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Brooks Washington

ED AT A GLANCE

P/E ► 13.5 AVG EV/EBITDA ► 7.40 AVG ROA ► 4.5% AVG ROE ► 8.3% AVG Debt to Equity ► 2.44 AVG Current Ratio ► 0.919 AVG Interest Coverage Ratio ► 2.68 AVG

 

 

 

 

 

 

Consolidated Edison, Inc. is an energy holding company whose two primary subsidiaries are the regulated utilities Consolidated Edison Company of New York and Orange & Rockland. Con Edison of New York provides electricity, gas, and steam to over 4 million customers in New York City and Westchester County and is by far the largest business unity, bringing in 80% of operating revenues. Orange & Rockland provides electricity and gas to over 400,000 customers in New Jersey and parts of Pennsylvania.

As regulated utilities, Con Edison and Orange & Rockland have very little competition and strong customer bases. Their businesses are stable and relatively low-risk because they can rely on consistent customers who pay rates determined by the states’ utilities commissions. Con Edison is embarking on a major infrastructure upgrade to improve reliability and cut costs of energy transmission. The costs for this initiative are thus far essentially borne by the customers—they are included in the rates set by the state—so the project is low-risk for Con Edison and potentially very rewarding.

Still, Con Edison’s future is inextricably tied to its relationship with its regulatory bodies, especially the New York Public Service Commission. The NYPSC is responsible for setting most of the regulations that govern Con Edison’s business—most importantly the rates it is able to charge customers. Due to political fallout from last summer’s blackout in Queens, this year’s rate negotiations are expected to be more politicized and contentious than usual. While Con Edison of New York has taken steps to correct last summer’s problems and make up for its faults, the NYPSC is still under some pressure to reconsider its pro-utility stances.

Company Profile

History

Consolidated Edison’s roots begin in 1823 when the New York Gas Light Company was founded. By 1884, six gas companies had come together to form the Consolidated Gas Company. Around the same time, Con Edison’s electricity business began when Thomas Edison’s Edison Electric Illuminating Company of New York began serving lower Manhattan. Founded in 1882, Edison’s Electric originally served 59 customers in a one-square-mile area. By 1936, Consolidated Gas had bought the thriving New York Edison Company and renamed itself Consolidated Edison Company of New York—reflecting the increasing importance of its electric services. In 1998 the New York utility industry was deregulated and Consolidated Edison, Inc. was created as an energy holding company with Con Edison of New York as its largest subsidiary.

Most recently, in July of 2006, over 100,000 Con Edison of NY’s (CECONY) customers suffered a series of blackouts in Queens during a heat wave. After a week without power, only half of the customers had regained power and CECONY faced growing criticism of its operations. Eventually, they were forced to reimburse customers for spoiled food and other inconveniences. Mayor Michael Bloomberg initiated an inquiry into the causes and responses to the crisis and the political fallout continues today. There is concern that last summer’s power outages will affect CECONY’s rate negotiations later this month.

Businesses and Products

Consolidated Edison Company of New York

Consolidated Edison of New York is by far the largest subsidiary of Consolidated Edison, Inc. and serves New York City and Westchester County. It serves 3.2 million electric customers, 1.05 million gas customers, and 1800 steam customers in Manhattan. Because CECONY primary operations are in New York City, most of its customers are commercial and residential. This makes them more sensitive to weather fluxuations (like last year’s heat wave and the ensuing blackout in Queens), but less effected by economic changes. ConEd is regulated by the New York Public Service Commission. CECONY has no generation capacity, so it has to buy all of the energy it supplies to it customers.

Orange & Rockland

Orange & Rockland is the other utility owned by Consolidated Edison, Inc. and serves the regions northeast of New York City and in northern New Jersey and Pennsylvania. It is significantly smaller than CECONY and serves 294,000 electric and 25,000 gas customers. Its customers are similar to CECONY’s and are mostly residential and commercial with only a few industrial clients. It was purchased by ConEd in 1998 for $790 million and is regulated by the NYPSC as well as the New Jersey Board of Public Utilities.

Unregulated Businesses

Consolidated Edison, Inc. has four unregulated businesses: ConED Solutions, ConEd Development, ConEd Energy, and ConEd Communications. Together, these segments make uup less than 3% of ConEd’s earnings.

• ConEd Solutions is a retail provider of energy services that sells power, gas, and other energy services to a mix of residential, commercial, and industrial customers in competitive markets (small regions where customers can choose their providers). They also provide renewable energy options.

• ConEd Development owns and operates energy generation plans and other infrastructure projects in the Northeast and Mid-Atlantic area. They also provide asset management and facility maintenance services to other generations.

• ConEd Energy provides unregulated wholesale electricity to customers throughout the northeast. ConEd Energy’s customers include generations companies, distribution companies, traders, and municipal and cooperative customers—as well as its cousin ConEd Development. They provide energy sales, risk management, and some ancillary services.

Source: KeyBanc, Morgan Stanley

Trends and Forces

Regulatory Environment

Consolidated Edison’s profits are fundamentally tied to its relationship with the regulatory bodies that supervise its utilities. Because the bulk of its operations are in New York, ConEd is primarily regulated by the New York Public Service Commission (NYPSC). Its operations in New Jersey are regulated by the New Jersey Board of Public Utilities. These bodies set the prices ConEd can charge for energy and mandate maximum rates of return on equity. In the fall of 2006, Orange & Rockland Gas reached a settlement with the NYPSC on rates through October 2009. The settlement allows O&R Gas to achieve ROE between 9.8-11%. O&R Electric is currently allowed to achieve ROE of 12.75% but that agreement expired in October 2006 and is due to be renegotiated soon.

ConEd of New York Electric is also scheduled to renegotiate its rate plan in July of 2007. In the past ConEd has enjoyed a good working relationship with NYPSC and has benefited from a productive regulatory environment. ConEd’s current rate base settlement is built on 11-13% ROE and includes incentives for increasing capital expenditures. However, fallout from last year’s blackout crisis has created a more hostile political environment that could affect the upcoming rate base negotiations. Thus far, ConEd has been fined $18 million for last summer’s power failures and could be further penalized if the NYPSC finds that its performance has failed to meet regulatory standards. In addition, increased scrutiny and politicization of the negotiations could lower allowed ROE and affect the infrastructure projects currently planned for the next few years.

Population and Economic Shifts

As a monopolist, CECONY does not have to worry about competition, but does have to take into account population growth rates. Unlike most corporations, CECONY does not have to compete with other companies for competitors. Not only are they a monopoly, but prices are set by government regulators, so competition would be infeasible anyway. This means that key drivers of growth for ConEd are changes in the populations of the regions it serves. Recently, however, company growth has not come from population increases, but from load growth. This means that roughly the same number of customers have been consuming more energy per capita.

Furthermore, because of its mix of residential and commercial customers, CECONY is relatively protected against economic shocks (at least compared to utilities that serve more industrial clients). Still, ConEd is dependent on the health of New York’s economy and an economic downturn could seriously hurt earnings.

Energy Prices

Consolidated Edison is also subject to fluctuating energy prices. ConEd does not generate any meaningful amount of energy, so it is forced to buy energy on the open market. While this has not been a problem in the past, the potential exists for a crisis where market prices are set too high—and customer rates too low—for ConEd to generate a profit. This happened in California in 2000 and triggered the 2000-2001 energy crisis that left PG&E (a California utility) in bankruptcy. There are no signs of impending price shifts, but a significant price shock would have serious repercussions on ConEd’s utility businesses.

Competitors

Since its primary businesses are regulated utilities, Consolidated Edison does not face much competition in the markets it serves. While its competitive business units obviously must compete in the market place, their relatively small effect on the company as a whole makes competition a negligible force on the corporation. Nationwide, Consolidated Edison is one of the largest electric and gas providers and is the largest provider of steam. While not the only company to provide both gas and electricity, Consolidated Edison is in the minority as more utilities focus exclusively on electricity.

Investment Perspectives

References