by Component
For the three months ended March 31, 2020 and 2019, changes to accumulated other comprehensive income/(loss) (OCI) for Con Edison and CECONY are as follows:
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For the Three Months Ended March 31,
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Con Edison
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CECONY
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(Millions of Dollars)
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2020
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2019
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2020
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2019
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Beginning balance, accumulated OCI, net of taxes (a)
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$(19)
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$(16)
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$(6)
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$(5)
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OCI before reclassifications, net of tax of $(1) for Con Edison in 2020 and 2019
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4
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2
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—
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—
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Amounts reclassified from accumulated OCI related to pension plan liabilities, net of tax of $(1) for Con Edison in 2020 (a)(b)
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1
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2
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1
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—
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Current period OCI, net of taxes
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5
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4
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1
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—
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|
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Ending balance, accumulated OCI, net of taxes
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$(14)
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$(12)
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$(5)
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$(5)
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(a)
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Tax reclassified from accumulated OCI is reported in the income tax expense line item of the consolidated income statement.
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(b)
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For the portion of unrecognized pension and other postretirement benefit costs relating to the Utilities, costs are recorded into, and amortized out of, regulatory assets and liabilities instead of OCI. The net actuarial losses and prior service costs recognized during the period are included in the computation of total periodic pension and other postretirement benefit cost. See Notes E and F.
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Reconciliation of Cash, Temporary Cash Investments and Restricted Cash
Cash, temporary cash investments and restricted cash are presented on a combined basis in the Companies’ consolidated statements of cash flows. At March 31, 2020 and 2019, cash, temporary cash investments and restricted cash for Con Edison and CECONY were as follows:
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At March 31,
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Con Edison
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CECONY
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(Millions of Dollars)
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2020
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2019
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2020
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2019
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Cash and temporary cash investments
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$1,395
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$406
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$1,303
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$352
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Restricted cash (a)
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179
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68
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—
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—
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|
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Total cash, temporary cash investments and restricted cash
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$1,574
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$474
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$1,303
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$352
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(a)
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Restricted cash included cash of the Clean Energy Businesses' renewable electric production project subsidiaries ($179 million and $67 million at March 31, 2020 and 2019, respectively) that, under the related project debt agreements, is either restricted until the various maturity dates of the project debt to being used for normal operating expenses and capital expenditures, debt service, and required reserves or restricted as a result of the PG&E bankruptcy. During the pendency of the PG&E bankruptcy, unless the lenders for the related project debt otherwise agree, cash may not be distributed from the related projects to the Clean Energy Businesses. See “Long-Lived and Intangible Assets,” above, and Note C. In addition, restricted cash included O&R's New Jersey utility subsidiary, Rockland Electric Company transition bond charge collections, net of principal, interest, trustee and service fees ($1 million at March 31, 2019).
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Note B – Regulatory Matters
COVID-19 Regulatory Matters
Governors, public utility commissions, federal authorities and other regulatory agencies in the states in which the Utilities operate have issued orders related to the COVID-19 pandemic that impact the Utilities as described below.
New York State Regulation
In March 2020, New York State Governor Cuomo declared a State disaster emergency for the State of New York. Since that declaration, the NYSPSC and the Utilities have taken actions to mitigate the impact of the COVID-19 pandemic on the Utilities, their customers and other stakeholders. New York State has designated utilities, including CECONY and O&R, as essential businesses that may continue their work. The Utilities have modified or suspended certain work in the state.
In March 2020, the Utilities began suspending service disconnections, certain collection notices, final bill collection agency activity, new late payment charges and certain other fees for all customers. Historically, these fees have amounted to approximately $6 million and $0.4 million per month for CECONY and O&R, respectively. The suspension of these fees is expected to result in a reduction in revenues during the suspension period, the length of which has not yet been determined. The Utilities also began providing payment extensions for all customers that were scheduled to be disconnected prior to the start of the COVID-19 pandemic. All customer walk-in centers have been closed to the public and in-person investigations of billing issues at customer residences and businesses have been suspended. In April 2020, the NYSPSC also suspended certain interconnection payment deadlines to mitigate the impact of the COVID-19 pandemic on developers of distributed renewable generation and energy storage. See Note K to the First Quarter Financial Statements.
In March 2020, the Utilities requested and the NYSPSC granted extensions until July 31, 2020 to file their 2019 Earnings Adjustment Mechanisms (EAMs) reports, which would delay the start of collection of earned EAM incentives of approximately $46 million and $3 million for CECONY and O&R, respectively, from the twelve-month period beginning June 2020 until the twelve-month period beginning September 2020.
The Utilities’ rate plans have revenue decoupling mechanisms in their New York electric and gas businesses that reconcile actual energy delivery revenues to the authorized delivery revenues approved by the NYSPSC on a monthly basis and accumulate the deferred balances semi-annually under CECONY's electric rate plan (January through June and July through December, respectively) and annually under CECONY's gas rate plan and O&R New York's electric and gas rate plans (January through December). The difference is accrued with interest on a monthly basis for CECONY and O&R New York’s electric customers and after the annual deferral period ends for CECONY and O&R New York’s gas customers for refund to, or recovery from customers, as applicable. Generally, the refund to or recovery from customers begins August and February of each year over an ensuing six-month period for CECONY's electric customers and February of each year over an ensuing twelve-month period for CECONY's gas and O&R New York's electric and gas customers.
New Jersey State Regulation
In March 2020, New Jersey Governor Murphy declared a Public Health Emergency and State of Emergency for the State of New Jersey. Since that declaration, the NJBPU and RECO have taken actions to mitigate the impact of the COVID-19 pandemic on RECO, its customers and other stakeholders. New Jersey has designated utilities, including RECO, as essential businesses that may continue their work. RECO has modified or suspended certain work in the state. In March 2020, RECO began suspending late payment charges, terminations for non-payment, and no access fees during the COVID-19 pandemic. The suspension of these fees is not expected to be material.
Federal Regulation
In March 2020, the North American Electric Reliability Corporation (NERC) issued guidance that the effects of the COVID-19 pandemic will be considered an acceptable basis for non-compliance with certain NERC Reliability
Standards requirements that would have required action between March 1, 2020 and July 31, 2020. In addition, it suspended on-site NERC compliance audits until at least July 31, 2020.
Also in March 2020, FERC announced several actions to ease regulatory obligations in response to the COVID-19 pandemic. These include postponement of certain filing deadlines and the suspension of all audit site visits and investigative testimony.
In April 2020, FERC announced it would expeditiously review and act on requests for relief in response to the COVID-19 pandemic, give priority to processing filings that contribute to the business continuity of regulated entities’ energy infrastructure and will exercise prosecutorial discretion when addressing events arising during the emergency period. FERC also approved a blanket waiver of requirements in Open Access Transmission Tariffs that require entities to hold meetings in-person and to provide or obtain notarized documents.
Gas Safety
In March 2020, the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) issued a notice staying enforcement of certain federal operator qualification, control room management and drug testing requirements during the COVID-19 pandemic. The notice also announced that PHMSA would exercise discretion in its overall enforcement of other parts of the pipeline safety regulations. The NYSPSC also provided guidance that it was staying enforcement of many of the same pipeline safety requirements identified in the March 2020 PHMSA notice.
In April 2020, the NYSPSC issued an order that extended the deadlines to complete certain gas inspections by all New York gas utilities, including CECONY and O&R, from April 1, 2020 to August 1, 2020.
Other Regulatory Matters
In August 2018, the NYSPSC ordered CECONY to begin on January 1, 2019 to credit the company's electric and gas customers, and to begin on October 1, 2018 to credit its steam customers, with the net benefits of the federal Tax Cuts and Jobs Act of 2017 (TCJA) as measured based on amounts reflected in its rate plans prior to the enactment of the TCJA in December 2017. The net benefits include the revenue requirement impact of the reduction in the corporate federal income tax rate to 21 percent, the elimination for utilities of bonus depreciation and the amortization of excess deferred federal income taxes.
CECONY, under its electric rate plan that was approved in January 2020, is amortizing its TCJA net benefits prior to January 1, 2019 allocable to its electric customers ($377 million) over a three-year period, the “protected” portion of its net regulatory liability for future income taxes related to certain accelerated tax depreciation benefits allocable to its electric customers ($1,663 million) over the remaining lives of the related assets and the remainder, or “unprotected” portion of the net regulatory liability allocable to its electric customers ($784 million) over a five-year period. CECONY, under its gas rate plan that was approved in January 2020, is amortizing its remaining TCJA net benefits prior to January 1, 2019 allocable to its gas customers ($63 million) over a two-year period, the protected portion of its net regulatory liability for future income taxes allocable to its gas customers ($725 million) over the remaining lives of the related assets and the unprotected portion of the net regulatory liability allocable to its gas customers ($107 million) over a five-year period.
CECONY's net benefits prior to October 1, 2018 allocable to the company’s steam customers ($15 million) are being amortized over a three-year period. CECONY’s net regulatory liability for future income taxes, including both the protected and unprotected portions, allocable to the company’s steam customers ($185 million) is being amortized over the remaining lives of the related assets (with the amortization period for the unprotected portion subject to review in its next steam rate proceeding).
O&R, under its current electric and gas rate plans, has reflected its TCJA net benefits in its electric and gas rates beginning as of January 1, 2019. Under the rate plans, O&R is amortizing its net benefits prior to January 1, 2019 ($22 million) over a three-year period, the protected portion of its net regulatory liability for future income taxes ($123 million) over the remaining lives of the related assets and the unprotected portion ($30 million) over a fifteen-year period.
In January 2018, the NYSPSC issued an order initiating a focused operations audit of the income tax accounting of certain utilities, including CECONY and O&R. The Utilities are unable to estimate the amount or range of their possible loss related to this matter. At March 31, 2020, the Utilities had not accrued a liability related to this matter.
In March 2018, Winter Storms Riley and Quinn caused damage to the Utilities’ electric distribution systems and interrupted service to approximately 209,000 CECONY customers, 93,000 O&R customers and 44,000 RECO customers. At March 31, 2020, CECONY's costs related to March 2018 storms, including Riley and Quinn, amounted to $134 million, including operation and maintenance expenses reflected in its electric rate plan ($15 million), operation and maintenance expenses charged against a storm reserve pursuant to its electric rate plan ($84 million), capital expenditures ($29 million) and removal costs ($6 million). At March 31, 2020, O&R and RECO costs related to 2018 storms amounted to $43 million and $17 million, respectively, most of which were deferred as regulatory assets pursuant to their electric rate plans. In January 2019, O&R began recovering its deferred storm costs over a six-year period in accordance with its New York electric rate plan. In February 2020, RECO began recovering its deferred storm costs over a four-year period in accordance with its New Jersey electric rate plan. The NYSPSC investigated the preparation and response to the storms by CECONY, O&R, and other New York electric utilities, including all aspects of their emergency response plans. In April 2019, following the issuance of a NYSPSC staff report on the investigation, the NYSPSC ordered the utilities to show cause why the NYSPSC should not commence a penalty action against them for violating their emergency response plans. The Utilities are unable to estimate the amount or range of their possible loss related to this matter. At March 31, 2020, the Utilities had not accrued a liability related to this matter.
In July 2018, the NYSPSC commenced an investigation into the rupture of a CECONY steam main located on Fifth Avenue and 21st Street in Manhattan. Debris from the incident included dirt and mud containing asbestos. The response to the incident required the closing of buildings and streets for various periods. The NYSPSC has commenced an investigation. As of March 31, 2020, with respect to the incident, the company incurred operating costs of $17 million for property damage, clean-up and other response costs and invested $9 million in capital and retirement costs. The company is unable to estimate the amount or range of its possible loss related to the incident. At March 31, 2020, the company had not accrued a liability related to the incident.
In March 2019, the NYSPSC ordered CECONY to show cause why the NYSPSC should not commence a penalty action and prudence proceeding against CECONY for alleged violations of gas operator qualification, performance, and inspection requirements. At December 31, 2019, the company had an accrued regulatory liability related to this matter of $10 million, and at March 31, 2020, the company accrued an additional regulatory liability of $5 million. In April 2020, the NYSPSC approved a $15 million settlement agreement for the benefit of CECONY’s gas customers between CECONY and NYSPSC staff related to this matter.
On July 13, 2019, electric service was interrupted to approximately 72,000 CECONY customers on the west side of Manhattan. The NYSPSC and the Northeast Power Coordinating Council, a regional reliability entity, are investigating the July 13, 2019 power outage. Pursuant to the major outage reliability performance provisions of its electric rate plan, as a result of the July 13, 2019 power outage, the company recorded a $5 million negative revenue adjustment. The NYSPSC is also investigating other CECONY power outages that occurred in July 2019, primarily in the Flatbush area of Brooklyn. Primarily due to these outages, pursuant to the rate plan’s annual non-network outage frequency and non-network outage duration reliability performance provisions, the company recorded a $10 million negative revenue adjustment at December 31, 2019. The company is unable to estimate the amount or range of its possible additional loss related to these power outages.
Regulatory Assets and Liabilities
Regulatory assets and liabilities at March 31, 2020 and December 31, 2019 were comprised of the following items:
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|
|
|
|
|
|
|
|
|
|
|
|
Con Edison
|
|
CECONY
|
|
(Millions of Dollars)
|
2020
|
2019
|
|
|
2020
|
|
2019
|
|
|
Regulatory assets
|
|
|
|
|
|
|
Unrecognized pension and other postretirement costs
|
$2,246
|
$2,541
|
|
$2,113
|
$2,403
|
|
Environmental remediation costs
|
735
|
732
|
|
652
|
647
|
|
Revenue taxes
|
333
|
321
|
|
318
|
308
|
|
Property tax reconciliation
|
229
|
219
|
|
222
|
210
|
|
MTA power reliability deferral
|
224
|
248
|
|
224
|
248
|
|
Pension and other postretirement benefits deferrals
|
197
|
71
|
|
169
|
47
|
|
Deferred derivative losses
|
128
|
83
|
|
118
|
76
|
|
System peak reduction and energy efficiency programs
|
115
|
131
|
|
114
|
130
|
|
Municipal infrastructure support costs
|
78
|
75
|
|
78
|
75
|
|
Deferred storm costs
|
73
|
77
|
|
—
|
|
—
|
|
|
Brooklyn Queens demand management program
|
39
|
39
|
|
39
|
39
|
|
Meadowlands heater odorization project
|
34
|
35
|
|
34
|
35
|
|
Unamortized loss on reacquired debt
|
26
|
28
|
|
24
|
26
|
|
Recoverable REV demonstration project costs
|
23
|
21
|
|
20
|
19
|
|
Preferred stock redemption
|
22
|
22
|
|
22
|
22
|
|
Gate station upgrade project
|
19
|
19
|
|
19
|
19
|
|
Non-wire alternative projects
|
14
|
14
|
|
14
|
14
|
|
Workers’ compensation
|
2
|
3
|
|
2
|
3
|
|
Other
|
195
|
180
|
|
183
|
166
|
|
Regulatory assets – noncurrent
|
4,732
|
4,859
|
|
4,365
|
4,487
|
|
Deferred derivative losses
|
142
|
128
|
|
125
|
113
|
|
Recoverable energy costs
|
1
|
—
|
|
|
—
|
|
—
|
|
|
Regulatory assets – current
|
143
|
128
|
|
125
|
113
|
|
Total Regulatory Assets
|
$4,875
|
$4,987
|
|
$4,490
|
$4,600
|
|
Regulatory liabilities
|
|
|
|
|
|
|
Future income tax
|
$2,374
|
$2,426
|
|
$2,224
|
$2,275
|
|
Allowance for cost of removal less salvage
|
1,007
|
989
|
|
859
|
843
|
|
TCJA net benefits*
|
421
|
471
|
|
407
|
454
|
|
Net proceeds from sale of property
|
166
|
173
|
|
166
|
173
|
|
Energy efficiency portfolio standard unencumbered funds
|
120
|
122
|
|
117
|
118
|
|
Net unbilled revenue deferrals
|
95
|
199
|
|
95
|
199
|
|
Pension and other postretirement benefit deferrals
|
65
|
75
|
|
35
|
46
|
|
System benefit charge carrying charge
|
53
|
48
|
|
47
|
44
|
|
Property tax refunds
|
41
|
45
|
|
41
|
45
|
|
Unrecognized other postretirement costs
|
37
|
9
|
|
3
|
—
|
|
|
BQDM and REV Demo reconciliations
|
27
|
27
|
|
25
|
26
|
|
Settlement of gas proceedings
|
24
|
10
|
|
24
|
10
|
|
Sales and use tax refunds
|
19
|
8
|
|
19
|
8
|
|
Earnings sharing - electric, gas and steam
|
18
|
22
|
|
10
|
15
|
|
Settlement of prudence proceeding
|
7
|
8
|
|
7
|
8
|
|
Other
|
215
|
195
|
|
183
|
163
|
|
Regulatory liabilities – noncurrent
|
4,689
|
4,827
|
|
4,262
|
4,427
|
|
Refundable energy costs
|
68
|
44
|
|
38
|
12
|
|
Deferred derivative gains
|
33
|
34
|
|
33
|
34
|
|
Revenue decoupling mechanism
|
22
|
24
|
|
22
|
17
|
|
Regulatory liabilities – current
|
123
|
102
|
|
93
|
63
|
|
Total Regulatory Liabilities
|
$4,812
|
$4,929
|
|
$4,355
|
$4,490
|
* See "Other Regulatory Matters," above.
Note C – Capitalization
In January 2020, Con Edison issued 1,050,000 shares of its common stock for $88 million upon physical settlement of the remaining shares subject to its May 2019 forward sale agreement.
In March 2020, CECONY issued $600 million aggregate principal amount of 3.35 percent debentures, due 2030 and $1,000 million aggregate principal amount of 3.95 percent debentures, due 2050.
The carrying amounts and fair values of long-term debt at March 31, 2020 and December 31, 2019 were:
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2020
|
2019
|
|
Long-Term Debt (including current portion) (a)
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|
Con Edison
|
$21,516
|
$23,381
|
$19,973
|
$22,738
|
|
CECONY
|
$16,544
|
$18,299
|
$14,964
|
$17,505
|
|
|
|
|
(a)
|
Amounts shown are net of unamortized debt expense and unamortized debt discount of $197 million and $170 million for Con Edison and CECONY, respectively, as of March 31, 2020 and $178 million and $151 million for Con Edison and CECONY, respectively, as of December 31, 2019.
|
The fair values of the Companies' long-term debt have been estimated primarily using available market information and at March 31, 2020 are classified as Level 2 (see Note N).
As a result of the January 2019 PG&E bankruptcy (see "Long-Lived and Intangible Assets" in Note A), during the first quarter of 2019, Con Edison reclassified on its consolidated balance sheet the PG&E-related non-recourse project debt that was included in long-term debt to long-term debt due within one year. At March 31, 2020 and December 31, 2019, long-term debt due within one year included $980 million and $1,001 million of PG&E-related project debt, respectively. The lenders for the PG&E-related project debt may, upon written notice, declare principal and interest on the PG&E-related project debt to be due and payable immediately and, if such amounts are not timely paid, foreclose on the related projects. The company is seeking to negotiate agreements with the PG&E-related project debt lenders pursuant to which the lenders would defer exercising these remedies.
Note D – Short-Term Borrowing
At March 31, 2020, Con Edison had $1,208 million of commercial paper outstanding of which $597 million was outstanding under CECONY’s program. The weighted average interest rate at March 31, 2020 was 3.5 percent for both Con Edison and CECONY. At December 31, 2019, Con Edison had $1,692 million of commercial paper outstanding of which $1,137 million was outstanding under CECONY’s program. The weighted average interest rate at December 31, 2019 was 2.0 percent for both Con Edison and CECONY.
At March 31, 2020 and December 31, 2019, no loans were outstanding under the Companies' December 2016 credit agreement (Credit Agreement). An immaterial amount of letters of credit were outstanding under the Credit Agreement as of March 31, 2020 and December 31, 2019.
In April 2020, Con Edison entered into a credit agreement (the Supplemental Credit Agreement) under which banks are committed to provide loans, on a revolving credit basis until July 2, 2020, with an option, subject to certain conditions, for Con Edison to convert all loans outstanding on July 2, 2020 into a 270-day term loan. The banks committed to provide an aggregate amount of up to $750 million of credit. Subject to certain conditions, Con Edison and one or more banks may increase by up to $250 million the aggregate principal amount of loans available under the Supplemental Credit Agreement. Subject to certain exceptions, the commitments and loans under the Supplemental Credit Agreement are subject to mandatory termination and prepayment with the net cash proceeds of debt or equity issuances by Con Edison or its non-regulated subsidiaries. Con Edison intends to use the Supplemental Credit Agreement as additional liquidity and for other general corporate purposes. Con Edison has not entered into any loans under the Supplemental Credit Agreement.
The banks’ commitments under the Supplemental Credit Agreement are subject to certain conditions, including that there be no event of default. The commitments are not subject to maintenance of credit rating levels or the absence of a material adverse change. Upon a change of control of, or upon an event of default by Con Edison, the banks may terminate their commitments and declare the loans outstanding under the Supplemental Credit Agreement immediately due and payable. Events of Default include Con Edison exceeding at any time a ratio of consolidated debt to consolidated total capital of 0.65 to 1; having liens on its assets in an aggregate amount exceeding five percent of its consolidated total capital, subject to certain exceptions; Con Edison or any of its subsidiaries failing to make one or more payments in respect of material financial obligations (in excess of an aggregate $150 million of debt or derivative obligations other than non-recourse debt); the occurrence of an event or condition which results in the acceleration of the maturity of any material debt (in excess of an aggregate $150 million of debt other than non-recourse debt) or enables the holders of such debt to accelerate the maturity thereof; and other customary events of default.
Note E – Pension Benefits
Total Periodic Benefit Cost
The components of the Companies’ total periodic benefit cost for the three months ended March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
Con Edison
|
CECONY
|
|
(Millions of Dollars)
|
2020
|
2019
|
2020
|
2019
|
|
Service cost – including administrative expenses
|
$73
|
$62
|
$69
|
$58
|
|
Interest cost on projected benefit obligation
|
137
|
150
|
129
|
141
|
|
Expected return on plan assets
|
(258)
|
(247)
|
(245)
|
(234)
|
|
Recognition of net actuarial loss
|
175
|
130
|
165
|
123
|
|
Recognition of prior service cost/(credit)
|
(4)
|
(4)
|
(5)
|
(5)
|
|
TOTAL PERIODIC BENEFIT COST
|
$123
|
$91
|
$113
|
$83
|
|
Cost capitalized
|
(31)
|
(26)
|
(29)
|
(24)
|
|
Reconciliation to rate level
|
(64)
|
(5)
|
(62)
|
(4)
|
|
Total expense recognized
|
$28
|
$60
|
$22
|
$55
|
Components of net periodic benefit cost other than service cost are presented outside of operating income on the Companies' consolidated income statements, and only the service cost component is eligible for capitalization. Accordingly, the service cost component is included in the line "Other operations and maintenance" and the non-service cost components are included in the line "Other deductions" in the Companies' consolidated income statements.
Expected Contributions
Based on estimates as of March 31, 2020, Con Edison and CECONY expect to make contributions to the pension plans during 2020 of $474 million (of which $434 million is to be made by CECONY). The Companies’ policy is to fund the total periodic benefit cost of the qualified plan to the extent tax deductible and to also contribute to the non-qualified supplemental plans. During the first three months of 2020, the Companies contributed $4 million to the pension plans, nearly all of which was contributed by CECONY.
Note F – Other Postretirement Benefits
Total Periodic Benefit Cost
The components of the Companies’ total periodic other postretirement benefit cost/(credit) for the three months ended March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
Con Edison
|
CECONY
|
|
(Millions of Dollars)
|
2020
|
|
2019
|
2020
|
2019
|
|
|
Service cost
|
$5
|
$4
|
$4
|
$3
|
|
Interest cost on accumulated other postretirement benefit obligation
|
9
|
11
|
8
|
9
|
|
Expected return on plan assets
|
(16)
|
(16)
|
(14)
|
(14)
|
|
Recognition of net actuarial loss/(gain)
|
27
|
(2)
|
27
|
(2)
|
|
Recognition of prior service credit
|
(1)
|
(1)
|
(1)
|
—
|
|
|
TOTAL PERIODIC OTHER POSTRETIREMENT BENEFIT COST/(CREDIT)
|
$24
|
$(4)
|
$24
|
$(4)
|
|
Cost capitalized
|
(2)
|
(2)
|
(1)
|
(2)
|
|
Reconciliation to rate level
|
(22)
|
3
|
(24)
|
2
|
|
Total credit recognized
|
|
$—
|
|
$(3)
|
$(1)
|
$(4)
|
For information about the presentation of the components of other postretirement benefit costs, see Note E.
Expected Contributions
Based on estimates as of March 31, 2020, Con Edison and CECONY expect to make a contribution of $3 million (all of which is to be made by CECONY) to the other postretirement benefit plans in 2020. The Companies' policy is to fund the total periodic benefit cost of the plans to the extent tax deductible.
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 the undiscounted cost to investigate the sites and, for sites that have been investigated in whole or in part, the cost to remediate the sites, if remediation is necessary and if a reasonable estimate of such cost can be made. Remediation costs are estimated in light of the information available, applicable remediation standards and experience with similar sites.
The accrued liabilities and regulatory assets related to Superfund Sites at March 31, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
Con Edison
|
CECONY
|
|
(Millions of Dollars)
|
2020
|
2019
|
2020
|
2019
|
|
Accrued Liabilities:
|
|
|
|
|
|
Manufactured gas plant sites
|
$636
|
$640
|
$557
|
$561
|
|
Other Superfund Sites
|
101
|
94
|
100
|
93
|
|
Total
|
$737
|
$734
|
$657
|
$654
|
|
Regulatory assets
|
$735
|
$732
|
$652
|
$647
|
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. The Utilities are permitted to recover or defer as regulatory assets (for subsequent recovery through rates) prudently incurred site investigation and remediation costs.
Environmental remediation costs incurred related to Superfund Sites for the three months ended March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
Con Edison
|
CECONY
|
|
(Millions of Dollars)
|
2020
|
2019
|
2020
|
2019
|
|
Remediation costs incurred
|
$5
|
$3
|
$5
|
$2
|
Insurance and other third-party recoveries received by Con Edison or CECONY were immaterial for the three months ended March 31, 2020 and 2019.
In 2019, Con Edison and CECONY estimated that for their manufactured gas plant sites (including CECONY’s Astoria site), the aggregate undiscounted potential liability for the investigation and remediation of coal tar and/or other environmental contaminants could range up to $2.8 billion and $2.6 billion, respectively. 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. At March 31, 2020, Con Edison and CECONY have accrued their estimated aggregate undiscounted potential liabilities for these suits and additional suits that may be brought over the next 15 years as shown in the following table. These estimates were based upon a combination of modeling, historical data analysis and risk factor assessment. Courts have begun, and unless otherwise determined on appeal may continue, to apply different standards for determining liability in asbestos suits than the standard that applied historically. As a result, the Companies currently believe that there is a reasonable possibility of an exposure to loss in excess of the liability accrued for the suits. The Companies are unable to estimate the amount or range of such loss. In addition, certain current and former employees have claimed or are claiming workers’ compensation benefits based on alleged disability from exposure to asbestos. 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, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
Con Edison
|
CECONY
|
|
(Millions of Dollars)
|
2020
|
2019
|
2020
|
2019
|
|
Accrued liability – asbestos suits
|
$8
|
$8
|
$7
|
$7
|
|
Regulatory assets – asbestos suits
|
$8
|
$8
|
$7
|
$7
|
|
Accrued liability – workers’ compensation
|
$77
|
$78
|
$72
|
$73
|
|
Regulatory assets – workers’ compensation
|
$2
|
$3
|
$2
|
$3
|
Note H – Other Material Contingencies
Manhattan Explosion and Fire
On March 12, 2014, two multi-use five-story tall buildings located on Park Avenue between 116th and 117th Streets in Manhattan were destroyed by an explosion and fire. CECONY had delivered gas to the buildings through service lines from a distribution main located below ground on Park Avenue. Eight people died and more than 50 people were injured. Additional buildings were also damaged. The National Transportation Safety Board (NTSB) investigated. The parties to the investigation included the company, the City of New York, the Pipeline and Hazardous Materials Safety Administration and the NYSPSC. In June 2015, the NTSB issued a final report concerning the incident, its probable cause and safety recommendations. The NTSB determined that the probable cause of the incident was (1) the failure of a defective fusion joint at a service tee (which joined a plastic service line to a plastic distribution main) installed by the company that allowed gas to leak from the distribution main and migrate into a building where it ignited and (2) a breach in a City sewer line that allowed groundwater and soil to flow into the sewer, resulting in a loss of support for the distribution main, which caused it to sag and overstressed the defective fusion joint. The NTSB also made safety recommendations, including recommendations to the company that addressed its procedures for the preparation and examination of plastic fusions, training of its staff on conditions for notifications to the City’s Fire Department and extension of its gas main isolation valve installation program. In February 2017, the NYSPSC approved a settlement agreement with the company related to the NYSPSC's investigations of the incident and the practices of qualifying persons to perform plastic fusions. Pursuant to the agreement, the company is providing $27 million of future benefits to customers (for which it has accrued a regulatory liability) and will not recover from customers $126 million of costs for gas emergency response activities that it had previously incurred and expensed. Approximately eighty suits are pending against the company seeking generally unspecified damages and, in some cases, punitive damages, for wrongful death, personal injury, property damage and business interruption. The company has notified its insurers of the incident and believes that the policies in force at the time of the incident will cover the company’s costs, in excess of a required retention (the amount of which is not material), to satisfy any liability it may have for damages in connection with the incident. The company is unable to estimate the amount or range of its possible loss for damages related to the incident. At March 31, 2020, the company had not accrued a liability for damages related to the incident.
Other Contingencies
For information about the PG&E bankruptcy, see "Long-Lived and Intangible Assets" in Note A and Note C. Also, for additional contingencies, see "Other Regulatory Matters" in Note B and “Uncertain Tax Positions” in Note J.
Guarantees
Con Edison and its subsidiaries have entered into various agreements providing financial or performance assurance primarily to third parties on behalf of their subsidiaries. Maximum amounts guaranteed by Con Edison under these agreements totaled $1,913 million and $1,831 million at March 31, 2020 and December 31, 2019, respectively.
A summary, by type and term, of Con Edison’s total guarantees under these agreements at March 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Guarantee Type
|
0 – 3 years
|
4 – 10 years
|
|
> 10 years
|
|
Total
|
|
|
(Millions of Dollars)
|
|
Con Edison Transmission
|
$362
|
$186
|
|
$—
|
|
$548
|
|
Energy transactions
|
432
|
30
|
209
|
671
|
|
Renewable electric production projects
|
218
|
9
|
397
|
624
|
|
Other
|
70
|
—
|
|
—
|
|
70
|
|
Total
|
$1,082
|
$225
|
$606
|
$1,913
|
Con Edison Transmission — Con Edison has guaranteed payment by CET Electric of the contributions CET Electric agreed to make to New York Transco LLC (NY Transco). CET Electric owns a 45.7 percent interest in NY Transco. In April 2019, the New York Independent System Operator (NYISO) selected a transmission project that was jointly proposed by National Grid and NY Transco. The siting, construction and operation of the project will require approvals and permits from appropriate governmental agencies and authorities, including the NYSPSC. The NYISO indicated it will work with the developers to enter into agreements for the development and operation of the projects, including a schedule for entry into service by December 2023. Guarantee amounts shown includes the maximum possible required amount of CET Electric’s contributions for this project as calculated based on the
assumptions that the project is completed at 175 percent of its estimated costs and NY Transco does not use any debt financing for the project.
Energy Transactions — Con Edison guarantees payments on behalf of the Clean Energy Businesses in order to facilitate physical and financial transactions in electricity, gas, pipeline capacity, transportation, oil, 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.
Renewable Electric Production Projects — Con Edison and the Clean Energy Businesses guarantee payments on behalf of their wholly-owned subsidiaries associated with their investment in, or development for others of, solar and wind energy facilities.
Other — Other guarantees include $70 million in guarantees provided by Con Edison to Travelers Insurance Company for indemnity agreements for surety bonds in connection with operation of solar energy facilities and energy service projects of the Clean Energy Businesses.
Note I – Leases
Operating lease cost and cash paid for amounts included in the measurement of lease liabilities for the three months ended March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Con Edison
|
CECONY
|
|
(Millions of Dollars)
|
2020
|
2019
|
2020
|
2019
|
|
Operating lease cost
|
|
$21
|
|
|
$21
|
|
|
$16
|
|
|
$16
|
|
|
Operating lease cash flows
|
|
$11
|
|
|
$8
|
|
|
$4
|
|
|
$4
|
|
As of March 31, 2020, assets recorded as finance leases were $1 million for Con Edison and an immaterial amount for CECONY, and the accumulated amortization associated with finance leases for Con Edison and CECONY were $3 million and $1 million, respectively. As of December 31, 2019, assets recorded as finance leases were $1 million for Con Edison and an immaterial amount for CECONY, and the accumulated amortization associated with finance leases for Con Edison and CECONY were $5 million and $3 million, respectively.
For the three months ended March 31, 2020 and 2019, finance lease costs and cash flows for Con Edison and CECONY were immaterial.
Right-of-use assets obtained in exchange for lease obligations were immaterial for Con Edison and CECONY for the three months ended March 31, 2020 and 2019.
Other information related to leases for Con Edison and CECONY at March 31, 2020 and December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
Con Edison
|
CECONY
|
|
|
2020
|
2019
|
2020
|
2019
|
|
Weighted Average Remaining Lease Term:
|
|
|
|
|
|
Operating leases
|
19.5 years
|
19.8 years
|
13.8 years
|
14.0 years
|
|
Finance leases
|
13.1 years
|
12.2 years
|
2.5 years
|
2.4 years
|
|
Weighted Average Discount Rate:
|
|
|
|
|
|
Operating leases
|
4.3%
|
4.3%
|
3.6%
|
3.6%
|
|
Finance leases
|
3.2%
|
3.5%
|
3.5%
|
4.1%
|
Future minimum lease payments under non-cancellable leases at March 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
Con Edison
|
CECONY
|
|
Year Ending March 31,
|
Operating Leases
|
Finance Leases
|
Operating Leases
|
Finance Leases
|
|
2021
|
$77
|
|
$—
|
|
$59
|
|
$—
|
|
|
2022
|
74
|
—
|
|
56
|
—
|
|
|
2023
|
72
|
—
|
|
54
|
—
|
|
|
2024
|
72
|
—
|
|
54
|
—
|
|
|
2025
|
72
|
—
|
|
55
|
—
|
|
|
All years thereafter
|
983
|
1
|
499
|
—
|
|
|
Total future minimum lease payments
|
$1,350
|
$1
|
$777
|
|
$—
|
|
|
Less: imputed interest
|
(474)
|
—
|
|
(170)
|
—
|
|
|
Total
|
$876
|
$1
|
$607
|
|
$—
|
|
|
Reported as of March 31, 2020
|
|
|
|
|
|
Operating lease liabilities (current)
|
$77
|
|
$—
|
|
$59
|
|
$—
|
|
|
Operating lease liabilities (noncurrent)
|
799
|
—
|
|
548
|
—
|
|
|
Other noncurrent liabilities
|
—
|
|
1
|
—
|
|
—
|
|
|
Total
|
$876
|
$1
|
$607
|
|
$—
|
|
At March 31, 2020, the Companies did not have material obligations under operating or finance leases that had not yet commenced.
The Companies are lessors under certain leases whereby the Companies own real estate and distribution poles and lease portions of them to others. Revenue under such leases was immaterial for Con Edison and CECONY for the three months ended March 31, 2020 and 2019.
Note J – Income Tax
In response to the economic impacts of the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. The CARES Act provides relief to corporate taxpayers by permitting a five-year carryback of net operating losses (NOLs) for tax years 2018, 2019 and 2020, removing the 80 percent limitation when applying the NOLs to carryback years, increasing the 30 percent limitation on interest deductibility to 50 percent of adjusted taxable income for tax years 2019 and 2020, and provides for certain employment tax credits and refunds for eligible employers.
Under the CARES Act, Con Edison will carryback its $29 million NOL from tax year 2018 to tax year 2013 generating a $2.5 million net tax refund for which a tax receivable was established at March 31, 2020. In addition, Con Edison recognized a discrete income tax benefit of $4 million in the first quarter of 2020, due to the higher federal statutory tax rate in 2013. The 2018 federal NOL was recorded at 21 percent and will be carried back to tax year 2013, which had a 35 percent federal statutory tax rate. This tax benefit was primarily recognized at the Clean Energy Businesses.
Con Edison’s income tax expense decreased to $55 million for the three months ended March 31, 2020 from $108 million for the three months ended March 31, 2019. The decrease in income tax expense is primarily due to lower income before income tax expense (excluding income attributable to noncontrolling interest (see Note O)), lower state income taxes, an increase in the amortization of excess deferred federal income taxes due to CECONY’s new rate plan beginning in the first quarter of 2020, and a $4 million income tax benefit due to the ability to carryback a net operating loss (NOL) from the 2018 tax year to the 2013 tax year as allowed under the CARES Act.
CECONY’s income tax expense decreased to $95 million for the three months ended March 31, 2020 from $124 million for the three months ended March 31, 2019. The decrease in income tax expense is primarily due to lower income before income tax expense and an increase in the amortization of excess deferred federal income taxes due to CECONY’s new rate plan beginning in the first quarter of 2020, offset, in part, by higher state income taxes.
Reconciliation of the difference between income tax expense and the amount computed by applying the prevailing statutory income tax rate to income before income taxes for the three months ended March 31, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Con Edison
|
CECONY
|
|
(% of Pre-tax income)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
STATUTORY TAX RATE
|
|
|
|
|
|
Federal
|
21
|
%
|
21
|
%
|
21
|
%
|
21
|
%
|
|
Changes in computed taxes resulting from:
|
|
|
|
|
|
State income tax
|
4
|
|
4
|
|
5
|
|
5
|
|
|
Taxes attributable to non-controlling interest
|
(1
|
)
|
(1
|
)
|
—
|
|
—
|
|
|
Cost of removal
|
2
|
|
1
|
|
2
|
|
1
|
|
|
Other plant-related items
|
(1
|
)
|
—
|
|
(1
|
)
|
—
|
|
|
Renewable energy credits
|
(2
|
)
|
(1
|
)
|
—
|
|
—
|
|
|
CARES Act NOL carryback
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
|
Amortization of excess deferred federal income taxes
|
(9
|
)
|
(3
|
)
|
(8
|
)
|
(3
|
)
|
|
Other
|
(1
|
)
|
(1
|
)
|
—
|
|
(1
|
)
|
|
Effective tax rate
|
12
|
%
|
20
|
%
|
19
|
%
|
23
|
%
|
CECONY deferred as regulatory liabilities its estimated net benefits for its electric service under the TCJA for the three months ended March 31, 2019. The net benefits include the revenue requirement impact of the reduction in the corporate federal income tax rate to 21 percent, the elimination for utilities of bonus depreciation and the amortization of excess deferred federal income taxes the utilities collected from customers that will not need to be paid to the Internal Revenue Service under the TCJA. See “Other Regulatory Matters” in Note B.
Under CECONY’s new electric rate plan that began in the first quarter of 2020, the deferral of its net benefits for its electric service ceased and is included in its new rates. Additionally, the amortization of the unprotected excess deferred federal income taxes for its electric and gas services is being amortized over a five-year period, which increased the tax benefit in the first quarter of 2020.
Uncertain Tax Positions
At March 31, 2020, the estimated liability for uncertain tax positions for Con Edison was $13 million ($3 million for CECONY). Con Edison reasonably expects to resolve within the next twelve months approximately $10 million of various federal and state uncertainties due to the expected completion of ongoing tax examinations, of which the entire amount, if recognized, would reduce Con Edison's effective tax rate. The amount related to CECONY is approximately $1 million, which, if recognized, would reduce CECONY’s effective tax rate. The total amount of unrecognized tax benefits, if recognized, that would reduce Con Edison’s effective tax rate is $13 million ($12 million, net of federal taxes) with $3 million attributable to CECONY.
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 three months ended March 31, 2020, the Companies recognized an immaterial amount of interest expense and penalties for uncertain tax positions in their consolidated income statements. At March 31, 2020 and December 31, 2019, the Companies recognized an immaterial amount of accrued interest on their consolidated balance sheets.
Note K – Revenue Recognition
The following table presents, for the three months ended March 31, 2020 and 2019, revenue from contracts with customers as defined in Accounting Standards Codification (ASC) Topic 606, "Revenue from Contracts with Customers," as well as additional revenue from sources other than contracts with customers, disaggregated by major source.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2020
|
For the Three Months Ended March 31, 2019
|
|
(Millions of Dollars)
|
Revenues from contracts with customers
|
|
Other revenues (a)
|
Total operating revenues
|
Revenues from contracts with customers
|
|
Other revenues (a)
|
Total operating revenues
|
|
CECONY
|
|
|
|
|
|
|
|
|
|
Electric
|
$1,732
|
|
$38
|
$1,770
|
$1,714
|
|
$83
|
$1,797
|
|
Gas
|
833
|
|
1
|
834
|
910
|
|
11
|
|
921
|
|
Steam
|
245
|
|
5
|
250
|
317
|
|
4
|
|
321
|
|
Total CECONY
|
$2,810
|
|
$44
|
$2,854
|
$2,941
|
|
$98
|
$3,039
|
|
O&R
|
|
|
|
|
|
|
|
|
|
Electric
|
128
|
|
8
|
136
|
143
|
|
2
|
145
|
|
Gas
|
93
|
|
4
|
97
|
114
|
|
(1)
|
113
|
|
Total O&R
|
$221
|
|
$12
|
$233
|
$257
|
|
$1
|
$258
|
|
Clean Energy Businesses
|
|
|
|
|
|
|
|
|
|
Renewables
|
114
|
(b)
|
—
|
|
114
|
106
|
(b)
|
—
|
|
106
|
|
Energy services
|
11
|
|
—
|
|
11
|
23
|
|
—
|
|
23
|
|
Other
|
—
|
|
|
21
|
21
|
—
|
|
|
88
|
88
|
|
Total Clean Energy Businesses
|
$125
|
|
$21
|
$146
|
$129
|
|
$88
|
$217
|
|
Con Edison Transmission
|
1
|
|
—
|
|
1
|
1
|
|
—
|
|
1
|
|
Other (c)
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
(1)
|
(1)
|
|
Total Con Edison
|
$3,157
|
|
$77
|
$3,234
|
$3,328
|
|
$186
|
$3,514
|
(a) For the Utilities, this includes revenue from alternative revenue programs, such as the revenue decoupling mechanisms under their New York electric and gas rate plans. For the Clean Energy Businesses, this includes revenue from wholesale services.
(b) Included within the totals for Renewables revenue at the Clean Energy Businesses is $3 million and $2 million for the three months ended March 31, 2020 and 2019, respectively, of revenue related to engineering, procurement and construction services.
|
|
|
|
(c)
|
Parent company and consolidation adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
|
(Millions of Dollars)
|
Unbilled contract revenue (a)
|
Unearned revenue (b)
|
|
|
Unbilled contract revenue (a)
|
Unearned revenue (b)
|
|
|
|
Beginning balance as of January 1,
|
$29
|
$17
|
|
$29
|
$20
|
|
|
Additions (c)
|
14
|
—
|
|
|
24
|
—
|
|
|
|
Subtractions (c)
|
18
|
1
|
(d)
|
15
|
1
|
(d)
|
|
Ending balance as of March 31,
|
$25
|
$16
|
|
$38
|
$19
|
|
|
|
|
|
(a)
|
Unbilled contract revenue represents accumulated incurred costs and earned profits on contracts (revenue arrangements), which have been recorded as revenue, but have not yet been billed to customers, and which represent contract assets as defined in Topic 606. Substantially all accrued unbilled contract revenue is expected to be collected within one year. Unbilled contract revenue arises from the cost-to-cost method of revenue recognition. Unbilled contract revenue from fixed-price type contracts is converted to billed receivables when amounts are invoiced to customers according to contractual billing terms, which generally occur when deliveries or other performance milestones are completed.
|
|
|
|
|
(b)
|
Unearned revenue represents a liability for billings to customers in excess of earned revenue, which are contract liabilities as defined in Topic 606.
|
|
|
|
|
(c)
|
Additions for unbilled contract revenue and subtractions for unearned revenue represent additional revenue earned. Additions for unearned revenue and subtractions for unbilled contract revenue represent billings. Activity also includes appropriate balance sheet classification for the period.
|
|
|
|
|
(d)
|
Of the subtractions from unearned revenue, $1 million was included in the balances as of January 1, 2020 and 2019.
|
As of March 31, 2020, the aggregate amount of the remaining fixed performance obligations of the Clean Energy Businesses under contracts with customers for energy services is $74 million, of which $38 million will be recognized within the next two years, and the remaining $36 million will be recognized pursuant to long-term service and maintenance agreements.
In March 2020, the Utilities began suspending new late payment charges and certain other fees for all customers. The amount of these charges that was not collected for the three months ended March 31, 2020 was $3 million for Con Edison and CECONY. The Utilities also began providing payment extensions for all customers that were scheduled to be disconnected prior to the start of the COVID-19 pandemic. See "COVID-19 Regulatory Matters" in Note B.
Note L – Financial Information by Business Segment
Con Edison’s principal business segments are CECONY’s regulated utility activities, O&R’s regulated utility activities, the Clean Energy Businesses and Con Edison Transmission. CECONY’s principal business segments are its regulated electric, gas and steam utility activities. The financial data for the business segments for the three months ended March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
Operating
revenues
|
Inter-segment
revenues
|
Depreciation and
amortization
|
Operating
income/(loss)
|
|
(Millions of Dollars)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
CECONY
|
|
|
|
|
|
|
|
|
|
Electric
|
$1,770
|
$1,797
|
$4
|
$4
|
$297
|
$257
|
$282
|
$257
|
|
Gas
|
834
|
921
|
2
|
2
|
71
|
55
|
369
|
344
|
|
Steam
|
250
|
321
|
19
|
18
|
22
|
22
|
91
|
125
|
|
Consolidation adjustments
|
—
|
|
—
|
|
(25)
|
(24)
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Total CECONY
|
$2,854
|
$3,039
|
|
$—
|
|
|
$—
|
|
$390
|
$334
|
$742
|
$726
|
|
O&R
|
|
|
|
|
|
|
|
|
|
Electric
|
$136
|
$145
|
|
$—
|
|
|
$—
|
|
$16
|
$15
|
$14
|
$16
|
|
Gas
|
97
|
113
|
—
|
|
—
|
|
6
|
6
|
41
|
38
|
|
Total O&R
|
$233
|
$258
|
|
$—
|
|
|
$—
|
|
$22
|
$21
|
$55
|
$54
|
|
Clean Energy Businesses
|
$146
|
$217
|
|
$—
|
|
|
$—
|
|
$57
|
$58
|
$14
|
$11
|
|
Con Edison Transmission
|
1
|
1
|
—
|
|
—
|
|
1
|
—
|
|
(2)
|
(2)
|
|
Other (a)
|
—
|
|
(1)
|
—
|
|
—
|
|
—
|
|
—
|
|
(1)
|
(3)
|
|
Total Con Edison
|
$3,234
|
$3,514
|
|
$—
|
|
|
$—
|
|
$470
|
$413
|
$808
|
$786
|
(a) Parent company and consolidation adjustments. Other does not represent a business segment.
Note M – Derivative Instruments and Hedging Activities
Con Edison’s subsidiaries hedge market price fluctuations associated with physical purchases and sales of electricity, natural gas, steam and, to a lesser extent, refined fuels by using derivative instruments including futures, forwards, basis swaps, options, transmission congestion contracts and financial transmission rights contracts. These are economic hedges, for which the Utilities and the Clean Energy Business do not elect hedge accounting. The Clean Energy Businesses use interest rate swaps to manage the risks associated with interest rates related to outstanding and expected future debt issuances and borrowings. Derivatives are recognized on the consolidated balance sheet at fair value (see Note N), unless an exception is available under the accounting rules for derivatives and hedging. Qualifying derivative contracts that have been designated as normal purchases or normal sales contracts are not reported at fair value under the accounting rules.
The fair values of the Companies’ derivatives including the offsetting of assets and liabilities on the consolidated balance sheet at March 31, 2020 and December 31, 2019 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
2020
|
|
2019
|
|
|
Balance Sheet Location
|
Gross Amounts of
Recognized
Assets/(Liabilities)
|
Gross
Amounts
Offset
|
Net Amounts
of Assets/
(Liabilities) (a)
|
|
Gross Amounts of
Recognized
Assets/(Liabilities)
|
Gross
Amounts
Offset
|
Net Amounts
of Assets/
(Liabilities) (a)
|
|
|
Con Edison
|
|
|
|
|
|
|
|
|
|
Fair value of derivative assets
|
|
|
|
|
|
|
|
|
|
Current
|
$61
|
$(4)
|
$57
|
(b)
|
$60
|
$(3)
|
$57
|
(b)
|
|
Noncurrent
|
17
|
(9)
|
8
|
|
19
|
(13)
|
6
|
(d)
|
|
Total fair value of derivative assets
|
$78
|
$(13)
|
$65
|
|
$79
|
$(16)
|
$63
|
|
|
Fair value of derivative liabilities
|
|
|
|
|
|
|
|
|
|
Current
|
$(167)
|
$14
|
$(153)
|
(c)
|
$(140)
|
$17
|
$(123)
|
(d)
|
|
Noncurrent
|
(241)
|
13
|
(228)
|
(c)
|
(122)
|
16
|
(106)
|
(d)
|
|
Total fair value of derivative liabilities
|
$(408)
|
$27
|
$(381)
|
|
$(262)
|
$33
|
$(229)
|
|
|
Net fair value derivative assets/(liabilities)
|
$(330)
|
$14
|
$(316)
|
|
$(183)
|
$17
|
$(166)
|
|
|
CECONY
|
|
|
|
|
|
|
|
|
|
Fair value of derivative assets
|
|
|
|
|
|
|
|
|
|
Current
|
$44
|
$(14)
|
$30
|
(b)
|
$39
|
$(6)
|
$33
|
(b)
|
|
Noncurrent
|
16
|
(8)
|
8
|
|
17
|
(12)
|
5
|
|
|
Total fair value of derivative assets
|
$60
|
$(22)
|
$38
|
|
$56
|
$(18)
|
$38
|
|
|
Fair value of derivative liabilities
|
|
|
|
|
|
|
|
|
|
Current
|
$(123)
|
$24
|
$(99)
|
|
$(100)
|
$19
|
$(81)
|
|
|
Noncurrent
|
(122)
|
9
|
(113)
|
|
(80)
|
16
|
(64)
|
|
|
Total fair value of derivative liabilities
|
$(245)
|
$33
|
$(212)
|
|
$(180)
|
$35
|
$(145)
|
|
|
Net fair value derivative assets/(liabilities)
|
$(185)
|
$11
|
$(174)
|
|
$(124)
|
$17
|
$(107)
|
|
|
|
|
|
(a)
|
Derivative instruments and collateral were offset on the consolidated balance sheet as applicable under the accounting rules. The Companies enter into master agreements for their commodity derivatives. These agreements typically provide offset in the event of contract termination. In such case, generally the non-defaulting party’s payable will be offset by the defaulting 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.
|
|
|
|
|
(b)
|
At March 31, 2020 and December 31, 2019, margin deposits for Con Edison ($8 million and $9 million, respectively) and CECONY ($7 million and $8 million, respectively) were classified as derivative assets on the consolidated balance sheet, but not included in the table. Margin is collateral, typically cash, that the holder of a derivative instrument is required to deposit in order to transact on an exchange and to cover its potential losses with its broker or the exchange.
|
|
|
|
|
(c)
|
Includes amounts for interest rate swaps of $(17) million in current liabilities and $(109) million in noncurrent liabilities. At March 31, 2020, the Clean Energy Businesses had interest rate swaps with notional amounts of $910 million. The expiration dates of the swaps range from 2024-2041.
|
|
|
|
|
(d)
|
Includes amounts for interest rate swaps of $1 million in noncurrent assets, $(7) million in current liabilities and $(34) million in noncurrent liabilities. At December 31, 2019, the Clean Energy Businesses had interest rate swaps with notional amounts of $919 million. The expiration dates of the swaps range from 2024-2041.
|
The Utilities generally recover their prudently incurred fuel, purchased power and gas costs, including hedging gains and losses, in accordance with rate provisions approved by the applicable state utility regulators. 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.
The Clean Energy Businesses record realized and unrealized gains and losses on their derivative contracts in purchased power, gas purchased for resale and non-utility revenue in the reporting period in which they occur. The Clean Energy Businesses record changes in the fair value of their interest rate swaps in other interest expense at the end of each reporting period. Management believes that these derivative instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices and interest rates.
The following table presents the realized and unrealized gains or losses on derivatives that have been deferred or recognized in earnings for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
Con Edison
|
|
CECONY
|
|
(Millions of Dollars)
|
Balance Sheet Location
|
2020
|
2019
|
|
2020
|
|
2019
|
|
|
Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:
|
|
|
|
|
Current
|
Deferred derivative gains
|
$(1)
|
$5
|
|
$(1)
|
$3
|
|
Noncurrent
|
Deferred derivative gains
|
3
|
(6)
|
|
3
|
(5)
|
|
Total deferred gains/(losses)
|
|
$2
|
$(1)
|
|
$2
|
$(2)
|
|
Current
|
Deferred derivative losses
|
$(14)
|
$(3)
|
|
$(12)
|
|
$—
|
|
|
Current
|
Recoverable energy costs
|
(96)
|
(18)
|
|
(86)
|
(14)
|
|
Noncurrent
|
Deferred derivative losses
|
(45)
|
(26)
|
|
(42)
|
(26)
|
|
Total deferred gains/(losses)
|
|
$(155)
|
$(47)
|
|
$(140)
|
$(40)
|
|
Net deferred gains/(losses)
|
|
$(153)
|
$(48)
|
|
$(138)
|
$(42)
|
|
|
Income Statement Location
|
|
|
|
|
|
|
Pre-tax gains/(losses) recognized in income
|
|
|
|
|
|
|
|
Gas purchased for resale
|
$(2)
|
$(3)
|
|
|
$—
|
|
|
$—
|
|
|
|
Non-utility revenue
|
5
|
9
|
|
—
|
|
—
|
|
|
|
Other operations and maintenance expense
|
(7)
|
2
|
|
(7)
|
2
|
|
|
|
Other interest expense
|
(86)
|
(9)
|
|
—
|
|
|
|
|
Total pre-tax gains/(losses) recognized in income
|
$(90)
|
$(1)
|
|
$(7)
|
|
$2
|
|
The following table presents the hedged volume of Con Edison’s and CECONY’s commodity derivative transactions at March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Energy
(MWh) (a)(b)
|
Capacity (MW) (a)
|
Natural Gas
(Dt) (a)(b)
|
Refined Fuels
(gallons)
|
|
Con Edison
|
21,682,575
|
|
26,614
|
|
260,204,579
|
|
10,752,000
|
|
|
CECONY
|
19,582,075
|
|
21,900
|
|
241,100,000
|
|
10,752,000
|
|
|
|
|
|
(a)
|
Volumes are reported net of long and short positions, except natural gas collars where the volumes of long positions are reported.
|
|
|
|
|
(b)
|
Excludes electric congestion and gas basis swap contracts, which are associated with electric and gas contracts and hedged volumes.
|
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 Clean Energy Businesses. Credit risk relates to the loss that may result from a counterparty’s nonperformance. The Companies use credit policies to manage this risk, including an established credit approval process, monitoring of counterparty limits, netting provisions within agreements, collateral or prepayment arrangements, credit insurance and credit default swaps. The Companies measure credit risk exposure as the replacement cost for open energy commodity and derivative positions plus amounts owed from counterparties for settled transactions. The replacement cost of open positions represents unrealized gains, net of any unrealized losses where the Companies have a legally enforceable right to offset.
At March 31, 2020, Con Edison and CECONY had $120 million and $7 million of credit exposure in connection with open energy supply net receivables and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $47 million with independent system operators, $36 million with non-investment grade/non-rated counterparties, $28 million with investment-grade counterparties and $9 million with commodity exchange brokers. CECONY’s net credit exposure consisted of $7 million with commodity exchange brokers and an immaterial amount with non-investment-grade counterparties.
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 a party to provide collateral on its derivative instruments that are in a net liability position. The amount of collateral to be provided will depend on the fair value of the derivative instruments and the party’s credit ratings.
The following table presents the aggregate fair value of the Companies’ derivative instruments with credit-risk-related contingent features that are in a net liability position, the collateral posted for such positions 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 at March 31, 2020:
|
|
|
|
|
|
|
|
|
(Millions of Dollars)
|
Con Edison (a)
|
|
CECONY (a)
|
|
|
Aggregate fair value – net liabilities
|
$232
|
|
$210
|
|
|
Collateral posted
|
134
|
|
128
|
|
|
Additional collateral (b) (downgrade one level from current ratings)
|
39
|
|
31
|
|
|
Additional collateral (b) (downgrade to below investment grade from current ratings)
|
123
|
(c)
|
102
|
(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 the Clean Energy Businesses were no longer extended unsecured credit for such purchases, the Companies would be required to post an immaterial amount of additional collateral at March 31, 2020. 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 liability 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 to offset.
|
|
|
|
|
(c)
|
Derivative instruments that are net assets have been excluded from the table. At March 31, 2020, if Con Edison had been downgraded to below investment grade, it would have been required to post additional collateral for such derivative instruments of $32 million.
|
Note N – Fair Value Measurements
The accounting rules for fair value measurements and disclosures define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in a principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets or liabilities. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Companies often make certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, and the risks inherent in the inputs to valuation techniques. The Companies use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
The accounting rules for fair value measurements and disclosures established a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value in three broad levels. The rules require that assets and liabilities be classified in their entirety based on the level of input that is significant to the fair value measurement. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability and may affect the valuation of the asset or liability and their placement within the fair value hierarchy. The Companies classify fair value balances based on the fair value hierarchy defined by the accounting rules for fair value measurements and disclosures as follows:
|
|
|
|
•
|
Level 1 – Consists of assets or liabilities whose value is based on unadjusted quoted prices in active markets at the measurement date. An active market is one in which transactions for assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis. This category includes contracts traded on active exchange markets valued using unadjusted prices quoted directly from the exchange.
|
|
|
|
|
•
|
Level 2 – Consists of assets or liabilities valued using industry standard models and based on prices, other than quoted prices within Level 1, that are either directly or indirectly observable as of the measurement date. The industry standard models consider observable assumptions including time value, volatility factors and current market and contractual prices for the underlying commodities, in addition to other economic measures. This category includes contracts traded on active exchanges or in over-the-counter markets priced with industry standard models.
|
|
|
|
|
•
|
Level 3 – Consists of assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date. Unobservable inputs are developed based on the best available information and subject to cost benefit constraints. This category includes contracts priced using models that are internally developed and contracts placed in illiquid markets. It also includes contracts that expire after the period of time for which quoted prices are available and internal models are used to determine a significant portion of the value.
|
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
|
(Millions of Dollars)
|
Level 1
|
Level 2
|
Level 3
|
Netting
Adjustment (e)
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Netting
Adjustment (e)
|
Total
|
|
Con Edison
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity (a)(b)(c)
|
$8
|
$64
|
$2
|
$(1)
|
$73
|
$4
|
$61
|
$2
|
$4
|
$71
|
|
Interest rate swaps (a)(b)(c)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
—
|
|
—
|
|
1
|
|
Other (a)(b)(d)
|
308
|
125
|
—
|
|
—
|
|
433
|
353
|
125
|
—
|
|
—
|
|
478
|
|
Total assets
|
$316
|
$189
|
$2
|
$(1)
|
$506
|
$357
|
$187
|
$2
|
$4
|
$550
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity (a)(b)(c)
|
$18
|
$245
|
$15
|
$(23)
|
$255
|
$18
|
$174
|
$18
|
$(22)
|
$188
|
|
Interest rate swaps (a)(b)(c)
|
—
|
|
126
|
—
|
|
—
|
|
126
|
—
|
|
41
|
—
|
|
—
|
|
41
|
|
Total liabilities
|
$18
|
$371
|
$15
|
$(23)
|
$381
|
$18
|
$215
|
$18
|
$(22)
|
$229
|
|
CECONY
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity (a)(b)(c)
|
$6
|
$49
|
$1
|
$(11)
|
$45
|
$3
|
$42
|
$1
|
|
$—
|
|
$46
|
|
Other (a)(b)(d)
|
289
|
119
|
—
|
|
—
|
|
408
|
333
|
119
|
—
|
|
—
|
|
452
|
|
Total assets
|
$295
|
$168
|
$1
|
$(11)
|
$453
|
$336
|
$161
|
$1
|
|
$—
|
|
$498
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity (a)(b)(c)
|
$16
|
$218
|
$7
|
$(29)
|
$212
|
$15
|
$147
|
$7
|
$(24)
|
$145
|
|
|
|
|
(a)
|
The Companies’ policy is to review the fair value hierarchy and recognize transfers into and transfers out of the levels at the end of each reporting period. Con Edison and CECONY had no transfers between levels 1, 2, and 3 during the three months ended March 31, 2020. Con Edison and CECONY had $24 million and $22 million of commodity derivative liabilities transferred from level 3 to level 2 during the year ended December 31, 2019 because of availability of observable market data due to the decrease in the terms of certain contracts from beyond three years as of September 30, 2019 to less than three years as of December 31, 2019.
|
|
|
|
|
(b)
|
Level 2 assets and liabilities include investments held in the deferred compensation plan and/or non-qualified retirement plans, exchange-traded contracts where there is insufficient market liquidity to warrant inclusion in Level 1, certain over-the-counter derivative instruments for electricity, refined products and natural gas. Derivative instruments classified as Level 2 are valued using industry standard models that incorporate corroborated observable inputs; such as pricing services or prices from similar instruments that trade in liquid markets, time value and volatility factors.
|
|
|
|
|
(c)
|
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, 2020 and December 31, 2019, the Companies determined that nonperformance risk would have no material impact on their financial position or results of operations.
|
|
|
|
|
(d)
|
Other assets are comprised of assets such as life insurance contracts within the deferred compensation plan and non-qualified retirement plans.
|
|
|
|
|
(e)
|
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.
|
The employees in the Companies’ risk management group develop and maintain the Companies’ valuation policies and procedures for, and verify pricing and fair value valuation of, commodity derivatives and interest rate swaps. Under the Companies’ policies and procedures, multiple independent sources of information are obtained for forward price curves used to value commodity derivatives and interest rate swaps. Fair value and changes in fair value of commodity derivatives and interest rate swaps 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 Clean Energy Businesses. The risk management group reports to the Companies’ Vice President and Treasurer.
|
|
|
|
|
|
|
|
|
|
Fair Value of Level 3 at March 31, 2020
|
Valuation
Techniques
|
Unobservable Inputs
|
Range
|
|
|
(Millions of Dollars)
|
|
Con Edison – Commodity
|
|
Electricity
|
$(14)
|
Discounted Cash Flow
|
Forward capacity prices (a)
|
$0.10-$8.75 per kW-month
|
|
Transmission Congestion Contracts/Financial Transmission Rights
|
1
|
Discounted Cash Flow
|
Inter-zonal forward price curves adjusted for historical zonal losses (b)
|
$(2.40)-$3.50 per MWh
|
|
Total Con Edison—Commodity
|
$(13)
|
|
|
|
|
CECONY – Commodity
|
|
Electricity
|
$(7)
|
Discounted Cash Flow
|
Forward capacity prices (a)
|
$0.36-$8.75 per kW-month
|
|
Transmission Congestion Contracts
|
1
|
Discounted Cash Flow
|
Inter-zonal forward price curves adjusted for historical zonal losses (b)
|
$0.13-$2.10 per MWh
|
|
Total CECONY—Commodity
|
$(6)
|
|
|
|
|
|
|
|
(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, 2020 and 2019 and classified as Level 3 in the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
Con Edison
|
CECONY
|
|
(Millions of Dollars)
|
2020
|
2019
|
2020
|
|
2019
|
|
|
Beginning balance as of January 1,
|
$(16)
|
$(13)
|
$(6)
|
$(2)
|
|
Included in earnings
|
(5)
|
(4)
|
(2)
|
—
|
|
|
Included in regulatory assets and liabilities
|
1
|
(5)
|
—
|
|
(3)
|
|
Settlements
|
7
|
3
|
2
|
—
|
|
|
Ending balance as of March 31,
|
$(13)
|
$(19)
|
$(6)
|
$(5)
|
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 regulators. 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 Clean Energy Businesses, realized and unrealized gains and losses on Level 3 commodity derivative assets and liabilities are reported in non-utility revenues ($1 million gain and $1 million loss) and purchased power costs (immaterial for both periods) on the consolidated income statement for the three months ended March 31, 2020 and 2019, respectively. The change in fair value relating to Level 3 commodity derivative assets and liabilities held at March 31, 2020 and 2019 is included in non-utility revenues ($1 million gain and $1 million loss) and purchased power costs (immaterial for both periods) on the consolidated income statement for the three months ended March 31, 2020 and 2019, respectively.
Note O – Variable Interest Entities
The accounting rules for consolidation address the consolidation of a variable interest entity (VIE) by a business enterprise that is the primary beneficiary. A VIE is an entity that does not have a sufficient equity investment at risk to permit it to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest. The primary beneficiary is the business enterprise that has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and either absorbs a significant amount of the VIE’s losses or has the right to receive benefits that could be significant to the VIE.
The Companies enter into arrangements including leases, partnerships and electricity purchase agreements, with various entities. As a result of these arrangements, the Companies retain or may retain a variable interest in these entities.
CECONY
CECONY has an ongoing long-term electricity purchase agreement with Brooklyn Navy Yard Cogeneration Partners, LP, a potential VIE. In 2019, a request was made of this counterparty for information necessary to determine whether the entity was a VIE and whether CECONY is the primary beneficiary; however, the information
was not made available. The payments for this contract constitute CECONY’s maximum exposure to loss with respect to the potential VIE.
Clean Energy Businesses
In September 2019, the Clean Energy Businesses, which previously owned an 80 percent membership interest in OCI Solar San Antonio 4 LLC (Texas Solar 4), acquired the remaining 20 percent interest. As a result of the acquisition, Texas Solar 4 is a consolidated entity. Prior to the acquisition, Con Edison had a variable interest in Texas Solar 4, as to which Con Edison was the primary beneficiary since the power to direct the activities that most significantly impact the economics of Texas Solar 4 was held by the Clean Energy Businesses. Texas Solar 4 owns a project company that developed a 40 MW (AC) solar electric production project. Electricity generated by the project is sold pursuant to a long-term power purchase agreement. Con Edison's earnings from Texas Solar 4 for the three months ended March 31, 2019 were immaterial.
In December 2018, the Clean Energy Businesses completed its acquisition of Sempra Solar Holdings, LLC. Included in the acquisition were certain operating projects (Tax Equity Projects) with a noncontrolling tax equity investor to which a percentage of earnings, tax attributes and cash flows are allocated. The Tax Equity Projects are consolidated entities in which Con Edison has less than a 100 percent membership interest. Con Edison is the primary beneficiary since the power to direct the activities that most significantly impact the economics of the Tax Equity Projects is held by the Clean Energy Businesses. Electricity generated by the Tax Equity Projects is sold to utilities and municipalities pursuant to long-term power purchase agreements. For the three months ended March 31, 2020, the hypothetical liquidation at book value (HLBV) method of accounting for the Tax Equity Projects resulted in $17 million of income ($13 million, after tax) for the tax equity investor and a $14 million loss ($10 million, after tax) for Con Edison. For the three months ended March 31, 2019, the HLBV method of accounting for the Tax Equity Projects resulted in $21 million of income ($16 million, after tax) for the tax equity investor and a $19 million loss ($14 million, after tax) for Con Edison.
Con Edison has determined that the use of HLBV accounting is reasonable and appropriate to attribute income and loss to the tax equity investors. Using the HLBV method, the company's earnings from the projects are adjusted to reflect the income or loss allocable to the tax equity investors calculated based on how the project would allocate and distribute its cash if it were to sell all of its assets for their carrying amounts and liquidate at a particular point in time. Under the HLBV method, the company calculates the liquidation value allocable to the tax equity investors at the beginning and end of each period based on the contractual liquidation waterfall and adjusts its income for the period to reflect the change in the liquidation value allocable to the tax equity investors.
At March 31, 2020 and December 31, 2019, Con Edison’s consolidated balance sheet included the following amounts associated with its VIEs:
|
|
|
|
|
|
|
|
|
|
Tax Equity Projects
|
|
|
Great Valley Solar
(c)(d)
|
Copper Mountain - Mesquite Solar
(c)(e)
|
|
(Millions of Dollars)
|
2020
|
2019
|
2020
|
2019
|
|
Non-utility property, less accumulated depreciation (f)(g)
|
$291
|
$293
|
$456
|
$461
|
|
Other assets
|
41
|
40
|
181
|
128
|
|
Total assets (a)
|
$332
|
$333
|
$637
|
$589
|
|
Other liabilities
|
16
|
17
|
67
|
18
|
|
Total liabilities (b)
|
$16
|
$17
|
$67
|
$18
|
|
|
|
|
(a)
|
The assets of the Tax Equity Projects represent assets of a consolidated VIE that can be used only to settle obligations of the consolidated VIE.
|
|
|
|
|
(b)
|
The liabilities of the Tax Equity Projects represent liabilities of a consolidated VIE for which creditors do not have recourse to the general credit of the primary beneficiary.
|
|
|
|
|
(c)
|
Con Edison did not provide any financial or other support during the year that was not previously contractually required.
|
|
|
|
|
(d)
|
Great Valley Solar consists of the Great Valley Solar 1, Great Valley Solar 2, Great Valley Solar 3 and Great Valley Solar 4 projects, for which the noncontrolling interest of the tax equity investor was $66 million and $62 million at March 31, 2020 and December 31, 2019, respectively.
|
|
|
|
|
(e)
|
Copper Mountain - Mesquite Solar consists of the Copper Mountain Solar 4, Mesquite Solar 2 and Mesquite Solar 3 projects for which the noncontrolling interest of the tax equity investor was $137 million and $126 million at March 31, 2020 and December 31, 2019, respectively.
|
|
|
|
|
(f)
|
Non-utility property is reduced by accumulated depreciation of $11 million for Great Valley Solar and $19 million for Copper Mountain - Mesquite Solar at March 31, 2020.
|
|
|
|
|
(g)
|
Non-utility property is reduced by accumulated depreciation of $9 million for Great Valley Solar and $15 million for Copper Mountain - Mesquite Solar at December 31, 2019.
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Note P – New Financial Accounting Standards
In December 2019, the FASB issued amendments to the guidance for income taxes through ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The amendments in this update simplify the accounting for income taxes by removing certain exceptions such as: 1) the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items, 2) the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, 3) the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary, and 4) the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. For public entities, the amendments are effective for reporting periods beginning after December 15, 2020. Early adoption is permitted. The Companies are in the process of evaluating the potential impact of the new guidance on the Companies’ financial position, results of operations and liquidity.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). The United Kingdom’s Financial Conduct Authority has announced that it intends to stop persuading or compelling banks to submit the London Interbank Offered Rate (“LIBOR”), a benchmark interest rate referenced in a variety of agreements, after 2021. ASU 2020-04 provides entities with optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The guidance is applied prospectively from any date beginning March 12, 2020. The optional relief is temporary and generally cannot be applied to contract modifications and hedging relationships entered into or evaluated after, December 31, 2022. The Companies do not expect the new guidance to have a material impact on their financial position, results of operations or liquidity.