Income Tax

Con Edison’s income tax expense decreased to $175 million for the three months ended September 30, 2018 from $270 million for the three months ended September 30, 2017. CECONY’s income tax expense decreased to $125 million for the three months ended September 30, 2018 from $242 million for the three months ended September 30, 2017. The decrease in income tax expense for both Companies is due primarily to lower income before income tax expense, the lower corporate federal income tax rate of 21 percent in 2018 resulting from the enactment of the TCJA and an increase in the amortization of excess deferred federal income taxes due to the TCJA. Con Edison’s decrease in income tax expense was offset in part by $42 million of income tax expense which, as discussed below, resulted from newly issued guidance on the TCJA and the subsequent re-measurement of deferred tax assets associated with Con Edison’s 2017 federal net operating loss (NOL) carryover into 2018.

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 for the three months ended September 30, is as follows:



	Con Edison				CECONY
(% of Pre-tax income)	2018		2017		2018		2017
STATUTORY TAX RATE
Federal	21	%	35	%	21	%	35	%
Changes in computed taxes resulting from:
State income tax	5		5		5		4
Other plant-related items	(1	)	(1	)	(1	)	(1	)
Renewable energy credits	(1	)	(1	)	—		—
TCJA deferred tax re-measurement	7		—		—		—
Amortization of excess deferred federal income taxes	(2	)	—		(2	)	—
Other	(1	)	(1	)	(1	)	—
Effective tax rate	28	%	37	%	22	%	38	%

Con Edison’s income tax expense decreased to $330 million for the nine months ended September 30, 2018 from $599 million for the nine months ended September 30, 2017. CECONY’s income tax expense decreased to $274 million for the nine months ended September 30, 2018 from $551 million for the nine months ended September 30, 2017. The decrease in income tax expense for both Companies is due primarily to lower income before income tax expense, the lower corporate federal income tax rate of 21 percent in 2018 resulting from the enactment of the TCJA and an increase in the amortization of excess deferred federal income taxes due to the TCJA. Con Edison’s decrease in income tax expense was offset in part by $42 million of income tax expense which, as discussed below, resulted from newly issued guidance on the TCJA and the subsequent re-measurement of deferred tax assets associated with Con Edison’s 2017 federal NOL carryover into 2018.

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 for the nine months ended September 30, is as follows:



	Con Edison				CECONY
(% of Pre-tax income)	2018		2017		2018		2017
STATUTORY TAX RATE
Federal	21	%	35	%	21	%	35	%
Changes in computed taxes resulting from:
State income tax	5		4		5		4
Cost of removal	1		1		1		1
Other plant-related items	(1	)	(1	)	(1	)	(1	)
Renewable energy credits	(1	)	(1	)	—		—
TCJA deferred tax re-measurement	3		—		—		—
Amortization of excess deferred federal income taxes	(3	)	—		(3	)	—
Other	(1	)	(1	)	(1	)	(1	)
Effective tax rate	24	%	37	%	22	%	38	%

CECONY and O&R deferred as regulatory liabilities their estimated net benefits under the TCJA for the nine months ended September 30, 2018. RECO deferred as a regulatory liability its estimated net benefits under the TCJA for the three months ended March 31, 2018. The net benefits include the revenue requirement impact of the reduction in the corporate federal income tax rate to 21 percent, the elimination for utilities of bonus depreciation and the amortization of excess deferred federal income taxes the utilities collected from customers that will not need to be paid to the Internal Revenue Service under the TCJA. See “Other Regulatory Matters” in Note B.

At December 31, 2017, the Companies recorded provisional income tax amounts in its accounting for certain effects of the provisions of the TCJA as allowed under SEC Staff Accounting Bulletin 118 (SAB 118). SAB 118 allowed a one year period for companies to finalize the provisional amounts recorded as of December 31, 2017. In August 2018, the Internal Revenue Service and U.S. Department of Treasury issued proposed regulations that clarified provisions in TCJA on the allowance for additional first-year depreciation for qualified property of regulated public utilities placed in service in the fourth quarter of 2017. Under this guidance, the Utilities deducted $477 million in additional depreciation in Con Edison’s 2017 federal income tax return. The additional depreciation increased Con Edison’s 2017 federal NOL carryover to $563 million (CECONY’s 2017 federal NOL carryover is $153 million), which required a re-measurement of deferred tax assets and liabilities associated with the filing of its 2017 federal income tax return. As a result, Con Edison decreased its net deferred tax liabilities by $16 million (including $51 million for CECONY), recognized $42 million in income tax expense at the parent company related to re-measuring the 2017 federal NOL carryover to 2018 and accrued a regulatory liability for future income tax of $58 million (including $51 million for CECONY). The Companies expect to complete their assessment and record any final adjustments to the provisional amounts by the fourth quarter of 2018.

Uncertain Tax Positions

In March 2018, Con Edison received approval of its tax refunds by the Joint Committee on Taxation for tax years 2012 through 2015. The approval effectively settled approximately $3 million in uncertain federal tax positions. Federal income tax returns for 2016 and 2017 remain under examination.

At September 30, 2018, the estimated liability for uncertain tax positions for Con Edison was $11 million ($5 million for CECONY). Con Edison reasonably expects to resolve within the next twelve months approximately $10 million ($9 million, net of federal taxes) of various federal and state uncertainties due to the expected completion of ongoing tax examinations, resolution of state refund claims and expiration of statute of limitations, of which the entire amount, if recognized, would reduce Con Edison's effective tax rate. The amount related to CECONY is approximately $3 million, which, if recognized, would reduce CECONY’s effective tax rate. The total amount of unrecognized tax benefits, if recognized, that would reduce Con Edison’s effective tax rate is $11 million ($10 million, net of federal taxes).

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 the three and nine months ended September 30, 2018, the Companies recognized an immaterial amount of interest expense and no penalties for uncertain tax positions in their consolidated income statements. At September 30, 2018 and December 31, 2017, the Companies recognized an immaterial amount of accrued interest on their consolidated balance sheets.