Pension Benefits

Con Edison maintains a tax-qualified, non-contributory pension plan that covers substantially all employees of CECONY, O&R and Con Edison Transmission and certain employees of the Clean Energy Businesses. The plan is designed to comply with the Internal Revenue Code and the Employee Retirement Income Security Act of 1974. Con Edison also maintains additional non–qualified supplemental pension plans.

Total Periodic Benefit Cost

The components of the Companies’ total periodic benefit costs for 2018, 2017 and 2016 were as follows:



	Con Edison			CECONY
(Millions of Dollars)	2018	2017	2016	2018	2017	2016
Service cost – including administrative expenses	$290	$263	$275	$272	$246	$258
Interest cost on projected benefit obligation	561	591	596	525	554	559
Expected return on plan assets	(1,033)	(968)	(947)	(979)	(917)	(898)
Recognition of net actuarial loss	688	595	596	651	563	565
Recognition of prior service cost/(credit)	(17)	(17)	4	(19)	(19)	2
TOTAL PERIODIC BENEFIT COST	$489	$464	$524	$450	$427	$486
Cost capitalized	(127)	(181)	(214)	(119)	(169)	(203)
Reconciliation to rate level	(92)	(34)	54	(100)	(41)	58
Total expense recognized	$270	$249	$364	$231	$217	$341

In March 2017, the FASB issued amendments to the guidance for retirement benefits through ASU 2017-07, “Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The Companies adopted ASU 2017-07 beginning on January 1, 2018. The guidance requires that components of net periodic benefit cost other than service cost be presented outside of operating income on consolidated income statements, and that only the service cost component is eligible for capitalization. Accordingly, the service cost components are included in the line "Other operations and maintenance" and the non-service cost components are included in the line “Other deductions” in the Companies' consolidated income statements. As permitted by a practical expedient under ASU 2017-07, the Companies applied the presentation requirements retrospectively for both pension and other postretirement benefit costs using amounts disclosed in prior-period financial statements as appropriate estimates.

Funded Status

The funded status at December 31, 2018, 2017 and 2016 was as follows:



	Con Edison			CECONY
(Millions of Dollars)	2018	2017	2016	2018	2017	2016
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year	$15,536	$14,095	$14,377	$14,567	$13,203	$13,482
Service cost – excluding administrative expenses	286	259	271	267	241	254
Interest cost on projected benefit obligation	561	591	596	525	554	559
Net actuarial loss/(gain)	(1,219)	1,231	(302)	(1,159)	1,171	(282)
Plan amendments	—	6	(256)	—	—	(259)
Benefits paid	(715)	(646)	(591)	(658)	(602)	(551)
PROJECTED BENEFIT OBLIGATION AT END OF YEAR	$14,449	$15,536	$14,095	$13,542	$14,567	$13,203
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year	$14,274	$12,472	$11,759	$13,519	$11,815	$11,141
Actual return on plan assets	(536)	2,041	829	(507)	1,935	787
Employer contributions	473	450	508	434	412	469
Benefits paid	(715)	(646)	(591)	(658)	(602)	(551)
Administrative expenses	(46)	(43)	(33)	(44)	(41)	(31)
FAIR VALUE OF PLAN ASSETS AT END OF YEAR	$13,450	$14,274	$12,472	$12,744	$13,519	$11,815
FUNDED STATUS	$(999)	$(1,262)	$(1,623)	$(798)	$(1,048)	$(1,388)
Unrecognized net loss	$2,464	$2,760	$3,157	$2,338	$2,624	$2,995
Unrecognized prior service costs	(205)	(223)	(244)	(222)	(242)	(258)
Accumulated benefit obligation	13,030	13,897	12,655	12,161	12,972	11,806

The decrease in the pension liability at Con Edison and CECONY of $263 million and $250 million, respectively, compared with December 31, 2017, was primarily due to a decrease in the plan’s projected benefit obligation as a result of an increase in the discount rate, partially offset by a decrease in plan assets as a result of the actual return on plan assets. For Con Edison, this decrease in pension liability corresponds with a decrease to regulatory assets of $273 million for unrecognized net losses and unrecognized prior service costs associated with the Utilities consistent with the accounting rules for regulated operations, a credit to OCI of $7 million (net of taxes) for the unrecognized net losses, and an immaterial change to OCI (net of taxes) for the unrecognized prior service costs associated with the Clean Energy Businesses, Con Edison Transmission, and RECO.

For CECONY, the decrease in pension liability corresponds with a decrease to regulatory assets of $265 million for unrecognized net losses and unrecognized prior service costs consistent with the accounting rules for regulated operations, and also a credit to OCI of $1 million (net of taxes) for unrecognized net losses, and an immaterial change to OCI (net of taxes) for the unrecognized prior service costs associated with certain employees of the Clean Energy Businesses and Con Edison Transmission who previously worked for CECONY.

A portion of the unrecognized net loss and prior service cost for the pension plan, equal to $512 million and $(17) million, respectively, will be recognized from accumulated OCI and the regulatory asset into net periodic benefit cost over the next year for Con Edison. Included in these amounts are $486 million and $(19) million, respectively, for CECONY.

At December 31, 2018 and 2017, Con Edison’s investments include $326 million and $330 million, respectively, held in external trust accounts for benefit payments pursuant to the supplemental retirement plans. Included in these amounts for CECONY were $301 million. See Note P. The accumulated benefit obligations for the supplemental retirement plans for Con Edison and CECONY were $316 million and $285 million as of December 31, 2018 and $331 million and $297 million as of December 31, 2017, respectively.

Assumptions

The actuarial assumptions were as follows:



	2018		2017		2016
Weighted-average assumptions used to determine benefit obligations at December 31:
Discount rate	4.25	%	3.70	%	4.25	%
Rate of compensation increase
CECONY	4.25	%	4.25	%	4.25	%
O&R	4.00	%	4.00	%	4.00	%
Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31:
Discount rate	3.70	%	4.25	%	4.25	%
Expected return on plan assets	7.50	%	7.50	%	7.80	%
Rate of compensation increase
CECONY	4.25	%	4.25	%	4.25	%
O&R	4.00	%	4.00	%	4.00	%

The expected return assumption reflects anticipated returns on the plan’s current and future assets. The Companies’ expected return was based on an evaluation of the current environment, market and economic outlook, relationships between the economy and asset class performance patterns, and recent and long-term trends in asset class performance. The projections were based on the plan’s target asset allocation.

Discount Rate Assumption

To determine the assumed discount rate, the Companies use a model that produces a yield curve based on yields on selected highly rated (Aa or higher by either Moody’s or Standard & Poor’s) corporate bonds. Bonds with insufficient liquidity, bonds with questionable pricing information and bonds that are not representative of the overall market are excluded from consideration. For example, the bonds used in the model cannot be callable (with the exception of "make whole" callable bonds), and the amount of the bond issue outstanding must be in excess of $50 million. The spot rates defined by the yield curve and the plan’s projected benefit payments are used to develop a weighted average discount rate.

Expected Benefit Payments

Based on current assumptions, the Companies expect to make the following benefit payments over the next ten years:



(Millions of Dollars)	2019	2020	2021	2022	2023	2024-2028
Con Edison	$707	$726	$740	$755	$772	$4,072
CECONY	658	676	689	703	718	3,795

Expected Contributions

Based on estimates as of December 31, 2018, the Companies expect to make contributions to the pension plans during 2019 of $332 million (of which $301 million is to be made by CECONY). The Companies’ policy is to fund the total periodic benefit cost of the qualified plan to the extent tax deductible and to also contribute to the non-qualified supplemental plans.

Plan Assets

The asset allocations for the pension plan at the end of 2018, 2017 and 2016, and the target allocation for 2019 are as follows:



	Target Allocation Range	Plan Assets at December 31,
Asset Category	2019	2018		2017		2016
Equity Securities	45% - 55%	51	%	58	%	58	%
Debt Securities	33% - 43%	39	%	33	%	33	%
Real Estate	10% -14%	10	%	9	%	9	%
Total	100%	100	%	100	%	100	%

Con Edison has established a pension trust for the investment of assets to be used for the exclusive purpose of providing retirement benefits to participants and beneficiaries and payment of plan expenses.

Pursuant to resolutions adopted by Con Edison’s Board of Directors, the Management Development and Compensation Committee of the Board of Directors (the Committee) has general oversight responsibility for Con Edison’s pension and other employee benefit plans. The pension plan’s named fiduciaries have been granted the authority to control and manage the operation and administration of the plans, including overall responsibility for the investment of assets in the trust and the power to appoint and terminate investment managers.

The investment objectives of the Con Edison pension plan are to maintain a level and form of assets adequate to meet benefit obligations to participants, to achieve the expected long-term total return on the trust assets within a prudent level of risk and maintain a level of volatility that is not expected to have a material impact on the company’s expected contribution and expense or the company’s ability to meet plan obligations. The assets of the plan have no significant concentration of risk in one country (other than the United States), industry or entity.

The strategic asset allocation is intended to meet the objectives of the pension plan by diversifying its funds across asset classes, investment styles and fund managers. An asset/liability study typically is conducted every few years to determine whether the current strategic asset allocation continues to represent the appropriate balance of expected risk and reward for the plan to meet expected liabilities. Each study considers the investment risk of the asset allocation and determines the optimal asset allocation for the plan. The target asset allocation for 2019 reflects the results of such a study conducted in 2018.

Individual fund managers operate under written guidelines provided by Con Edison, which cover such areas as investment objectives, performance measurement, permissible investments, investment restrictions, trading and execution, and communication and reporting requirements. Con Edison management regularly monitors, and the named fiduciaries review and report to the Committee regarding, asset class performance, total fund performance, and compliance with asset allocation guidelines. Management changes fund managers and rebalances the portfolio as appropriate. At the direction of the named fiduciaries, such changes are reported to the Committee.

Assets measured at fair value on a recurring basis are summarized below as defined by the accounting rules for fair value measurements (see Note P).

The fair values of the pension plan assets at December 31, 2018 by asset category are as follows:



(Millions of Dollars)	Level 1	Level 2	Total
Investments within the fair value hierarchy
U.S. Equity (a)	$3,515	$10	$3,525
International Equity (b)	2,896	—	2,896
U.S. Government Issued Debt (c)	—	1,886	1,886
Corporate Bonds Debt (d)	—	2,619	2,619
Structured Assets Debt (e)	—	6	6
Other Fixed Income Debt (f)	—	121	121
Cash and Cash Equivalents (g)	160	556	716
Futures (h)	568	—	568
Total investments within the fair value hierarchy	$7,139	$5,198	$12,337
Investments measured at NAV per share (n)
Private Equity (i)			440
Real Estate (j)			1,310
Hedge Funds (k)			255
Total investments valued using NAV per share			$2,005
Funds for retiree health benefits (l)	(118)	(86)	(204)
Funds for retiree health benefits measured at NAV per share (l)(n)			(33)
Total funds for retiree health benefits			$(237)
Investments (excluding funds for retiree health benefits)	$7,021	$5,112	$14,105
Pending activities (m)			(655)
Total fair value of plan net assets			$13,450


(a)	U.S. Equity includes both actively- and passively-managed assets with investments in domestic equity index funds and actively-managed small-capitalization equities.


(b)	International Equity includes international equity index funds and actively-managed international equities.


(c)	U.S. Government Issued Debt includes agency and treasury securities.


(d)	Corporate Bonds Debt consists of debt issued by various corporations.


(e)	Structured Assets Debt includes commercial-mortgage-backed securities and collateralized mortgage obligations.


(f)	Other Fixed Income Debt includes municipal bonds, sovereign debt and regional governments.


(g)	Cash and Cash Equivalents include short term investments, money markets, foreign currency and cash collateral.


(h)	Futures consist of exchange-traded financial contracts encompassing U.S. Equity, International Equity and U.S. Government indices.


(i)	Private Equity consists of global equity funds that are not exchange-traded.


(j)	Real Estate investments include real estate funds based on appraised values that are broadly diversified by geography and property type.


(k)	Hedge Funds are within a commingled structure which invests in various hedge fund managers who can invest in all financial instruments.

(l)

The Companies set aside funds for retiree health benefits through a separate account within the pension trust, as permitted under Section 401(h) of the Internal Revenue Code of 1986, as amended. In accordance with the Code, the plan’s investments in the 401(h) account may not be used for, or diverted to, any purpose other than providing health benefits for retirees. The net assets held in the 401(h) account are calculated based on a pro-rata percentage allocation of the net assets in the pension plan. The related obligations for health benefits are not included in the pension plan’s obligations and are included in the Companies’ other postretirement benefit obligation. See Note F.


(m)	Pending activities include security purchases and sales that have not settled, interest and dividends that have not been received and reflects adjustments for available estimates at year end.


(n)	In accordance with ASU 2015-07, Fair Value Measurements (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its equivalent), certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.

The fair values of the pension plan assets at December 31, 2017 by asset category are as follows:



(Millions of Dollars)	Level 1	Level 2	Total
Investments within the fair value hierarchy
U.S. Equity (a)	$3,872	$28	$3,900
International Equity (b)	4,132	—	4,132
U.S. Government Issued Debt (c)	—	1,786	1,786
Corporate Bonds Debt (d)	—	2,450	2,450
Structured Assets Debt (e)	—	3	3
Other Fixed Income Debt (f)	—	125	125
Cash and Cash Equivalents (g)	124	352	476
Futures (h)	308	—	308
Total investments within the fair value hierarchy	$8,436	$4,744	$13,180
Investments measured at NAV per share (n)
Private Equity (i)			336
Real Estate (j)			1,214
Hedge Funds (k)			251
Total investments valued using NAV per share			$1,801
Funds for retiree health benefits (l)	(168)	(94)	(262)
Funds for retiree health benefits measured at NAV per share (l)(n)			(36)
Total funds for retiree health benefits			$(298)
Investments (excluding funds for retiree health benefits)	$8,268	$4,650	$14,683
Pending activities (m)			(409)
Total fair value of plan net assets			$14,274

(a) - (n) Reference is made to footnotes (a) through (n) in the above table of pension plan assets at December 31, 2018 by asset category.

The Companies also offer a defined contribution savings plan that covers substantially all employees and made contributions to the plan as follows:



	For the Years Ended December 31,
(Millions of Dollars)	2018	2017	2016
Con Edison	$45	$40	$36
CECONY	39	35	32