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. Derivatives are recognized on the consolidated balance sheet at fair value (see Note L), 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’ commodity derivatives including the offsetting of assets and liabilities on the consolidated balance sheet at June 30, 2017 and December 31, 2016 were:



(Millions of Dollars)	2017				2016
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	$93	$(78)	$15	(b)	$81	$(64)	$17	(b)
Noncurrent	63	(63)	—		49	(43)	6
Total fair value of derivative assets	$156	$(141)	$15		$130	$(107)	$23
Fair value of derivative liabilities
Current	$(153)	$89	$(64)		$(138)	$61	$(77)
Noncurrent	(136)	62	(74)		(91)	52	(39)	(c)
Total fair value of derivative liabilities	$(289)	$151	$(138)		$(229)	$113	$(116)
Net fair value derivative assets/(liabilities)	$(133)	$10	$(123)	(b)	$(99)	$6	$(93)	(b) (c)
CECONY
Fair value of derivative assets
Current	$52	$(48)	$4	(b)	$52	$(45)	$7	(b)
Noncurrent	53	(53)	—		41	(35)	6
Total fair value of derivative assets	$105	$(101)	$4		$93	$(80)	$13
Fair value of derivative liabilities
Current	$(105)	$56	$(49)		$(111)	$45	$(66)
Noncurrent	(119)	53	(66)		(77)	44	(33)
Total fair value of derivative liabilities	$(224)	$109	$(115)		$(188)	$89	$(99)
Net fair value derivative assets/(liabilities)	$(119)	$8	$(111)	(b)	$(95)	$9	$(86)	(b)

(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 June 30, 2017 and December 31, 2016, margin deposits for Con Edison ($7 million and $7 million, respectively) and CECONY ($7 million and $7 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)	Does not include $(1) million for interest rate swap.

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. Management believes that these derivative instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices.

The following table presents the realized and unrealized gains or losses on commodity derivatives that have been deferred or recognized in earnings for the three and six months ended June 30, 2017 and 2016:



		For the Three Months Ended June 30,
		Con Edison					CECONY
(Millions of Dollars)	Balance Sheet Location	2017			2016		2017		2016
Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:
Current	Deferred derivative gains	$(21)			$10		$(17)		$9
Noncurrent	Deferred derivative gains	—			1		—		—
Total deferred gains/(losses)		$(21)			$11		$(17)		$9
Current	Deferred derivative losses	$22			$68		$20		$61
Current	Recoverable energy costs	(40)			(52)		(39)		(47)
Noncurrent	Deferred derivative losses	(9)			68		(8)		62
Total deferred gains/(losses)		$(27)			$84		$(27)		$76
Net deferred gains/(losses)		$(48)			$95		$(44)		$85
	Income Statement Location
Pre-tax gain/(loss) recognized in income
	Purchased power expense		$—		$45	(b)		$—		$—
	Gas purchased for resale	(51)			(23)		—		—
	Non-utility revenue	(8)		(a)	5	(b)	—		—
Total pre-tax gain/(loss) recognized in income		$(59)			$27			$—		$—


(a)	For the three months ended June 30, 2017, Con Edison recorded an unrealized pre-tax loss in non-utility operating revenue ($7 million).


(b)	For the three months ended June 30, 2016, Con Edison recorded an unrealized pre-tax gain in purchased power expense ($97 million gain).



		For the Six Months Ended June 30,
		Con Edison					CECONY
(Millions of Dollars)	Balance Sheet Location	2017			2016		2017		2016
Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:
Current	Deferred derivative gains	$(22)			$7		$(19)		$5
Noncurrent	Deferred derivative gains	(3)			1		(3)		(1)
Total deferred gains/(losses)		$(25)			$8		$(22)		$4
Current	Deferred derivative losses	$20			$38		$21		$33
Current	Recoverable energy costs	(85)			(125)		(78)		(113)
Noncurrent	Deferred derivative losses	(29)			12		(28)		11
Total deferred gains/(losses)		$(94)			$(75)		$(85)		$(69)
Net deferred gains/(losses)		$(119)			$(67)		$(107)		$(65)
	Income Statement Location
Pre-tax gain/(loss) recognized in income
	Purchased power expense		$—		$(70)	(b)		$—		$—
	Gas purchased for resale	(114)			(33)		—		—
	Non-utility revenue	6		(a)	17	(b)	—		—
Total pre-tax gain/(loss) recognized in income		$(108)			$(86)			$—		$—


(a)	For the six months ended June 30, 2017, Con Edison recorded an unrealized pre-tax loss in non-utility operating revenue ($4 million).


(b)	For the six months ended June 30, 2016, Con Edison recorded unrealized pre-tax gains and losses in non-utility operating revenue ($1 million loss) and purchased power expense ($35 million gain).

The following table presents the hedged volume of Con Edison’s and CECONY’s derivative transactions at June 30, 2017:



	Electric Energy (MWh) (a)(b)	Capacity (MW) (a)	Natural Gas (Dt) (a)(b)	Refined Fuels (gallons)
Con Edison	33,854,855	9,319	99,241,963	1,680,000
CECONY	31,442,175	4,500	91,970,000	1,680,000


(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 June 30, 2017, Con Edison and CECONY had $70 million and $9 million of credit exposure in connection with energy supply and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $23 million with investment-grade counterparties, $21 million with non-investment grade/non-rated counterparties$13 million with commodity exchange brokers, and $13 million with independent system operators. CECONY’s net credit exposure consisted of $7 million with commodity exchange brokers and $2 million with 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 June 30, 2017:



(Millions of Dollars)	Con Edison (a)		CECONY (a)
Aggregate fair value – net liabilities	$128		$113
Collateral posted	41		41
Additional collateral (b) (downgrade one level from current ratings)	16		15
Additional collateral (b) (downgrade to below investment grade from current ratings)	99	(c)	84	(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 additional collateral of $12 million at June 30, 2017. 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 June 30, 2017, if Con Edison had been downgraded to below investment grade, it would have been required to post additional collateral for such derivative instruments of $14 million.

Interest Rate Swap

In December 2016, the Clean Energy Businesses acquired Coram Wind project which holds an interest rate swap that terminates in June 2024, pursuant to which it pays a fixed-rate of 2.0855 percent and receives a LIBOR-based variable rate. The fair value of this interest rate swap was a liability of $1 million as of June 30, 2017 and December 31, 2016 on Con Edison’s consolidated balance sheet.