Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2014

Derivative Instruments and Hedging Activities

Note L – Derivative Instruments and Hedging Activities

Under the accounting rules for derivatives and hedging, derivatives are recognized on the balance sheet at fair value, unless an exception is available under the accounting rules. Certain qualifying derivative contracts have been designated as normal purchases or normal sales contracts. These contracts are not reported at fair value under the accounting rules.

Energy Price Hedging

Con Edison’s subsidiaries hedge market price fluctuations associated with physical purchases and sales of electricity, natural gas, and steam by using derivative instruments including futures, forwards, basis swaps, options, transmission congestion contracts and financial transmission rights contracts.

The Companies enter into master agreements for their commodity derivatives. These agreements typically provide for setoff in the event of contract termination. In such case, generally the non-defaulting or non-affected party’s payable will be set-off by the other 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.

The fair values of the Companies’ commodity derivatives including the offsetting of assets and liabilities at March 31, 2014 were:

(Millions of Dollars)
Commodity Derivatives	Gross Amounts of Recognized Assets/(Liabilities)			Gross Amounts Offset in the Statement of Financial Position			Net Amounts of Assets/(Liabilities) Presented in the Statement of Financial Position			Gross Amounts Not Offset in the Statement of Financial Position				Net Amount
										Financial instruments		Cash collateral received
Con Edison
Derivative assets	$	232		$	(94	)	$	138	(a)	$	—	$	—	$	138	(a)
Derivative liabilities		(95	)		89			(6	)		—		—		(6	)
Net derivative assets/(liabilities)	$	137		$	(5	)	$	132	(a)	$	—	$	—	$	132	(a)
CECONY
Derivative assets	$	83		$	(34	)	$	49	(a)	$	—	$	—	$	49	(a)
Derivative liabilities		(36	)		33			(3	)		—		—		(3	)
Net derivative assets/(liabilities)	$	47		$	(1	)	$	46	(a)	$	—	$	—	$	46	(a)

(a) At March 31, 2014, Con Edison and CECONY had margin deposits of $25 million and $14 million, respectively, classified as derivative assets in the balance sheet, but not included in the table. As required by an exchange, a margin is collateral, typically cash, that the holder of a derivative instrument has to deposit in order to transact on an exchange and to cover its potential losses with its broker or the exchange.

The fair values of the Companies’ commodity derivatives including the offsetting of assets and liabilities at December 31, 2013 were:

(Millions of Dollars)
Commodity Derivatives	Gross Amounts of Recognized Assets/(Liabilities)		Gross Amounts Offset in the Statement of Financial Position			Net Amounts of Assets/(Liabilities) Presented in the Statement of Financial Position			Gross Amounts Not Offset in the Statement of Financial Position				Net Amount
									Financial instruments		Cash collateral received
Con Edison
Derivative assets	$	166	$	(101)		$	65	(a)	$	—	$	—	$	65	(a)
Derivative liabilities		(113)		98			(15	)		—		—		(15	)
Net derivative assets/(liabilities)	$	53	$	(3	)	$	50	(a)	$	—	$	—	$	50	(a)
CECONY
Derivative assets	$	41	$	(32)		$	9	(a)	$	—	$	—	$	9	(a)
Derivative liabilities		(51)		37			(14	)		—		—		(14	)
Net derivative assets/(liabilities)	$	(10)	$	5		$	(5	)(a)	$	—	$	—	$	(5	)(a)

(a) At December 31, 2013, Con Edison and CECONY had margin deposits of $17 million and $16 million, respectively, classified as derivative assets in the balance sheet, but not included in the table. As required by an exchange, a margin is collateral, typically cash, that the holder of a derivative instrument has to deposit in order to transact on an exchange and to cover its potential losses with its broker or the exchange.

Credit Exposure

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 competitive 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 of setoff.

At March 31, 2014, Con Edison and CECONY had $236 million and $48 million of credit exposure in connection with energy supply and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $96 million with independent system operators, $78 million with commodity exchange brokers, $60 million with investment-grade counterparties and $2 million with non-investment grade/non-rated counterparties. CECONY’s net credit exposure consisted of $28 million with commodity exchange brokers and $20 million with investment-grade counterparties.

Economic Hedges

The Companies enter into certain derivative instruments that do not qualify or are not designated as hedges under the accounting rules for derivatives and hedging. However, management believes these instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices.

The fair values of the Companies’ commodity derivatives at March 31, 2014 were:

(Millions of Dollars)	Fair Value of Commodity Derivatives(a) Balance Sheet Location	Con Edison			CECONY
Derivative Assets
Current	Other current assets	$	193		$	65
Long-term	Other deferred charges and noncurrent assets		39			18
Total derivative assets		$	232		$	83
Impact of netting			(69	)		(20	)
Net derivative assets		$	163		$	63
Derivative Liabilities
Current	Fair value of derivative liabilities	$	68		$	21
Long-term	Fair value of derivative liabilities		27			15
Total derivative liabilities		$	95		$	36
Impact of netting			(89	)		(33	)
Net derivative liabilities		$	6		$	3

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

The fair values of the Companies’ commodity derivatives at December 31, 2013 were:

(Millions of Dollars)	Fair Value of Commodity Derivatives(a) Balance Sheet Location	Con Edison			CECONY
Derivative Assets
Current	Other current assets	$	134		$	27
Long-term	Other deferred charges and noncurrent assets		32			14
Total derivative assets		$	166		$	41
Impact of netting			(84	)		(16	)
Net derivative assets		$	82		$	25
Derivative Liabilities
Current	Fair value of derivative liabilities	$	82		$	32
Long-term	Fair value of derivative liabilities		31			19
Total derivative liabilities		$	113		$	51
Impact of netting			(98	)		(37	)
Net derivative liabilities		$	15		$	14

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

The Utilities generally recover all of their prudently incurred fuel, purchased power and gas cost, including hedging gains and losses, in accordance with rate provisions approved by the applicable state utility commissions. 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. Con Edison’s competitive energy businesses record realized and unrealized gains and losses on their derivative contracts in earnings in the reporting period in which they occur.

The following table presents the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the three months ended March 31, 2014:

Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a) Deferred or Recognized in Income for the Three Months Ended March 31, 2014
(Millions of Dollars)	Balance Sheet Location	Con Edison			CECONY
Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:
Current	Deferred derivative gains	$	30		$	25
Long-term	Deferred derivative gains		4			4
Total deferred gains/(losses)		$	34		$	29
Current	Deferred derivative losses	$	17		$	17
Current	Recoverable energy costs		94			77
Long-term	Deferred derivative losses		2			2
Total deferred gains/(losses)		$	113		$	96
Net deferred gains/(losses)		$	147		$	125
	Income Statement Location
Pre-tax gain/(loss) recognized in income
	Purchased power expense	$	175	(b)	$	—
	Gas purchased for resale		(14	)		—
	Non-utility revenue		(24	)(b)		—
Total pre-tax gain/(loss) recognized in income		$	137		$	—

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

(b) For the three months ended March 31, 2014, Con Edison recorded in purchased power expense an unrealized pre-tax gain of $20 million.

The following table presents the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the three months ended March 31, 2013:

Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a) Deferred or Recognized in Income for the Three Months Ended March 31, 2013
(Millions of Dollars)	Balance Sheet Location	Con Edison			CECONY
Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:
Current	Deferred derivative gains	$	9		$	8
Long-term	Regulatory liabilities		2			1
Total deferred gains/(losses)		$	11		$	9
Current	Deferred derivative losses	$	38		$	32
Current	Recoverable energy costs		11			10
Long-term	Deferred derivative losses		7			6
Total deferred gains/(losses)		$	56		$	48
Net deferred gains/(losses)		$	67		$	57
	Income Statement Location
Pre-tax gain/(loss) recognized in income
	Purchased power expense	$	67	(b)	$	—
	Gas purchased for resale		(4	)		—
	Non-utility revenue		(1	)(b)		—
Total pre-tax gain/(loss) recognized in income		$	62		$	—

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

(b) For the three months ended March 31, 2013, Con Edison recorded in non-utility operating revenues and purchased power expense an unrealized pre-tax gain of $1 million and $45 million, respectively.

As of March 31, 2014, Con Edison had 1,165 contracts, including 538 CECONY contracts, which were considered to be derivatives under the accounting rules for derivatives and hedging (excluding qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts). The following table presents the number of contracts by commodity type:

	Electric Derivatives								Gas Derivatives
	Number of Energy Contracts (a)		MWHs (b)		Number of Capacity Contracts (a)		MWs (b)		Number of Contracts (a)		Dths (b)		Total Number Of Contracts (a)
Con Edison		548		14,882,496		67		6,442		550		70,343,157		1,165
CECONY		87		3,198,875		4		1,200		447		64,560,000		538

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

(b) Volumes are reported net of long and short positions.

The Companies also enter into electric congestion and gas basis swap contracts to hedge the congestion and transportation charges which are associated with electric and gas contracts and hedged volumes.

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 the Companies to provide collateral on derivative instruments in net liability positions. The amount of collateral to be provided will depend on the fair value of the derivative instruments and the Companies’ credit ratings.

The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position and collateral posted at March 31, 2014, 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 were:

(Millions of Dollars)	Con Edison (a)			CECONY (a)
Aggregate fair value – net liabilities	$	2		$	1
Collateral posted	$	—		$	—
Additional collateral(b) (downgrade one level from current ratings)	$	2		$	—
Additional collateral(b) (downgrade to below investment grade from current ratings)	$	4	(c)	$	2	(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 Con Edison’s competitive energy businesses were no longer extended unsecured credit for such purchases, the Companies would be required to post collateral, which at March 31, 2014, would have amounted to an estimated $29 million for Con Edison, including $7 million for CECONY. 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 liabilities 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 of setoff.

(c) Derivative instruments that are net assets have been excluded from the table. At March 31, 2014, if Con Edison had been downgraded to below investment grade, it would have been required to post additional collateral for such derivative instruments of $64 million, including $1 million for CECONY.

Interest Rate Swap

O&R has an interest rate swap, which terminates in October 2014, pursuant to which it pays a fixed-rate of 6.09 percent and receives a LIBOR-based variable rate. The fair value of this interest rate swap at March 31, 2014 was an unrealized loss of $2 million, which has been included in Con Edison’s consolidated balance sheet as a current liability/fair value of derivative liabilities and a regulatory asset. The increase in the fair value of the swap for the three months ended March 31, 2014 was immaterial. In the event O&R’s credit rating was downgraded to BBB- or lower by S&P or Baa3 or lower by Moody’s, the swap counterparty could elect to terminate the agreement and, if it did so, the parties would then be required to settle the transaction.

CECONY [Member]

Derivative Instruments and Hedging Activities

Note L – Derivative Instruments and Hedging Activities

Under the accounting rules for derivatives and hedging, derivatives are recognized on the balance sheet at fair value, unless an exception is available under the accounting rules. Certain qualifying derivative contracts have been designated as normal purchases or normal sales contracts. These contracts are not reported at fair value under the accounting rules.

Energy Price Hedging

Con Edison’s subsidiaries hedge market price fluctuations associated with physical purchases and sales of electricity, natural gas, and steam by using derivative instruments including futures, forwards, basis swaps, options, transmission congestion contracts and financial transmission rights contracts.

The Companies enter into master agreements for their commodity derivatives. These agreements typically provide for setoff in the event of contract termination. In such case, generally the non-defaulting or non-affected party’s payable will be set-off by the other 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.

The fair values of the Companies’ commodity derivatives including the offsetting of assets and liabilities at March 31, 2014 were:

(Millions of Dollars)
Commodity Derivatives	Gross Amounts of Recognized Assets/(Liabilities)			Gross Amounts Offset in the Statement of Financial Position			Net Amounts of Assets/(Liabilities) Presented in the Statement of Financial Position			Gross Amounts Not Offset in the Statement of Financial Position				Net Amount
										Financial instruments		Cash collateral received
Con Edison
Derivative assets	$	232		$	(94	)	$	138	(a)	$	—	$	—	$	138	(a)
Derivative liabilities		(95	)		89			(6	)		—		—		(6	)
Net derivative assets/(liabilities)	$	137		$	(5	)	$	132	(a)	$	—	$	—	$	132	(a)
CECONY
Derivative assets	$	83		$	(34	)	$	49	(a)	$	—	$	—	$	49	(a)
Derivative liabilities		(36	)		33			(3	)		—		—		(3	)
Net derivative assets/(liabilities)	$	47		$	(1	)	$	46	(a)	$	—	$	—	$	46	(a)

(a) At March 31, 2014, Con Edison and CECONY had margin deposits of $25 million and $14 million, respectively, classified as derivative assets in the balance sheet, but not included in the table. As required by an exchange, a margin is collateral, typically cash, that the holder of a derivative instrument has to deposit in order to transact on an exchange and to cover its potential losses with its broker or the exchange.

The fair values of the Companies’ commodity derivatives including the offsetting of assets and liabilities at December 31, 2013 were:

(Millions of Dollars)
Commodity Derivatives	Gross Amounts of Recognized Assets/(Liabilities)		Gross Amounts Offset in the Statement of Financial Position			Net Amounts of Assets/(Liabilities) Presented in the Statement of Financial Position			Gross Amounts Not Offset in the Statement of Financial Position				Net Amount
									Financial instruments		Cash collateral received
Con Edison
Derivative assets	$	166	$	(101)		$	65	(a)	$	—	$	—	$	65	(a)
Derivative liabilities		(113)		98			(15	)		—		—		(15	)
Net derivative assets/(liabilities)	$	53	$	(3	)	$	50	(a)	$	—	$	—	$	50	(a)
CECONY
Derivative assets	$	41	$	(32)		$	9	(a)	$	—	$	—	$	9	(a)
Derivative liabilities		(51)		37			(14	)		—		—		(14	)
Net derivative assets/(liabilities)	$	(10)	$	5		$	(5	)(a)	$	—	$	—	$	(5	)(a)

(a) At December 31, 2013, Con Edison and CECONY had margin deposits of $17 million and $16 million, respectively, classified as derivative assets in the balance sheet, but not included in the table. As required by an exchange, a margin is collateral, typically cash, that the holder of a derivative instrument has to deposit in order to transact on an exchange and to cover its potential losses with its broker or the exchange.

Credit Exposure

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 competitive 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 of setoff.

At March 31, 2014, Con Edison and CECONY had $236 million and $48 million of credit exposure in connection with energy supply and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $96 million with independent system operators, $78 million with commodity exchange brokers, $60 million with investment-grade counterparties and $2 million with non-investment grade/non-rated counterparties. CECONY’s net credit exposure consisted of $28 million with commodity exchange brokers and $20 million with investment-grade counterparties.

Economic Hedges

The Companies enter into certain derivative instruments that do not qualify or are not designated as hedges under the accounting rules for derivatives and hedging. However, management believes these instruments represent economic hedges that mitigate exposure to fluctuations in commodity prices.

The fair values of the Companies’ commodity derivatives at March 31, 2014 were:

(Millions of Dollars)	Fair Value of Commodity Derivatives(a) Balance Sheet Location	Con Edison			CECONY
Derivative Assets
Current	Other current assets	$	193		$	65
Long-term	Other deferred charges and noncurrent assets		39			18
Total derivative assets		$	232		$	83
Impact of netting			(69	)		(20	)
Net derivative assets		$	163		$	63
Derivative Liabilities
Current	Fair value of derivative liabilities	$	68		$	21
Long-term	Fair value of derivative liabilities		27			15
Total derivative liabilities		$	95		$	36
Impact of netting			(89	)		(33	)
Net derivative liabilities		$	6		$	3

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

The fair values of the Companies’ commodity derivatives at December 31, 2013 were:

(Millions of Dollars)	Fair Value of Commodity Derivatives(a) Balance Sheet Location	Con Edison			CECONY
Derivative Assets
Current	Other current assets	$	134		$	27
Long-term	Other deferred charges and noncurrent assets		32			14
Total derivative assets		$	166		$	41
Impact of netting			(84	)		(16	)
Net derivative assets		$	82		$	25
Derivative Liabilities
Current	Fair value of derivative liabilities	$	82		$	32
Long-term	Fair value of derivative liabilities		31			19
Total derivative liabilities		$	113		$	51
Impact of netting			(98	)		(37	)
Net derivative liabilities		$	15		$	14

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

The Utilities generally recover all of their prudently incurred fuel, purchased power and gas cost, including hedging gains and losses, in accordance with rate provisions approved by the applicable state utility commissions. 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. Con Edison’s competitive energy businesses record realized and unrealized gains and losses on their derivative contracts in earnings in the reporting period in which they occur.

The following table presents the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the three months ended March 31, 2014:

Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a) Deferred or Recognized in Income for the Three Months Ended March 31, 2014
(Millions of Dollars)	Balance Sheet Location	Con Edison			CECONY
Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:
Current	Deferred derivative gains	$	30		$	25
Long-term	Deferred derivative gains		4			4
Total deferred gains/(losses)		$	34		$	29
Current	Deferred derivative losses	$	17		$	17
Current	Recoverable energy costs		94			77
Long-term	Deferred derivative losses		2			2
Total deferred gains/(losses)		$	113		$	96
Net deferred gains/(losses)		$	147		$	125
	Income Statement Location
Pre-tax gain/(loss) recognized in income
	Purchased power expense	$	175	(b)	$	—
	Gas purchased for resale		(14	)		—
	Non-utility revenue		(24	)(b)		—
Total pre-tax gain/(loss) recognized in income		$	137		$	—

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

(b) For the three months ended March 31, 2014, Con Edison recorded in purchased power expense an unrealized pre-tax gain of $20 million.

The following table presents the changes in the fair values of commodity derivatives that have been deferred or recognized in earnings for the three months ended March 31, 2013:

Realized and Unrealized Gains/(Losses) on Commodity Derivatives(a) Deferred or Recognized in Income for the Three Months Ended March 31, 2013
(Millions of Dollars)	Balance Sheet Location	Con Edison			CECONY
Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:
Current	Deferred derivative gains	$	9		$	8
Long-term	Regulatory liabilities		2			1
Total deferred gains/(losses)		$	11		$	9
Current	Deferred derivative losses	$	38		$	32
Current	Recoverable energy costs		11			10
Long-term	Deferred derivative losses		7			6
Total deferred gains/(losses)		$	56		$	48
Net deferred gains/(losses)		$	67		$	57
	Income Statement Location
Pre-tax gain/(loss) recognized in income
	Purchased power expense	$	67	(b)	$	—
	Gas purchased for resale		(4	)		—
	Non-utility revenue		(1	)(b)		—
Total pre-tax gain/(loss) recognized in income		$	62		$	—

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

(b) For the three months ended March 31, 2013, Con Edison recorded in non-utility operating revenues and purchased power expense an unrealized pre-tax gain of $1 million and $45 million, respectively.

As of March 31, 2014, Con Edison had 1,165 contracts, including 538 CECONY contracts, which were considered to be derivatives under the accounting rules for derivatives and hedging (excluding qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts). The following table presents the number of contracts by commodity type:

	Electric Derivatives								Gas Derivatives
	Number of Energy Contracts (a)		MWHs (b)		Number of Capacity Contracts (a)		MWs (b)		Number of Contracts (a)		Dths (b)		Total Number Of Contracts (a)
Con Edison		548		14,882,496		67		6,442		550		70,343,157		1,165
CECONY		87		3,198,875		4		1,200		447		64,560,000		538

(a) Qualifying derivative contracts, which have been designated as normal purchases or normal sales contracts, are not reported at fair value under the accounting rules for derivatives and hedging and, therefore, are excluded from the table.

(b) Volumes are reported net of long and short positions.

The Companies also enter into electric congestion and gas basis swap contracts to hedge the congestion and transportation charges which are associated with electric and gas contracts and hedged volumes.

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 the Companies to provide collateral on derivative instruments in net liability positions. The amount of collateral to be provided will depend on the fair value of the derivative instruments and the Companies’ credit ratings.

The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position and collateral posted at March 31, 2014, 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 were:

(Millions of Dollars)	Con Edison (a)			CECONY (a)
Aggregate fair value – net liabilities	$	2		$	1
Collateral posted	$	—		$	—
Additional collateral(b) (downgrade one level from current ratings)	$	2		$	—
Additional collateral(b) (downgrade to below investment grade from current ratings)	$	4	(c)	$	2	(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 Con Edison’s competitive energy businesses were no longer extended unsecured credit for such purchases, the Companies would be required to post collateral, which at March 31, 2014, would have amounted to an estimated $29 million for Con Edison, including $7 million for CECONY. 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 liabilities 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 of setoff.

(c) Derivative instruments that are net assets have been excluded from the table. At March 31, 2014, if Con Edison had been downgraded to below investment grade, it would have been required to post additional collateral for such derivative instruments of $64 million, including $1 million for CECONY.

Interest Rate Swap

O&R has an interest rate swap, which terminates in October 2014, pursuant to which it pays a fixed-rate of 6.09 percent and receives a LIBOR-based variable rate. The fair value of this interest rate swap at March 31, 2014 was an unrealized loss of $2 million, which has been included in Con Edison’s consolidated balance sheet as a current liability/fair value of derivative liabilities and a regulatory asset. The increase in the fair value of the swap for the three months ended March 31, 2014 was immaterial. In the event O&R’s credit rating was downgraded to BBB- or lower by S&P or Baa3 or lower by Moody’s, the swap counterparty could elect to terminate the agreement and, if it did so, the parties would then be required to settle the transaction.