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Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 31, 2014
Derivative Instruments and Hedging Activities

Note O – Derivative Instruments and Hedging Activities

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. Derivatives are recognized on the balance sheet at fair value (See Note P), 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 December 31, 2014 and 2013 were:

 

(Millions of Dollars)    2014     2013  
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

    $ 111      $ (67 )    $ 44 (b)    $ 134      $ (77 )    $ 57 (b) 

Non-current

      34        (23 )      11        32        (24 )      8   

Total fair value of derivative assets

    $ 145      $ (90 )    $ 55      $ 166      $ (101 )    $ 65   

Fair value of derivative liabilities

               

Current

    $ (242 )    $ 139      $ (103 )    $ (82 )    $ 72      $ (10 ) 

Non-current

      (66 )      91        25        (31 )      26        (5 ) 

Total fair value of derivative liabilities

    $ (308 )    $ 230      $ (78 )    $ (113 )    $ 98      $ (15 ) 

Net fair value derivative assets/(liabilities)

    $ (163 )    $ 140      $ (23 )(b)    $ 53      $ (3 )    $ 50 (b) 

CECONY

               

Fair value of derivative assets

               

Current

    $ 26      $ (15 )    $ 11 (b)    $ 27      $ (19 )    $ 8 (b) 

Non-current

      22        (20 )      2        14        (13 )      1   

Total fair value of derivative assets

    $ 48      $ (35 )    $ 13      $ 41      $ (32 )    $ 9   

Fair value of derivative liabilities

               

Current

    $ (96 )    $ 48      $ (48 )    $ (32 )    $ 21      $ (11 ) 

Non-current liabilities

      (42 )      32        (10 )      (19 )      16        (3 ) 

Total fair value of derivative liabilities

    $ (138 )    $ 80      $ (58 )    $ (51 )    $ 37      $ (14 ) 

Net fair value derivative assets/(liabilities)

    $ (90 )    $ 45      $ (45 )(b)    $ (10 )    $ 5      $ (5 )(b) 

 

(a) Derivative instruments and collateral were set off 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 setoff in the event of contract termination. In such case, generally the non-defaulting party’s payable will be set-off 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 December 31, 2014 and 2013, margin deposits for Con Edison ($27 million and $17 million, respectively) and CECONY ($25 million and $16 million, respectively) were classified as derivative assets in the 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.

 

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. See “Recoverable Energy Costs” in Note A. 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 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 years ended December 31, 2014 and 2013:

 

            Con Edison     CECONY  
(Millions of Dollars)    Balance Sheet Location        2014             2013             2014             2013      

Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:

  

        

Current

    Deferred derivative gains    $ (10 )    $ 14      $ (7 )    $ 11   

Long-term

    Deferred derivative gains      1        -        1        -   

Total deferred gains/(losses)

         $ (9 )    $ 14      $ (6 )    $ 11   

Current

    Deferred derivative losses    $ (75 )    $ 47      $ (70 )    $ 38   

Current

    Recoverable energy costs      36        (39 )      26        (37 ) 

Long-term

    Deferred derivative losses      (17 )      27        (17 )      13   

Total deferred gains/(losses)

       $ (56 )    $ 35      $ (61 )    $ 14   

Net deferred gains/(losses)

         $ (65 )    $ 49      $ (67 )    $ 25   
      Income Statement Location                             

Pre-tax gain/(loss) recognized in income

  

        
   Purchased power expense    $ (37 )(a)    $ 90 (a)    $ -      $ -   
   Gas purchased for resale      (115 )      (27 )      -        -   
     Non-utility revenue      29 (a)      9 (a)      -        -   

Total pre-tax gain/(loss) recognized in income

         $ (123 )    $ 72      $ -      $ -   

 

(a) Con Edison recorded unrealized gains and losses in non-utility operating revenue ($4 million gain and an immaterial gain) and purchased power expense ($132 million loss and $74 million gain) for the years ended December 31, 2014 and 2013, respectively.

The following table presents the hedged volume of Con Edison’s and CECONY’s derivative transactions at December 31, 2014:

 

      Electric Energy (MWHs)(a)(b)      Capacity (MWs)(a)      Natural Gas (Dt)(a)(b)  

Con Edison

      17,792,555         7,706         66,793,011   

CECONY

      5,543,250         2,100         62,065,000   

 

(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 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 December 31, 2014, Con Edison and CECONY had $148 million and $25 million of credit exposure in connection with energy supply and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $79 million with commodity exchange brokers, $45 million with independent system operators, $20 million with investment-grade counterparties and $4 million with non-investment grade/non-rated counterparties. CECONY’s net credit exposure was with commodity exchange brokers.

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 December 31, 2014:

 

(Millions of Dollars)   Con Edison(a)     CECONY(a)  

Aggregate fair value – net liabilities

   $ 78      $ 58   

Collateral posted

   $ 1      $ -   

Additional collateral(b) (downgrade one level from current ratings)

   $ 6      $ 2   

Additional collateral(b) (downgrade to below investment grade from current ratings)

   $ 105 (c)    $ 63 (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 December 31, 2014, would have amounted to an estimated $16 million for Con Edison, including $3 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 December 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 $15 million.
CECONY [Member]  
Derivative Instruments and Hedging Activities

Note O – Derivative Instruments and Hedging Activities

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. Derivatives are recognized on the balance sheet at fair value (See Note P), 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 December 31, 2014 and 2013 were:

 

(Millions of Dollars)    2014     2013  
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

    $ 111      $ (67 )    $ 44 (b)    $ 134      $ (77 )    $ 57 (b) 

Non-current

      34        (23 )      11        32        (24 )      8   

Total fair value of derivative assets

    $ 145      $ (90 )    $ 55      $ 166      $ (101 )    $ 65   

Fair value of derivative liabilities

               

Current

    $ (242 )    $ 139      $ (103 )    $ (82 )    $ 72      $ (10 ) 

Non-current

      (66 )      91        25        (31 )      26        (5 ) 

Total fair value of derivative liabilities

    $ (308 )    $ 230      $ (78 )    $ (113 )    $ 98      $ (15 ) 

Net fair value derivative assets/(liabilities)

    $ (163 )    $ 140      $ (23 )(b)    $ 53      $ (3 )    $ 50 (b) 

CECONY

               

Fair value of derivative assets

               

Current

    $ 26      $ (15 )    $ 11 (b)    $ 27      $ (19 )    $ 8 (b) 

Non-current

      22        (20 )      2        14        (13 )      1   

Total fair value of derivative assets

    $ 48      $ (35 )    $ 13      $ 41      $ (32 )    $ 9   

Fair value of derivative liabilities

               

Current

    $ (96 )    $ 48      $ (48 )    $ (32 )    $ 21      $ (11 ) 

Non-current liabilities

      (42 )      32        (10 )      (19 )      16        (3 ) 

Total fair value of derivative liabilities

    $ (138 )    $ 80      $ (58 )    $ (51 )    $ 37      $ (14 ) 

Net fair value derivative assets/(liabilities)

    $ (90 )    $ 45      $ (45 )(b)    $ (10 )    $ 5      $ (5 )(b) 

 

(a) Derivative instruments and collateral were set off 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 setoff in the event of contract termination. In such case, generally the non-defaulting party’s payable will be set-off 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 December 31, 2014 and 2013, margin deposits for Con Edison ($27 million and $17 million, respectively) and CECONY ($25 million and $16 million, respectively) were classified as derivative assets in the 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.

 

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. See “Recoverable Energy Costs” in Note A. 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 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 years ended December 31, 2014 and 2013:

 

            Con Edison     CECONY  
(Millions of Dollars)    Balance Sheet Location        2014             2013             2014             2013      

Pre-tax gains/(losses) deferred in accordance with accounting rules for regulated operations:

  

        

Current

    Deferred derivative gains    $ (10 )    $ 14      $ (7 )    $ 11   

Long-term

    Deferred derivative gains      1        -        1        -   

Total deferred gains/(losses)

         $ (9 )    $ 14      $ (6 )    $ 11   

Current

    Deferred derivative losses    $ (75 )    $ 47      $ (70 )    $ 38   

Current

    Recoverable energy costs      36        (39 )      26        (37 ) 

Long-term

    Deferred derivative losses      (17 )      27        (17 )      13   

Total deferred gains/(losses)

       $ (56 )    $ 35      $ (61 )    $ 14   

Net deferred gains/(losses)

         $ (65 )    $ 49      $ (67 )    $ 25   
      Income Statement Location                             

Pre-tax gain/(loss) recognized in income

  

        
   Purchased power expense    $ (37 )(a)    $ 90 (a)    $ -      $ -   
   Gas purchased for resale      (115 )      (27 )      -        -   
     Non-utility revenue      29 (a)      9 (a)      -        -   

Total pre-tax gain/(loss) recognized in income

         $ (123 )    $ 72      $ -      $ -   

 

(a) Con Edison recorded unrealized gains and losses in non-utility operating revenue ($4 million gain and an immaterial gain) and purchased power expense ($132 million loss and $74 million gain) for the years ended December 31, 2014 and 2013, respectively.

The following table presents the hedged volume of Con Edison’s and CECONY’s derivative transactions at December 31, 2014:

 

      Electric Energy (MWHs)(a)(b)      Capacity (MWs)(a)      Natural Gas (Dt)(a)(b)  

Con Edison

      17,792,555         7,706         66,793,011   

CECONY

      5,543,250         2,100         62,065,000   

 

(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 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 December 31, 2014, Con Edison and CECONY had $148 million and $25 million of credit exposure in connection with energy supply and hedging activities, net of collateral, respectively. Con Edison’s net credit exposure consisted of $79 million with commodity exchange brokers, $45 million with independent system operators, $20 million with investment-grade counterparties and $4 million with non-investment grade/non-rated counterparties. CECONY’s net credit exposure was with commodity exchange brokers.

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 December 31, 2014:

 

(Millions of Dollars)   Con Edison(a)     CECONY(a)  

Aggregate fair value – net liabilities

   $ 78      $ 58   

Collateral posted

   $ 1      $ -   

Additional collateral(b) (downgrade one level from current ratings)

   $ 6      $ 2   

Additional collateral(b) (downgrade to below investment grade from current ratings)

   $ 105 (c)    $ 63 (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 December 31, 2014, would have amounted to an estimated $16 million for Con Edison, including $3 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 December 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 $15 million.