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Fair Value Measurements
3 Months Ended
Mar. 31, 2013
Fair Value Measurements

Note L — Fair Value Measurements

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

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

 

   

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

   

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

   

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

 

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

 

     Level 1     Level 2     Level 3    

Netting

Adjustments(d)

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

Derivative assets:

                   

Commodity (a)(e)

    $    2        $    2        $  71        $  19        $36        $11        $(20     $   2        $  89        $  34   

Other assets (c)(e)

    109        102        112        103                                    221        205   

Total

    $111        $104        $183        $122        $36        $11        $(20     $   2        $310        $239   

Derivative liabilities:

                   

Commodity (a)(e)

    $    8        $    8        $  72        $  35        $22        $ —        $(67     $(27     $  35        $  16   

Interest rate contract (b)(e)

                  5                                           5          

Total

    $    8        $    8        $  77        $  35        $22        $ —        $(67     $(27     $  40        $  16   

 

(a) A portion of the commodity derivatives categorized in Level 3 is valued using an internally developed model with observable inputs. The models also include some less readily observable inputs resulting in the classification of the entire contract as Level 3. See Note K.
(b) See Note K.
(c) Other assets are comprised of assets such as life insurance contracts within the deferred compensation plan and non-qualified retirement plans.
(d) Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.
(e) The Companies’ policy is to recognize transfers into and transfers out of the levels at the end of the reporting period. There were no transfers between levels 1, 2, and 3 for the three months ended March 31, 2013.

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

 

     Level 1     Level 2     Level 3    

Netting

Adjustments(d)

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

Derivative assets:

                   

Commodity (a)(e)

    $   —        $ —        $  43        $    8        $33        $10        $(10     $ 12        $  66        $  30   

Other assets (c)(e)(f)

    106        99        107        98                                    213        197   

Total

    $106        $99        $150        $106        $33        $10        $(10     $ 12        $279        $227   

Derivative liabilities:

                   

Commodity (a)(e)(h)

    $  12        $12        $116        $  62        $38        $ —        $(94     $(35     $  72        $  39   

Interest rate contract (b)(e)(g)

                  6                                           6          

Total

    $  12        $12        $122        $  62        $38        $ —        $(94     $(35     $  78        $  39   

 

(a) A significant portion of the commodity derivative contracts categorized in Level 3 is valued using either an industry acceptable model or an internally developed model with observable inputs. The models also include some less readily observable inputs resulting in the classification of the entire contract as Level 3. See Note K.
(b) See Note K.
(c) Other assets are comprised of assets such as life insurance contracts within the deferred compensation plan and non-qualified retirement plans.
(d) Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.
(e) The Companies’ policy is to recognize transfers into and transfers out of the levels at the end of the reporting period.
(f) On March 31, 2012, other assets of $105 million for Con Edison and $95 million for CECONY were transferred from Level 3 to Level 2 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall as of March 31, 2012.
(g) On March 31, 2012, interest rate contract of $8 million was transferred from Level 3 to Level 2 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall.
(h) During 2012, Con Edison transferred commodity derivate contract liabilities of $2 million from Level 1 to Level 2, $9 million from Level 2 to Level 1, $2 million from Level 2 to Level 3, and $11 million from Level 3 to Level 2 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall.

 

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

 

    

Fair Value of
Level 3 at
March 31, 2013

(Millions of Dollars)

 

Valuation

Techniques

  Unobservable Inputs   Range

Con Edison—Commodity

         

Electricity

    $ 12     Discounted Cash Flow  

Forward energy prices (a)

Forward capacity prices

  $28-$116 per MWH

$1.50-$14.20 KW- month

Electricity Wholesale Contract

      1     Discounted Cash Flow  

Forward energy prices (b)

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

  $33-$49 per MWH

$2.50-$110 per SREC

Standard Offer Capacity Agreements

      (12 )   Discounted Cash Flow  

Forward capacity prices (a)

Forward price escalator (a)

Present value factor (a)

  $166 MW-day

0%-3%

1.66%

Transmission Congestion Contracts / Financial Transmission Rights

      13     Discounted Cash Flow  

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

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

  17.5%-38%

8.5%-49%

 

                  Inter-zonal forward price curves and for historical zonal losses (b)   $0.11-$5.74

Total Con Edison—Commodity

    $ 14              

CECONY—Commodity

         

Transmission Congestion Contracts

    $ 11     Discounted Cash Flow  

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

 

17.5%-38%

                  Discount to adjust auction prices for historical monthly realized settlements (b)   8.5%-49%

 

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

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

 

     For Three Months Ended March 31, 2013  
           

Total Gains/(Losses)—

Realized and Unrealized

                                           
(Millions of Dollars)   Beginning
Balance as of
January 1, 2013
    Included in
Earnings
    Included in
Regulatory Assets
and Liabilities
    Purchases     Issuances     Sales     Settlements     Transfer
In/Out of
Level 3
   

Ending

Balance as of
March 31,

2013

 

Con Edison

                 

Derivatives:

                 

Commodity

    $ (5     $31        $5        $4        $—        $—        $(21     $—        $14   

CECONY

                 

Derivatives:

                 

Commodity

    $10        $10        $1        $4        $—        $—        $(14     $—        $11   

 

 

     For Three Months Ended March 31, 2012  
           

Total Gains/(Losses)—

Realized and Unrealized

                                           
(Millions of Dollars)   Beginning
Balance as of
January 1, 2012
    Included in
Earnings
    Included in
Regulatory Assets
and Liabilities
    Purchases     Issuances     Sales     Settlements     Transfer
In/Out of
Level 3
   

Ending

Balance as of
March 31,

2012

 

Con Edison

                 

Derivatives:

                 

Commodity

    $(62     $(58     $(17     $6        $—        $—        $38        $   —        $(93

Interest rate contract

    (8     (1                                 1        8          

Other assets(a)

    99        3        3                                    (105       

Total

    $  29        $(56     $(14     $6        $—        $—        $39        $(97     $(93

CECONY

                 

Derivatives:

                 

Commodity

    $  (7     $  (5     $  (7     $6        $—        $—        $ —        $   —        $(13

Other assets(a)

    90        3        2                                    (95       

Total

    $  83        $  (2     $  (5     $6        $—        $—        $ —        $(95     $(13

 

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

 

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

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

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

CECONY [Member]
 
Fair Value Measurements

Note L — Fair Value Measurements

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

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

 

   

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

   

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

   

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

 

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

 

     Level 1     Level 2     Level 3    

Netting

Adjustments(d)

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

Derivative assets:

                   

Commodity (a)(e)

    $    2        $    2        $  71        $  19        $36        $11        $(20     $   2        $  89        $  34   

Other assets (c)(e)

    109        102        112        103                                    221        205   

Total

    $111        $104        $183        $122        $36        $11        $(20     $   2        $310        $239   

Derivative liabilities:

                   

Commodity (a)(e)

    $    8        $    8        $  72        $  35        $22        $ —        $(67     $(27     $  35        $  16   

Interest rate contract (b)(e)

                  5                                           5          

Total

    $    8        $    8        $  77        $  35        $22        $ —        $(67     $(27     $  40        $  16   

 

(a) A portion of the commodity derivatives categorized in Level 3 is valued using an internally developed model with observable inputs. The models also include some less readily observable inputs resulting in the classification of the entire contract as Level 3. See Note K.
(b) See Note K.
(c) Other assets are comprised of assets such as life insurance contracts within the deferred compensation plan and non-qualified retirement plans.
(d) Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.
(e) The Companies’ policy is to recognize transfers into and transfers out of the levels at the end of the reporting period. There were no transfers between levels 1, 2, and 3 for the three months ended March 31, 2013.

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

 

     Level 1     Level 2     Level 3    

Netting

Adjustments(d)

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

Derivative assets:

                   

Commodity (a)(e)

    $   —        $ —        $  43        $    8        $33        $10        $(10     $ 12        $  66        $  30   

Other assets (c)(e)(f)

    106        99        107        98                                    213        197   

Total

    $106        $99        $150        $106        $33        $10        $(10     $ 12        $279        $227   

Derivative liabilities:

                   

Commodity (a)(e)(h)

    $  12        $12        $116        $  62        $38        $ —        $(94     $(35     $  72        $  39   

Interest rate contract (b)(e)(g)

                  6                                           6          

Total

    $  12        $12        $122        $  62        $38        $ —        $(94     $(35     $  78        $  39   

 

(a) A significant portion of the commodity derivative contracts categorized in Level 3 is valued using either an industry acceptable model or an internally developed model with observable inputs. The models also include some less readily observable inputs resulting in the classification of the entire contract as Level 3. See Note K.
(b) See Note K.
(c) Other assets are comprised of assets such as life insurance contracts within the deferred compensation plan and non-qualified retirement plans.
(d) Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.
(e) The Companies’ policy is to recognize transfers into and transfers out of the levels at the end of the reporting period.
(f) On March 31, 2012, other assets of $105 million for Con Edison and $95 million for CECONY were transferred from Level 3 to Level 2 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall as of March 31, 2012.
(g) On March 31, 2012, interest rate contract of $8 million was transferred from Level 3 to Level 2 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall.
(h) During 2012, Con Edison transferred commodity derivate contract liabilities of $2 million from Level 1 to Level 2, $9 million from Level 2 to Level 1, $2 million from Level 2 to Level 3, and $11 million from Level 3 to Level 2 because of reassessment of the levels in the fair value hierarchy within which certain inputs fall.

 

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

 

    

Fair Value of
Level 3 at
March 31, 2013

(Millions of Dollars)

 

Valuation

Techniques

  Unobservable Inputs   Range

Con Edison—Commodity

         

Electricity

    $ 12     Discounted Cash Flow  

Forward energy prices (a)

Forward capacity prices

  $28-$116 per MWH

$1.50-$14.20 KW- month

Electricity Wholesale Contract

      1     Discounted Cash Flow  

Forward energy prices (b)

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

  $33-$49 per MWH

$2.50-$110 per SREC

Standard Offer Capacity Agreements

      (12 )   Discounted Cash Flow  

Forward capacity prices (a)

Forward price escalator (a)

Present value factor (a)

  $166 MW-day

0%-3%

1.66%

Transmission Congestion Contracts / Financial Transmission Rights

      13     Discounted Cash Flow  

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

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

  17.5%-38%

8.5%-49%

 

                  Inter-zonal forward price curves and for historical zonal losses (b)   $0.11-$5.74

Total Con Edison—Commodity

    $ 14              

CECONY—Commodity

         

Transmission Congestion Contracts

    $ 11     Discounted Cash Flow  

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

 

17.5%-38%

                  Discount to adjust auction prices for historical monthly realized settlements (b)   8.5%-49%

 

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

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

 

     For Three Months Ended March 31, 2013  
           

Total Gains/(Losses)—

Realized and Unrealized

                                           
(Millions of Dollars)   Beginning
Balance as of
January 1, 2013
    Included in
Earnings
    Included in
Regulatory Assets
and Liabilities
    Purchases     Issuances     Sales     Settlements     Transfer
In/Out of
Level 3
   

Ending

Balance as of
March 31,

2013

 

Con Edison

                 

Derivatives:

                 

Commodity

    $ (5     $31        $5        $4        $—        $—        $(21     $—        $14   

CECONY

                 

Derivatives:

                 

Commodity

    $10        $10        $1        $4        $—        $—        $(14     $—        $11   

 

 

     For Three Months Ended March 31, 2012  
           

Total Gains/(Losses)—

Realized and Unrealized

                                           
(Millions of Dollars)   Beginning
Balance as of
January 1, 2012
    Included in
Earnings
    Included in
Regulatory Assets
and Liabilities
    Purchases     Issuances     Sales     Settlements     Transfer
In/Out of
Level 3
   

Ending

Balance as of
March 31,

2012

 

Con Edison

                 

Derivatives:

                 

Commodity

    $(62     $(58     $(17     $6        $—        $—        $38        $   —        $(93

Interest rate contract

    (8     (1                                 1        8          

Other assets(a)

    99        3        3                                    (105       

Total

    $  29        $(56     $(14     $6        $—        $—        $39        $(97     $(93

CECONY

                 

Derivatives:

                 

Commodity

    $  (7     $  (5     $  (7     $6        $—        $—        $ —        $   —        $(13

Other assets(a)

    90        3        2                                    (95       

Total

    $  83        $  (2     $  (5     $6        $—        $—        $ —        $(95     $(13

 

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

 

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

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

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