Income Tax

12 Months Ended

Dec. 31, 2012

Income Tax

Note L – Income Tax

The components of income tax are as follows:

	Con Edison									CECONY
(Millions of Dollars)	2012			2011			2010			2012			2011			2010
State
Current	$	29		$	56		$	23		$	53		$	53		$	13
Deferred		97			63			106			53			55			100
Federal
Current		(13	)		53			(144	)		110			43			(139	)
Deferred		493			434			569			318			413			527
Amortization of investment tax credits		(6	)		(6	)		(6	)		(5	)		(6	)		(6	)
Total charge to income tax expense	$	600		$	600		$	548		$	529		$	558		$	495

The tax effects of temporary differences, which gave rise to deferred tax assets and liabilities, are as follows:

	Con Edison						CECONY
(Millions of Dollars)	2012			2011			2012			2011
Deferred tax liabilities:
Depreciation	$	4,210		$	3,652		$	3,909		$	3,464
Regulatory asset – future income tax		2,061			1,971			1,962			1,891
Unrecognized pension and other postretirement costs		2,472			2,554			2,202			2,255
State income tax		1,060			920			897			811
Capitalized overheads		565			536			496			470
Pension		736			682			730			709
Investment tax credits		49			55			47			52
Other		931			743			528			467
Total deferred tax liabilities		12,084			11,113			10,771			10,119
Deferred tax assets:
Unrecognized pension and other postretirement costs		2,472			2,554			2,202			2,255
State income tax		382			336			357			309
Regulatory liability – future income tax		126			173			117			167
Other		1,028			753			836			624
Total deferred tax assets		4,008			3,816			3,512			3,355
Net deferred tax liabilities and investment tax credits	$	8,076		$	7,297		$	7,259		$	6,764
Deferred income taxes and investment tax credits – Noncurrent	$	8,372		$	7,563		$	7,452		$	6,921
Deferred tax assets – Current		(296	)		(266	)		(193	)		(157	)
Net deferred tax liabilities and investment tax credits	$	8,076		$	7,297		$	7,259		$	6,764

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 is as follows:

	Con Edison									CECONY
(% of Pre-tax income)	2012			2011			2010			2012			2011			2010
STATUTORY TAX RATE
Federal		35	%		35	%		35	%		35	%		35	%		35	%
Changes in computed taxes resulting from:
State income tax		4			5			5			4			5			5
Cost of removal		(4	)		(4	)		(4	)		(4	)		(4	)		(4	)
Other		(1	)		-			(1	)		(1	)		-			(1	)
Effective Tax Rate		34	%		36	%		35	%		34	%		36	%		35	%

For federal income tax purposes, Con Edison has a net operating loss carryforward available of $11 million and $632 million from 2012 and 2011, respectively, primarily as a result of accelerated depreciation and storm related deductions, which if unused will expire in 2032 and 2031. Con Edison has recorded a deferred tax asset for its loss carryforward, and no valuation allowance has been provided, as it is more likely than not that the deferred tax asset will be realized.

For New York State income tax purposes, Con Edison has a net operating loss carryforward available from 2009 of $284 million, primarily as a result of repair allowance deductions discussed below. A deferred tax asset has been recognized for this New York State net operating loss that will not expire until 2029. A valuation allowance has not been provided; as it is more likely than not that the deferred tax asset will be realized.

Uncertain Tax Positions

Under the accounting rules for income taxes, an enterprise shall not recognize the tax benefit attributable to a tax position unless such position is more likely than not to be sustained upon examination by taxing authorities, including resolution of any related appeals and litigation processes, based solely on the technical merits of the position.

The IRS has essentially completed its field audits of the Con Edison’s federal income tax returns through 2011. Con Edison’s federal income tax returns for 1998 through 2011 reflect certain tax positions with which the IRS does not or may not agree. Any adjustments to federal income tax returns would result in changes to Con Edison’s New York state income tax returns. In addition, Con Edison’s state income tax returns for years beginning with 2006 remain open for examination.

The Companies’ 2011 and 2010 federal income tax returns reflect, among other things, an incremental current deduction for the costs of certain repairs to utility plant (the “repair allowance deductions”). Prior to 2009, Con Edison capitalized such costs and included these costs in depreciation expense in its federal income tax returns. At December 31, 2012, with respect to the repair allowance deductions, Con Edison recorded a liability for uncertain tax positions of $72 million ($66 million attributable to CECONY).

In August 2011, the IRS issued guidance regarding the use and evaluation of statistical samples and sampling estimates. This guidance provides a safe harbor method of determining whether certain expenditures for electric transmission and distribution property can be currently deducted for federal income tax purposes. No guidance was issued related to generation, gas, or steam property.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits for Con Edison and CECONY follows:

	Con Edison									CECONY
(Millions of Dollars)	2012			2011			2010			2012			2011			2010
Balance at January 1	$	130		$	93		$	86		$	114		$	79		$	92
Additions based on tax positions related to the current year		12			76			5			11			74			4
Additions based on tax positions of prior years		-			4			67			-			3			49
Reductions for tax positions of prior years		(57	)		(43	)		(4	)		(52	)		(42	)		(4	)
Settlements		1			-			(61	)		1			-			(62	)
Balance at December 31	$	86		$	130		$	93		$	74		$	114		$	79

At December 31, 2012, the Companies’ estimated liabilities for uncertain tax positions ($86 million for Con Edison and $74 million for CECONY) were classified on their respective consolidated balance sheets either as current liabilities ($44 million for Con Edison and $36 million for CECONY) or as a reduction to current deferred tax assets ($42 million for Con Edison and $38 million for CECONY). The Companies reasonably expect to resolve these uncertain tax positions with the IRS in the next 12 months.

The Companies recognize interest accrued related to the liability for uncertain tax positions in interest expense and would recognize penalties, if any, in operating expenses in the Companies’ consolidated income statements. In 2012, 2011 and 2010, the Companies recognized an immaterial amount of interest and no penalties for uncertain tax positions in their consolidated income statements. At December 31, 2012 and 2011, the Companies recognized an immaterial amount of interest and no penalties in their consolidated balance sheets.

At December 31, 2012, the total amount of unrecognized tax benefits that, if recognized, would affect the Companies’ effective tax rate is $7 million ($1 million attributable to CECONY).

In January 2013, a federal appeals court reversed a trial court decision that had allowed deductions claimed by Con Edison relating to Con Edison Development’s LILO transactions. See Note J.

CECONY [Member]

Income Tax

Note L – Income Tax

The components of income tax are as follows:

	Con Edison									CECONY
(Millions of Dollars)	2012			2011			2010			2012			2011			2010
State
Current	$	29		$	56		$	23		$	53		$	53		$	13
Deferred		97			63			106			53			55			100
Federal
Current		(13	)		53			(144	)		110			43			(139	)
Deferred		493			434			569			318			413			527
Amortization of investment tax credits		(6	)		(6	)		(6	)		(5	)		(6	)		(6	)
Total charge to income tax expense	$	600		$	600		$	548		$	529		$	558		$	495

The tax effects of temporary differences, which gave rise to deferred tax assets and liabilities, are as follows:

	Con Edison						CECONY
(Millions of Dollars)	2012			2011			2012			2011
Deferred tax liabilities:
Depreciation	$	4,210		$	3,652		$	3,909		$	3,464
Regulatory asset – future income tax		2,061			1,971			1,962			1,891
Unrecognized pension and other postretirement costs		2,472			2,554			2,202			2,255
State income tax		1,060			920			897			811
Capitalized overheads		565			536			496			470
Pension		736			682			730			709
Investment tax credits		49			55			47			52
Other		931			743			528			467
Total deferred tax liabilities		12,084			11,113			10,771			10,119
Deferred tax assets:
Unrecognized pension and other postretirement costs		2,472			2,554			2,202			2,255
State income tax		382			336			357			309
Regulatory liability – future income tax		126			173			117			167
Other		1,028			753			836			624
Total deferred tax assets		4,008			3,816			3,512			3,355
Net deferred tax liabilities and investment tax credits	$	8,076		$	7,297		$	7,259		$	6,764
Deferred income taxes and investment tax credits – Noncurrent	$	8,372		$	7,563		$	7,452		$	6,921
Deferred tax assets – Current		(296	)		(266	)		(193	)		(157	)
Net deferred tax liabilities and investment tax credits	$	8,076		$	7,297		$	7,259		$	6,764

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 is as follows:

	Con Edison									CECONY
(% of Pre-tax income)	2012			2011			2010			2012			2011			2010
STATUTORY TAX RATE
Federal		35	%		35	%		35	%		35	%		35	%		35	%
Changes in computed taxes resulting from:
State income tax		4			5			5			4			5			5
Cost of removal		(4	)		(4	)		(4	)		(4	)		(4	)		(4	)
Other		(1	)		-			(1	)		(1	)		-			(1	)
Effective Tax Rate		34	%		36	%		35	%		34	%		36	%		35	%

For federal income tax purposes, Con Edison has a net operating loss carryforward available of $11 million and $632 million from 2012 and 2011, respectively, primarily as a result of accelerated depreciation and storm related deductions, which if unused will expire in 2032 and 2031. Con Edison has recorded a deferred tax asset for its loss carryforward, and no valuation allowance has been provided, as it is more likely than not that the deferred tax asset will be realized.

For New York State income tax purposes, Con Edison has a net operating loss carryforward available from 2009 of $284 million, primarily as a result of repair allowance deductions discussed below. A deferred tax asset has been recognized for this New York State net operating loss that will not expire until 2029. A valuation allowance has not been provided; as it is more likely than not that the deferred tax asset will be realized.

Uncertain Tax Positions

Under the accounting rules for income taxes, an enterprise shall not recognize the tax benefit attributable to a tax position unless such position is more likely than not to be sustained upon examination by taxing authorities, including resolution of any related appeals and litigation processes, based solely on the technical merits of the position.

The IRS has essentially completed its field audits of the Con Edison’s federal income tax returns through 2011. Con Edison’s federal income tax returns for 1998 through 2011 reflect certain tax positions with which the IRS does not or may not agree. Any adjustments to federal income tax returns would result in changes to Con Edison’s New York state income tax returns. In addition, Con Edison’s state income tax returns for years beginning with 2006 remain open for examination.

The Companies’ 2011 and 2010 federal income tax returns reflect, among other things, an incremental current deduction for the costs of certain repairs to utility plant (the “repair allowance deductions”). Prior to 2009, Con Edison capitalized such costs and included these costs in depreciation expense in its federal income tax returns. At December 31, 2012, with respect to the repair allowance deductions, Con Edison recorded a liability for uncertain tax positions of $72 million ($66 million attributable to CECONY).

In August 2011, the IRS issued guidance regarding the use and evaluation of statistical samples and sampling estimates. This guidance provides a safe harbor method of determining whether certain expenditures for electric transmission and distribution property can be currently deducted for federal income tax purposes. No guidance was issued related to generation, gas, or steam property.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits for Con Edison and CECONY follows:

	Con Edison									CECONY
(Millions of Dollars)	2012			2011			2010			2012			2011			2010
Balance at January 1	$	130		$	93		$	86		$	114		$	79		$	92
Additions based on tax positions related to the current year		12			76			5			11			74			4
Additions based on tax positions of prior years		-			4			67			-			3			49
Reductions for tax positions of prior years		(57	)		(43	)		(4	)		(52	)		(42	)		(4	)
Settlements		1			-			(61	)		1			-			(62	)
Balance at December 31	$	86		$	130		$	93		$	74		$	114		$	79

At December 31, 2012, the Companies’ estimated liabilities for uncertain tax positions ($86 million for Con Edison and $74 million for CECONY) were classified on their respective consolidated balance sheets either as current liabilities ($44 million for Con Edison and $36 million for CECONY) or as a reduction to current deferred tax assets ($42 million for Con Edison and $38 million for CECONY). The Companies reasonably expect to resolve these uncertain tax positions with the IRS in the next 12 months.

The Companies recognize interest accrued related to the liability for uncertain tax positions in interest expense and would recognize penalties, if any, in operating expenses in the Companies’ consolidated income statements. In 2012, 2011 and 2010, the Companies recognized an immaterial amount of interest and no penalties for uncertain tax positions in their consolidated income statements. At December 31, 2012 and 2011, the Companies recognized an immaterial amount of interest and no penalties in their consolidated balance sheets.

At December 31, 2012, the total amount of unrecognized tax benefits that, if recognized, would affect the Companies’ effective tax rate is $7 million ($1 million attributable to CECONY).

In January 2013, a federal appeals court reversed a trial court decision that had allowed deductions claimed by Con Edison relating to Con Edison Development’s LILO transactions. See Note J.