Consolidated Edison

Moat: 3/5

Understandability: 1/5

Balance Sheet Health: 4/5

Con Edison is a regulated utility company, primarily operating in New York City and Westchester County, providing electricity, gas, and steam services, with a significant portion of its revenues coming from its utility operations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Con Edison’s business is primarily focused on regulated utility operations, which provides a relatively stable and predictable revenue stream. This is due to the fact that these types of companies are monopolies.

Business Overview

Con Edison’s operations are primarily concentrated in New York City and Westchester County. The company operates three main segments:

CECONY: This segment delivers electricity to approximately 3.7 million customers in New York City and part of Westchester County. It’s their largest segment and is responsible for the most revenues.
O&R: This segment provides electricity to approximately 0.3 million customers in southeastern New York and northern New Jersey, and also supplies gas to over 1 million customers in NY.
Clean Energy Businesses: This segment represents the company’s interest in renewable electric generating facilities and related products and services

The company has a history of over 200 years of continuous operations which gives it a great operating experience. They have a huge number of employees with a deep knowledge of how to operate this kind of business.

Industry Trends and Competitive Landscape

The utility sector is generally characterized by heavy regulation, high capital costs, and stable demand. Key trends affecting the industry include:

Transition to Renewable Energy: Increased regulatory mandates and incentives are pushing utilities toward renewable energy sources. Con Edison has a target of a 100% clean energy supply by 2040.
Grid Modernization: Investments in upgrading infrastructure, enhancing grid reliability, and incorporating advanced technologies to better manage power delivery are becoming a priority.
Climate Change: A variety of new policy changes and incentives are being implemented at various levels to tackle carbon emissions, and utilities such as Con Edison are increasingly finding themselves as critical players in this change.
Smart Grid Technology: Smart grids are becoming more and more utilized, allowing utilities to monitor and manage energy delivery more efficiently and reduce losses of energy.

The Utility industry is capital and time-intensive. It takes years to build new infrastructure. In the electric space, it is also very difficult to compete.

Con Edison operates in a natural monopoly, so it has limited direct competition in its primary service areas. However, it faces competition from other energy sources, and from municipalities, which can become more of a competitive threat due to changing regulations and incentives for renewable sources. Moreover, it faces competition for acquisition targets, as well as for customers when it expands outside of its core areas.

Although Con Edison is a utility with high fixed assets, it is difficult for competitors to gain access to the regulated market. It requires high capital investments and getting approvals from regulators, both a costly and time-consuming process.

Financial Analysis

A big point of consideration with Con Edison is their heavy regulatory environment, which makes it very difficult to forecast future numbers. Moreover, their financials include a ton of assets/liabilities that are specific to this industry which is very complicated for an average investor.

Revenue Streams: Consolidated Edison’s revenue stream is primarily based on delivery of electricity, gas, and steam in its service areas. Revenues are stable but highly reliant on regulated rates and tariffs. In its 2023 year-end report, Con Edison reported $15.4 Billion in operating revenues.
Operating Margins: The Company’s earnings have been under pressure due to high operating expenses like bought power costs and wages. However, as they streamline their business they have been able to increase margins through improved pricing as well as lower operation expenses. Net Income for Con Edison was approximately $1.95 Billion in 2023 and $1.96 billion in 2022
Capital Structure: A large majority of capital is long term debt with significant repayment obligations over long periods of time. While Con Edison has strong cashflow, the heavy debt obligations limit the availability of cash.
Historical Performance: The company has a history of stable, but rather modest, revenue and earnings growth. The company has shown continued dividend payouts despite market volatility. The ability to continuously grow the dividend is quite attractive.
Share Performance: In 2023 the company stock price has shown decent growth, primarily due to consistent revenue growth. However, the price is not immune to market fluctuations and may lose or gain value based on changing macro environment.

The financial statements of Con Edison are very complex and require a lot of industry-specific knowledge and analytical skills to accurately understand and value them. For an average investor, the sheer volume of regulatory considerations and unusual accounting practices make this a very complex exercise.

Moat Assessment

Con Edison’s moat stems from a combination of factors:

Regulation: Being a regulated utility, Con Edison has a natural monopoly in its service areas, which provides a significant barrier to entry. This ensures a stable revenue stream and limited competition from other providers.
Essential Services: Electricity, gas, and steam are essential services, making them highly inelastic in terms of demand. This provides high customer lock-in.
Infrastructure: The company has extensive infrastructure in place, which requires immense capital investments and years to replicate. Moreover, gaining permits from government agencies to build new infrastructure may take a very long time, making it infeasible for new competitors to enter the market.
Economies of Scale: The high fixed costs associated with utilities makes it difficult for small players to compete. Having economies of scale, and a strong infrastructure to make use of it, provides a distinct advantage.

However, Con Edison’s moat has some limitations:

Regulatory risk: Regulation can limit prices, reduce profitability, and may force a change in business strategy. Although Con Edison has historically been deemed to operate under a friendly regulatory system, changes in laws or political opinions may negatively affect future profitability.
Shift in energy generation: With the shift to renewable energy and new technologies, the cost of electricity may dramatically change and may make a company like Con Edison obsolete over time.
Technological change: In the future we could see a decentralized energy system using new methods that eliminate the need for a company like Con Edison.

While there are many factors that support the presence of a moat, many of them are susceptible to external risks. Based on the current trends in the industry, I give Con Edison a moat rating of 3/5 as the durability of its moat is dependent on the regulatory environment, which can change from time to time.

Legitimate Risks That Could Harm the Moat and Business Resilience

Several risks could potentially erode Con Edison’s moat:

Regulatory Changes: Changes in regulations can restrict pricing power and potentially decrease their returns. Changes in climate policy can dramatically change investment decisions and make the infrastructure less useful in the long term. There is also always the chance of the regulatory bodies taking a less friendly stance towards Con Edison.
Technological Disruption: New energy technologies may lead to decreased dependency on the company’s services. Home solar power or other forms of green energy generation may become more widespread and decrease reliance on the centralized energy system.
Infrastructure Failures: Major equipment failures or system breakdowns, especially during times of high use, can result in substantial financial losses. Additionally, issues like the one in Queens, New York that resulted in a massive blackout, can damage public opinion regarding Con Edison.
Economic Downturn: A substantial part of Con Edison’s business is reliant on New York City, and Westchester County. If these areas see a period of economic decline, there will likely be an impact on the demand for their services.
Debt burden: High level of debt make the business very susceptible to changing interest rates, and high debt levels may be difficult to meet if the business has a hard period.

Business Resilience

Con Edison has a resilient business model in part due to the following

Essential Services: Con Edison delivers essential services, making demand resistant to economic downturns.
Geographic Concentration: Although it may pose some risks, the geographic concentration also allows the company to have better control of the operating environment, and be able to manage local situations more effectively.
Diversification: Although most of their earnings come from electrical and gas utility operations, their clean energy business can help to offset losses in the future from other businesses. Also, their smaller side businesses in providing other services can help to diversify.
Regulation: A well-established regulatory environment can bring some stability to its returns.

Overall, the business is very resilient, but has limited growth, and may be susceptible to unexpected changes in policy.

Understandability: 1/5

Con Edison is very difficult to understand for a normal investor due to the many unique accounting practices specific to the utility sector, its regulatory environment, and its complex financials. For a person who is not well-versed in the utility sector, it would be very difficult to fully grasp their business. The complex relationships and financial obligations can seem impossible to understand without a deep analysis of the sector itself. That is why I am assigning a value of 1/5.

Balance Sheet Health: 4/5

Asset and liability analysis: Con Edison has significant infrastructure assets and significant debts. As a regulated company, the company’s assets must meet regulatory requirements and ensure a constant supply of electricity, gas, and steam.
Debt level: Con Edison relies heavily on debt financing, which adds interest expenses and may cause some issues in a rising interest environment. However, a significant portion of it is long-term debt which stabilizes the payments.
Cash Flow: The Company generates consistent cash flow due to consistent billing. But the large amount of capital expenditure keeps the Free cash flow low.

Overall, the company is well capitalized but is susceptible to interest rate increases. Its financial statements require a lot of specialized knowledge to be analyzed accurately, which may cause a problem for most investors. For these reasons, I will assign a value of 4/5.

Recent Concerns/Controversies/Problems

Rate Hikes: Con Edison recently requested rate increases to make up for increased operation and capital costs, as well as to fund their clean energy transition. These have received some pushback by consumer organizations.
Infrastructure Failures: A significant blackout occurred in parts of New York City last year, causing many to question the reliability of Con Edison’s infrastructure. The company has been investing heavily in upgrading the equipment to minimize this in the future.
Regulatory Landscape: New regulations pertaining to clean energy are likely to bring a lot of uncertainty to operations. Con Edison must adapt to these changing regulatory environments.
Inflation: Inflation has had a notable impact on Con Edison’s earnings and cash flows. As the cost of materials has increased, so has the costs associated with operating their current infrastructure and building new infrastructure.