ED Consolidated Edison
Excellent regulated franchise earning only slightly above its cost of equity; at 1.6x book the price is still fully valued.
The story
Con Edison is a near-pure regulated wires-and-pipes utility: CECONY in New York City provides most of its earnings, with the rest from O&R and transmission. Its returns are capped by NY PSC rate orders, with an allowed ROE of about 9.2-9.5% and earned returns usually a little below that. Trailing ROE of 9.2% is in line with the allowed level, not a cyclical peak. The balance sheet is solid investment grade, and book value grows with a large clean-energy and resiliency capex plan, partly funded by issuing new equity. The price has eased from 108 to 103.5, but the market still pays about 1.6x book for a spread of only about 1.3-1.5 points over cost of equity.
I raised ROE slightly, from 9.0% to 9.2%, because trailing earnings and the new CECONY rate plan both support earning close to the allowed return; it stays below allowed because of regulatory lag and NY's tough regulators. Year-1 book growth moves up a little to 4.5% to reflect rate-base capex net of equity dilution. Terminal growth stays at 3.5%, below the 5.24% risk-free rate. Beta stays at the 0.55 anchor, which gives a cost of equity of about 7.7%.
Value drivers
| Return on equity (normalized) | 9.2% |
| Book-value growth (Y1) | 4.5% |
| Terminal book growth | 3.5% |
| Beta | 0.55 |
| Failure probability | 0.4% |
| Cost of equity | 7.7% |
Valuation bridge
| PV of excess returns | 2.89B |
| PV of terminal excess | 6.02B |
| Equity value | 32.97B |
| ÷ shares → per share | $89.15 |
Projected excess returns on equity
| Yr | Book equity | ROE | Excess return | PV |
|---|---|---|---|---|
| 1 | 24.19B | 9.2% | 359.95M | 334.18M |
| 2 | 25.28B | 9.2% | 376.14M | 324.21M |
| 3 | 26.39B | 9.2% | 392.65M | 314.21M |
| 4 | 27.52B | 9.2% | 409.45M | 304.19M |
| 5 | 28.66B | 9.2% | 426.51M | 294.18M |
| 6 | 29.83B | 9.2% | 443.81M | 284.19M |
| 7 | 31.00B | 9.2% | 461.31M | 274.25M |
| 8 | 32.19B | 9.2% | 479.00M | 264.38M |
| 9 | 33.39B | 9.2% | 496.83M | 254.58M |
| 10 | 34.59B | 9.2% | 514.77M | 244.89M |
Key risks
- NY PSC pressure on affordability could cut allowed ROE or disallow capex as customer bills rise
- Equity issuance to fund the capex plan dilutes per-share book growth
- Higher-for-longer rates raise both cost of equity and debt costs, compressing utility multiples
Catalysts
- Constructive results from CECONY rate cases and multi-year rate plans
- Approval of large transmission and clean-energy projects that grow rate base faster