Income Tax

12 Months Ended

Dec. 31, 2013

Income Tax

Note L – Income Tax

The components of income tax are as follows:

	Con Edison									CECONY
(Millions of Dollars)	2013			2012			2011			2013			2012			2011
State
Current	$	151		$	29		$	56		$	111		$	53		$	53
Deferred		(70	)		97			63			(14	)		53			55
Federal
Current		285			(13	)		53			187			110			43
Deferred		115			493			434			241			318			413
Amortization of investment tax credits		(5	)		(6	)		(6	)		(5	)		(5	)		(6	)
Total charge to income tax expense	$	476		$	600		$	600		$	520		$	529		$	558

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

	Con Edison						CECONY
(Millions of Dollars)	2013			2012			2013			2012
Deferred tax liabilities:
Depreciation	$	4,602		$	4,210		$	4,277		$	3,909
Regulatory asset – future income tax		2,294			2,061			2,165			1,962
State income tax		1,111			1,060			1,008			897
Unrecognized pension and other postretirement costs		1,109			2,312			1,060			2,202
Pension		674			736			667			730
Capitalized overheads		566			565			501			496
Unamortized investment tax credits		43			49			42			47
Other		1,048			931			869			528
Total deferred tax liabilities		11,447			11,924			10,589			10,771
Deferred tax assets:
Unrecognized pension and other postretirement costs		1,109			2,312			1,060			2,202
Regulatory liability – future income tax		126			126			112			117
State income tax		555			382			500			357
Loss carryforwards		12			252			-			136
Loss carryforwards, valuation reserve		(12	)		(15	)		-			-
Other		1,313			791			1,185			700
Total deferred tax assets		3,103			3,848			2,857			3,512
Net deferred tax liabilities and investment tax credits	$	8,344		$	8,076		$	7,732		$	7,259
Deferred income taxes and investment tax credits – noncurrent	$	8,466		$	8,372		$	7,832		$	7,452
Deferred tax assets – current		(122	)		(296	)		(100	)		(193	)
Net deferred tax liabilities and investment tax credits	$	8,344		$	8,076		$	7,732		$	7,259

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)	2013			2012			2011			2013			2012			2011
STATUTORY TAX RATE
Federal		35	%		35	%		35	%		35	%		35	%		35	%
Changes in computed taxes resulting from:
State income tax		4			4			5			5			4			5
Cost of removal		(5	)		(4	)		(4	)		(5	)		(4	)		(4	)
Manufacturing deduction		(1	)		-			-			-			-			-
Other		(2	)		(1	)		-			(1	)		(1	)		-
Effective Tax Rate		31	%		34	%		36	%		34	%		34	%		36	%

In 2013, Con Edison applied its entire amount of federal and New York State net operating loss carryforwards of $529 million and $213 million, respectively. For New York City income tax purposes, Con Edison has a net operating loss carryforward available from the years 1999 through 2013 for which a deferred tax asset of $12 million has been recognized and will not expire until the years 2019 through 2033. A full valuation allowance has been provided; as it is not more likely than not that the deferred tax asset will be realized.

In September 2013, the IRS issued final regulations, effective in 2014, that provide guidance on the appropriate tax treatment of costs incurred to acquire, produce or improve tangible property, as well as routine maintenance and repair costs. Proposed regulations were issued addressing the tax treatment of asset dispositions. The application of these regulations is not expected to have a material impact on the Companies’ financial position, results of operations or liquidity.

Uncertain Tax Positions

Under the accounting rules for income taxes, the Companies are not permitted to 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 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, the Companies capitalized such costs and included these costs in depreciation expense in federal income tax returns. In 2012, with respect to the repair allowance deductions, Con Edison and CECONY recorded liabilities for uncertain tax positions of $72 million and $66 million, respectively. In 2013, the IRS accepted the Companies’ repair allowance deductions. As a result of this settlement, Con Edison and CECONY reduced their estimated liabilities for prior year uncertain tax positions by $72 million and $66 million, respectively, with a corresponding increase to accumulated deferred income tax liabilities.

In addition, as a result of the January 2013 Court of Appeals decision (see “Lease In/Lease Out Transactions” in Note J), Con Edison increased its estimated prior year liabilities for federal and state uncertain tax positions by $249 million, with a corresponding reduction to accumulated deferred income tax liabilities. In June 2013, Con Edison entered into a closing agreement with the IRS regarding the 1997 and 1999 LILO transactions, as a result of which Con Edison decreased its estimated prior year liabilities for federal and state uncertain tax positions by $249 million, with a corresponding increase to its current income tax liability. These changes to the Companies’ estimated liabilities for uncertain tax positions had no impact on income tax expense for the year ended December 31, 2013.

During the third quarter of 2013, the IRS completed its audits of the Companies’ federal income tax returns for the tax years 1998 through 2011 and Con Edison and CECONY recognized income tax benefits of approximately $13 million and $7 million, respectively, including $6 million that favorably affected Con Edison’s effective tax rate in 2013. Any adjustments to the federal income tax returns would result in changes to the Companies’ state income tax returns. The Companies’ state income tax returns for their primary jurisdiction, New York, for years beginning with 2006 remain open for examination.

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

	Con Edison									CECONY
(Millions of Dollars)	2013			2012			2011			2013			2012			2011
Balance at January 1	$	86		$	130		$	93		$	74		$	114		$	79
Additions based on tax positions related to the current year		5			12			76			-			11			74
Additions based on tax positions of prior years		253			-			4			-			-			3
Reductions for tax positions of prior years		(86	)		(57	)		(43	)		(74	)		(52	)		(42	)
Settlements		(249	)		1			-			-			1			-
Balance at December 31	$	9		$	86		$	130		$	-		$	74		$	114

At December 31, 2013, the Companies’ estimated liabilities for uncertain tax positions ($9 million for Con Edison and an immaterial amount for CECONY) were classified on their respective consolidated balance sheets as a noncurrent liability ($9 million for Con Edison) and as a current liability (an immaterial amount for CECONY). As of December 31, 2013, the Companies reasonably expect to resolve an immaterial amount of their uncertain tax positions within the next 12 months.

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 2013, Con Edison recognized $121 million of interest expense ($131 million related to the LILO transactions, less a reduction of $10 million in accrued interest expense primarily associated with repair allowance deductions and reversing other uncertain tax positions in 2013). In 2012 and 2011, the Companies recognized an immaterial amount of interest and no penalties for uncertain tax positions in their consolidated income statements. At December 31, 2013 and 2012, the Companies recognized an immaterial amount of interest and no penalties in their consolidated balance sheets.

At December 31, 2013, the total amount of unrecognized tax benefits that, if recognized, would affect the Companies’ effective tax rate is $9 million for Con Edison and an immaterial amount for CECONY.

CECONY [Member]

Income Tax

Note L – Income Tax

The components of income tax are as follows:

	Con Edison									CECONY
(Millions of Dollars)	2013			2012			2011			2013			2012			2011
State
Current	$	151		$	29		$	56		$	111		$	53		$	53
Deferred		(70	)		97			63			(14	)		53			55
Federal
Current		285			(13	)		53			187			110			43
Deferred		115			493			434			241			318			413
Amortization of investment tax credits		(5	)		(6	)		(6	)		(5	)		(5	)		(6	)
Total charge to income tax expense	$	476		$	600		$	600		$	520		$	529		$	558

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

	Con Edison						CECONY
(Millions of Dollars)	2013			2012			2013			2012
Deferred tax liabilities:
Depreciation	$	4,602		$	4,210		$	4,277		$	3,909
Regulatory asset – future income tax		2,294			2,061			2,165			1,962
State income tax		1,111			1,060			1,008			897
Unrecognized pension and other postretirement costs		1,109			2,312			1,060			2,202
Pension		674			736			667			730
Capitalized overheads		566			565			501			496
Unamortized investment tax credits		43			49			42			47
Other		1,048			931			869			528
Total deferred tax liabilities		11,447			11,924			10,589			10,771
Deferred tax assets:
Unrecognized pension and other postretirement costs		1,109			2,312			1,060			2,202
Regulatory liability – future income tax		126			126			112			117
State income tax		555			382			500			357
Loss carryforwards		12			252			-			136
Loss carryforwards, valuation reserve		(12	)		(15	)		-			-
Other		1,313			791			1,185			700
Total deferred tax assets		3,103			3,848			2,857			3,512
Net deferred tax liabilities and investment tax credits	$	8,344		$	8,076		$	7,732		$	7,259
Deferred income taxes and investment tax credits – noncurrent	$	8,466		$	8,372		$	7,832		$	7,452
Deferred tax assets – current		(122	)		(296	)		(100	)		(193	)
Net deferred tax liabilities and investment tax credits	$	8,344		$	8,076		$	7,732		$	7,259

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)	2013			2012			2011			2013			2012			2011
STATUTORY TAX RATE
Federal		35	%		35	%		35	%		35	%		35	%		35	%
Changes in computed taxes resulting from:
State income tax		4			4			5			5			4			5
Cost of removal		(5	)		(4	)		(4	)		(5	)		(4	)		(4	)
Manufacturing deduction		(1	)		-			-			-			-			-
Other		(2	)		(1	)		-			(1	)		(1	)		-
Effective Tax Rate		31	%		34	%		36	%		34	%		34	%		36	%

In 2013, Con Edison applied its entire amount of federal and New York State net operating loss carryforwards of $529 million and $213 million, respectively. For New York City income tax purposes, Con Edison has a net operating loss carryforward available from the years 1999 through 2013 for which a deferred tax asset of $12 million has been recognized and will not expire until the years 2019 through 2033. A full valuation allowance has been provided; as it is not more likely than not that the deferred tax asset will be realized.

In September 2013, the IRS issued final regulations, effective in 2014, that provide guidance on the appropriate tax treatment of costs incurred to acquire, produce or improve tangible property, as well as routine maintenance and repair costs. Proposed regulations were issued addressing the tax treatment of asset dispositions. The application of these regulations is not expected to have a material impact on the Companies’ financial position, results of operations or liquidity.

Uncertain Tax Positions

Under the accounting rules for income taxes, the Companies are not permitted to 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 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, the Companies capitalized such costs and included these costs in depreciation expense in federal income tax returns. In 2012, with respect to the repair allowance deductions, Con Edison and CECONY recorded liabilities for uncertain tax positions of $72 million and $66 million, respectively. In 2013, the IRS accepted the Companies’ repair allowance deductions. As a result of this settlement, Con Edison and CECONY reduced their estimated liabilities for prior year uncertain tax positions by $72 million and $66 million, respectively, with a corresponding increase to accumulated deferred income tax liabilities.

In addition, as a result of the January 2013 Court of Appeals decision (see “Lease In/Lease Out Transactions” in Note J), Con Edison increased its estimated prior year liabilities for federal and state uncertain tax positions by $249 million, with a corresponding reduction to accumulated deferred income tax liabilities. In June 2013, Con Edison entered into a closing agreement with the IRS regarding the 1997 and 1999 LILO transactions, as a result of which Con Edison decreased its estimated prior year liabilities for federal and state uncertain tax positions by $249 million, with a corresponding increase to its current income tax liability. These changes to the Companies’ estimated liabilities for uncertain tax positions had no impact on income tax expense for the year ended December 31, 2013.

During the third quarter of 2013, the IRS completed its audits of the Companies’ federal income tax returns for the tax years 1998 through 2011 and Con Edison and CECONY recognized income tax benefits of approximately $13 million and $7 million, respectively, including $6 million that favorably affected Con Edison’s effective tax rate in 2013. Any adjustments to the federal income tax returns would result in changes to the Companies’ state income tax returns. The Companies’ state income tax returns for their primary jurisdiction, New York, for years beginning with 2006 remain open for examination.

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

	Con Edison									CECONY
(Millions of Dollars)	2013			2012			2011			2013			2012			2011
Balance at January 1	$	86		$	130		$	93		$	74		$	114		$	79
Additions based on tax positions related to the current year		5			12			76			-			11			74
Additions based on tax positions of prior years		253			-			4			-			-			3
Reductions for tax positions of prior years		(86	)		(57	)		(43	)		(74	)		(52	)		(42	)
Settlements		(249	)		1			-			-			1			-
Balance at December 31	$	9		$	86		$	130		$	-		$	74		$	114

At December 31, 2013, the Companies’ estimated liabilities for uncertain tax positions ($9 million for Con Edison and an immaterial amount for CECONY) were classified on their respective consolidated balance sheets as a noncurrent liability ($9 million for Con Edison) and as a current liability (an immaterial amount for CECONY). As of December 31, 2013, the Companies reasonably expect to resolve an immaterial amount of their uncertain tax positions within the next 12 months.

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 2013, Con Edison recognized $121 million of interest expense ($131 million related to the LILO transactions, less a reduction of $10 million in accrued interest expense primarily associated with repair allowance deductions and reversing other uncertain tax positions in 2013). In 2012 and 2011, the Companies recognized an immaterial amount of interest and no penalties for uncertain tax positions in their consolidated income statements. At December 31, 2013 and 2012, the Companies recognized an immaterial amount of interest and no penalties in their consolidated balance sheets.

At December 31, 2013, the total amount of unrecognized tax benefits that, if recognized, would affect the Companies’ effective tax rate is $9 million for Con Edison and an immaterial amount for CECONY.