Con Ed Working Well With New York Regulators To Promote Clean Energy

Strategist

Travis Miller

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Consolidated Edison's core rate-regulated electric and natural gas distribution utilities in New York and New Jersey have produced stable earnings and dividend growth despite regulatory challenges. Now we think regulation is becoming more constructive as all stakeholders in the region pursue aggressive clean energy goals.

New York utility regulation is a mix of good and bad. Regulators historically have allowed low rates of return relative to Con Ed's peers, but they balance that with usage-decoupled customer rates and a three-year rate-setting framework. This improves cash flow and reduces investment risk.

Consolidated Edison of New York, Con Ed's largest subsidiary, reached what we consider a constructive settlement in mid-February that will set electric and gas base rates in 2023-25. We expect regulators to approve the bulk of the cumulative $1.9 billion rate increase, down from Con Ed's $3.2 billion rate increase request.

We expect the CECONY rate increases and rate increases at its smaller New York and New Jersey subsidiaries will support 6% earnings growth at least through 2025. We expect that Con Ed's utilities will average nearly $5 billion of annual capital investment for the foreseeable future.

Con Ed has dabbled in other businesses such as clean energy, electric transmission, and gas pipelines, but it has exited most of those businesses. Management sold its clean energy business for $6.8 billion to European utility RWE. We think is an attractive price for Con Ed's 3 gigawatts of solar and wind capacity mostly outside of New York. Those proceeds will now go to fund Con Ed's utility infrastructure growth investment and potentially some stock buybacks to avoid earnings dilution.

Con Ed has increased its dividend for 49 consecutive years and we expect that streak to continue albeit at growth rates that trail some of its peers. The board raised the dividend 2.5% in 2023, in line with the average dividend-growth rate during the last decade. Dividend growth might pick up slightly with its CECONY rate review and clean energy business sale complete.

Business Strategy & Outlook

We give Con Ed a no-moat rating. Regulation for some U.S. distribution utilities supports economic moats given the implicit agreement to maintain a return on capital for investors in utility infrastructure.

However, regulators in New York have a history of setting rates at levels that make it difficult for Con Ed to earn its cost of capital consistently. Con Ed's latest rate settlement at CECONY for rates in 2023-25 includes a 9.25% allowed return on equity, a step up from the 8.8% in its 2020-22 rate cycle, but still one of the lowest in the utilities sector. We don't expect a significant change in the coming years. Due to forward-looking regulatory frameworks, the utility usually earns near the allowed return; however, the returns on invested capital are only marginally above our estimate of the company's cost of capital. 

The small spread between returns on invested capital and cost of capital provides very little room for what at times can be a challenging political environment when its executives must square off against not only New York regulators but also the governor, the mayor of New York City, and others looking to generate political capital from targeting the utility. Thus, we have low confidence that the company can consistently earn above its cost of capital during the next 15 years.

Con Ed's customers in New York City pay among the highest rates for electricity in the country. The city's infrastructure is very old, mostly underground—which is much more expensive to expand and maintain—and perennially at risk from very serious storm-related damage. These factors also play a role in our lack of confidence in Con Ed's ability to create an economic moat.

Con Ed's nonregulated businesses are not large enough to have a material impact on our no-moat rating.

None

Economic Moat

Con Ed

Consolidated Edison, Inc. operates as a holding company, which through its subsidiaries engages in the business of regulated electric, gas, and steam delivery. It operates through the following segments: Consolidated Edison Company of New York(CECONY), Orange and Rockland Utilities(O&R), Con Edison Clean Energy Businesses and Con Edison Transmission. The Consolidated Edison Co. of New York involves regulated electric, gas, and steam utility businesses. The Orange & Rockland Utilities covers regulated electric and gas utility delivery businesses. The Con Edison Clean Energy Businesses develops, owns and operates renewable and energy infrastructure projects and provides energy-related products and services to wholesale and retail customers. The Con Edison Transmission invests in electric and gas transmission projects. The company was founded in 1823 and is headquartered in New York, NY.

Earnings data Q1 2024

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Consolidated Edison, Inc. is a holding company, which engages in the business of regulated electric, gas, and steam delivery. It operates through the following segments: Consolidated Edison Company of New York (CECONY), Orange and Rockland Utilities(O&R), Con Edison Clean Energy Businesses and Con Edison Transmission. The CECONY segment is involved in the regulated electric, gas, and steam utility businesses. The O&R segment covers regulated electric and gas utility delivery businesses. The Con Edison Clean Energy Businesses segment develops, owns, and operates renewable and energy infrastructure projects and provides energy-related products and services to wholesale and retail customers. The Con Edison Transmission segment invests in electric and gas transmission projects. The company was founded in 1823 and is headquartered in New York, NY.

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