Income Tax

12 Months Ended

Dec. 31, 2011

Income Tax

Note L — Income Tax

The components of income tax are as follows:

	Con Edison									CECONY
(millions of dollars)	2011			2010			2009			2011			2010			2009
State
Current	$	56		$	23		$	(12	)	$	53		$	13		$	(1	)
Deferred		63			106			118			55			100			103
Federal
Current		53			(144	)		16			43			(139	)		42
Deferred		434			569			324			413			527			266
Amortization of investment tax credits		(6	)		(6	)		(6	)		(6	)		(6	)		(6	)
Total charge to income tax expense	$	600		$	548		$	440		$	558		$	495		$	404

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

	Con Edison						CECONY
(millions of dollars)	2011			2010			2011			2010
Deferred tax liabilities:
Depreciation	$	3,699		$	3,083		$	3,464		$	2,915
Regulatory asset – future income tax		1,971			1,760			1,891			1,666
Unrecognized pension and other postretirement costs		2,554			1,775			2,255			1,686
State income tax		892			759			811			677
Capitalized overheads		536			508			470			444
Pension		682			625			709			638
Investment tax credits		55			61			52			58
Other		696			720			467			448
Total deferred tax liabilities		11,085			9,291			10,119			8,532
Deferred tax assets:
Unrecognized pension and other postretirement costs		2,554			1,775			2,255			1,686
Regulatory liability – future income tax		173			168			167			152
Other		1,061			741			933			623
Total deferred tax assets		3,788			2,684			3,355			2,461
Net deferred tax liabilities and investment tax credits	$	7,297		$	6,607		$	6,764		$	6,071
Deferred tax liabilities and investment tax credits – Non current	$	7,563		$	6,769		$	6,921		$	6,202
Deferred tax assets – Current		(266	)		(162	)		(157	)		(131	)
Total deferred tax liabilities and investment tax credits	$	7,297		$	6,607		$	6,764		$	6,071

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)	2011			2010			2009			2011			2010			2009
STATUTORY TAX RATE
Federal		35	%		35	%		35	%		35	%		35	%		35	%
Changes in computed taxes resulting from:
State income tax		5			5			5			5			5			6
Depreciation related differences		—			—			1			—			—			1
Cost of removal		(4	)		(4	)		(5	)		(4	)		(4	)		(6	)
Other		—			(1	)		(3	)		—			(1	)		(2	)
Effective Tax Rate		36	%		35	%		33	%		36	%		35	%		34	%

For federal income tax purposes, Con Edison has a net operating loss carryforward available from 2011 of $484 million, primarily as a result of accelerated depreciation, which if unused will expire in 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. Con Edison had a 2010 net operating loss for federal income tax purposes. In 2011, Con Edison received a refund using the 2010 net operating loss to offset a prior year's taxable income.

For New York State income tax purposes, Con Edison has a net operating loss carryforward available from 2009 of $220 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 2010. Con Edison's federal income tax returns for 1998 through 2010 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 New York state income tax returns for years beginning with 2006 remain open for examination.

The Companies' 2010 and 2009 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, 2011, with respect to the repair allowance deductions, Con Edison recorded a liability for uncertain tax positions of $88 million ($85 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. At December 31, 2011, the Companies' estimated liabilities for uncertain tax positions reflect their anticipated adoption of the new IRS guidance, which did not have a material impact on net income.

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

	Con Edison									CECONY
(millions of dollars)	2011			2010			2009			2011			2010			2009
Balance at the beginning of the year	$	93		$	86		$	118		$	79		$	92		$	108
Additions based on tax positions related to the current year		76			5			—			74			4			—
Additions based on tax positions of prior years		4			67			3			3			49			1
Reductions for tax positions of prior years		(43	)		(4	)		(21	)		(42	)		(4	)		(5	)
Settlements		—			(61	)		(14	)		—			(62	)		(12	)
Balance at the end of the year	$	130		$	93		$	86		$	114		$	79		$	92

At December 31, 2011, the Companies' estimated liabilities for uncertain tax positions ($130 million for Con Edison and $114 million for CECONY) were classified on their respective consolidated balance sheets either as current liabilities ($67 million for Con Edison and $53 million for CECONY) or as a reduction to current deferred tax assets ($63 million for Con Edison and $62 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 2011, 2010 and 2009, the Companies recognized an immaterial amount of interest and no penalties for uncertain tax positions in their consolidated income statements. At December 31, 2011 and 2010, the Companies recognized an immaterial amount of interest and no penalties in their consolidated balance sheets.

At December 31, 2011, the total amount of unrecognized tax benefits that, if recognized, would affect the Companies' effective tax rate is $11 million ($5 million attributable to CECONY).

CECONY [Member]

Income Tax

Note L — Income Tax

The components of income tax are as follows:

	Con Edison									CECONY
(millions of dollars)	2011			2010			2009			2011			2010			2009
State
Current	$	56		$	23		$	(12	)	$	53		$	13		$	(1	)
Deferred		63			106			118			55			100			103
Federal
Current		53			(144	)		16			43			(139	)		42
Deferred		434			569			324			413			527			266
Amortization of investment tax credits		(6	)		(6	)		(6	)		(6	)		(6	)		(6	)
Total charge to income tax expense	$	600		$	548		$	440		$	558		$	495		$	404

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

	Con Edison						CECONY
(millions of dollars)	2011			2010			2011			2010
Deferred tax liabilities:
Depreciation	$	3,699		$	3,083		$	3,464		$	2,915
Regulatory asset – future income tax		1,971			1,760			1,891			1,666
Unrecognized pension and other postretirement costs		2,554			1,775			2,255			1,686
State income tax		892			759			811			677
Capitalized overheads		536			508			470			444
Pension		682			625			709			638
Investment tax credits		55			61			52			58
Other		696			720			467			448
Total deferred tax liabilities		11,085			9,291			10,119			8,532
Deferred tax assets:
Unrecognized pension and other postretirement costs		2,554			1,775			2,255			1,686
Regulatory liability – future income tax		173			168			167			152
Other		1,061			741			933			623
Total deferred tax assets		3,788			2,684			3,355			2,461
Net deferred tax liabilities and investment tax credits	$	7,297		$	6,607		$	6,764		$	6,071
Deferred tax liabilities and investment tax credits – Non current	$	7,563		$	6,769		$	6,921		$	6,202
Deferred tax assets – Current		(266	)		(162	)		(157	)		(131	)
Total deferred tax liabilities and investment tax credits	$	7,297		$	6,607		$	6,764		$	6,071

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)	2011			2010			2009			2011			2010			2009
STATUTORY TAX RATE
Federal		35	%		35	%		35	%		35	%		35	%		35	%
Changes in computed taxes resulting from:
State income tax		5			5			5			5			5			6
Depreciation related differences		—			—			1			—			—			1
Cost of removal		(4	)		(4	)		(5	)		(4	)		(4	)		(6	)
Other		—			(1	)		(3	)		—			(1	)		(2	)
Effective Tax Rate		36	%		35	%		33	%		36	%		35	%		34	%

For federal income tax purposes, Con Edison has a net operating loss carryforward available from 2011 of $484 million, primarily as a result of accelerated depreciation, which if unused will expire in 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. Con Edison had a 2010 net operating loss for federal income tax purposes. In 2011, Con Edison received a refund using the 2010 net operating loss to offset a prior year's taxable income.

For New York State income tax purposes, Con Edison has a net operating loss carryforward available from 2009 of $220 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 2010. Con Edison's federal income tax returns for 1998 through 2010 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 New York state income tax returns for years beginning with 2006 remain open for examination.

The Companies' 2010 and 2009 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, 2011, with respect to the repair allowance deductions, Con Edison recorded a liability for uncertain tax positions of $88 million ($85 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. At December 31, 2011, the Companies' estimated liabilities for uncertain tax positions reflect their anticipated adoption of the new IRS guidance, which did not have a material impact on net income.

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

	Con Edison									CECONY
(millions of dollars)	2011			2010			2009			2011			2010			2009
Balance at the beginning of the year	$	93		$	86		$	118		$	79		$	92		$	108
Additions based on tax positions related to the current year		76			5			—			74			4			—
Additions based on tax positions of prior years		4			67			3			3			49			1
Reductions for tax positions of prior years		(43	)		(4	)		(21	)		(42	)		(4	)		(5	)
Settlements		—			(61	)		(14	)		—			(62	)		(12	)
Balance at the end of the year	$	130		$	93		$	86		$	114		$	79		$	92

At December 31, 2011, the Companies' estimated liabilities for uncertain tax positions ($130 million for Con Edison and $114 million for CECONY) were classified on their respective consolidated balance sheets either as current liabilities ($67 million for Con Edison and $53 million for CECONY) or as a reduction to current deferred tax assets ($63 million for Con Edison and $62 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 2011, 2010 and 2009, the Companies recognized an immaterial amount of interest and no penalties for uncertain tax positions in their consolidated income statements. At December 31, 2011 and 2010, the Companies recognized an immaterial amount of interest and no penalties in their consolidated balance sheets.

At December 31, 2011, the total amount of unrecognized tax benefits that, if recognized, would affect the Companies' effective tax rate is $11 million ($5 million attributable to CECONY).