Consolidated Edison, Inc. (ED)

Executive Summary / Key Takeaways

• Irreplaceable Infrastructure Moat in America's Densest Market: Consolidated Edison's 200-year-old regulated monopoly serving New York City and Westchester County creates a captive customer base of 3.8 million electric and 1.1 million gas accounts that cannot be replicated at any price, positioning the company to capture surging demand from data centers and building electrification.

• The Rate Base Growth Engine Is Accelerating: CECONY's approved $13.2 billion capital program (2026-2028) will expand rate base by mid-single digits annually, with electric rate plan revenues jumping $486 million year-to-date in 2025, demonstrating that regulators are granting recovery for critical grid upgrades despite political noise.

• Political Scrutiny Creates Near-Term Overhang but Long-Term Opportunity: Public calls from President Trump and Mayor-elect Mamdani to lower rates, combined with the ongoing gas weld investigation and $1.04 billion income tax regulatory asset audit, have created a valuation discount that could reverse if management successfully navigates these challenges while maintaining authorized 9.4% ROE.

• Financial Performance Validates the Strategy: Q3 2025 net income surged 18.99% to $688 million ($1.91/share) on 11.14% revenue growth, with CECONY contributing 93% of profits and operating margins expanding to 25.34%, proving that the 2023 Clean Energy divestiture is sharpening focus on the core regulated utility cash cow.

• Critical Variables to Monitor: The investment thesis hinges on two factors: whether the NYSPSC approves the November 2025 joint proposal that reconciles $33.3 million in gas revenue subject to refund for weld issues, and whether management can reduce aged receivables from $1.51 billion (vs. $408 million pre-COVID) to improve liquidity without triggering a political backlash over collection practices.

Setting the Scene: The Business Model That Cannot Be Disrupted

Consolidated Edison, tracing its origins to 1823 but incorporated in its current holding company structure in 1997, operates one of the most defensible business models in American infrastructure. The company doesn't sell electricity or gas—it sells delivery of these commodities through regulated monopolies in territories that include all of New York City (except a portion of Queens) and most of Westchester County. This distinction matters profoundly: while commodity prices fluctuate and can be hedged, the physical infrastructure that moves electrons and molecules through America's densest urban environment is irreplaceable.

The company's strategy is brutally simple and effective: invest heavily in grid reliability and resilience, then recover those costs plus a regulated return through rate cases. This creates a predictable, bond-like cash flow stream that has supported 49 consecutive years of dividend increases. What makes this moment different is the convergence of three megatrends: (1) data center-driven load growth, (2) New York's aggressive building electrification mandates, and (3) aging infrastructure that requires massive capital deployment. The result is a potential rate base growth acceleration that could drive earnings per share growth well above the traditional utility 4-6% range—if regulators allow it.

Consolidated Edison sits at the nexus of these trends because its service territory includes Manhattan, where land constraints make new generation impossible and grid upgrades are the only solution. While competitors like PSEG (PEG) serve adjacent New Jersey markets and National Grid (NGG) covers upstate New York, neither operates the largest steam distribution system in the United States (15,494 million pounds annually to 1,500 Manhattan customers). This steam business, while small, represents a unique asset that diversifies revenue and serves high-density commercial customers who cannot easily switch to alternatives.

Technology, Infrastructure, and Strategic Differentiation: Why Density Equals Value

The core technology advantage of Consolidated Edison isn't software or patents—it's the physical geometry of its network. With 3.8 million electric customers packed into approximately 300 square miles, the company achieves customer density that no other utility can match. This density translates into lower cost per customer for infrastructure maintenance and higher revenue per mile of distribution line. Why does this matter? Because it creates a structural cost advantage that regulators must acknowledge in rate cases, supporting higher allowed returns than sparsely populated utilities can justify.

The company's capital expenditure strategy reflects this reality. CECONY's electric rate plan (January 2026-December 2028) projects $4.55 billion in Year 1 capital spending alone, focused on grid hardening, substation upgrades, and distribution automation. These aren't discretionary investments—they're mandatory to maintain reliability as peak demand hit 12,530 MW on June 25, 2025, and is forecasted to grow 0.30% annually through 2030. The "so what" is clear: every dollar invested becomes part of rate base, generating regulated returns that flow directly to earnings and dividends.

The 2023 divestiture of Clean Energy Businesses for $3.99 billion crystallizes management's strategic focus. By selling renewable development assets to RWE (RWEOY), Consolidated Edison eliminated the earnings volatility and capital intensity of merchant power, freeing management to concentrate on the core regulated utility where it holds an unassailable market position. The $803 million after-tax gain bolstered the balance sheet, while retaining tax equity interests in select solar projects provided optionality without operational distraction. This matters because it transformed the company from a hybrid utility-developer into a pure-play regulated asset owner, commanding a higher valuation multiple from income-focused investors.

Financial Performance: Q3 2025 as Inflection Point Evidence

The third quarter results validate the refocused strategy. Consolidated Edison's net income jumped 18.99% to $688 million ($1.91/share) on revenue of $4.53 billion, up 10.7% year-over-year. This isn't just a weather-driven bump—weather-adjusted electric delivery volumes increased 0.30% for the quarter and 2.80% year-to-date, indicating underlying demand growth. The operating margin expanded to 25.34%, demonstrating that rate plan revenue increases are flowing through to profitability faster than cost inflation can erode them.

Segment performance reveals where the real value lies. CECONY's electric operations generated $1.124 billion in operating income for the quarter, up 12.63%, driven by a $205 million increase in rate plan revenues. This $205 million is significant as it represents pre-negotiated recovery of capital investments, not subject to quarterly commodity price volatility. The gas segment, despite posting a $122 million operating loss in Q3 (seasonally weak), contributed $601 million in operating income year-to-date, up 2.21% on $199 million higher rate plan revenues. The steam business, while small, saw 22.22% revenue growth year-to-date to $517 million, proving that even legacy thermal systems can generate cash in a decarbonizing world.

The balance sheet tells a story of disciplined capital management. Consolidated Edison's common equity ratio improved to 49.20% at September 30, 2025, up from 47.10% at year-end 2024, while debt-to-equity stands at 1.10x—conservative for a utility. The company generated $3.61 billion in operating cash flow over the trailing twelve months, though free cash flow is negative at -$1.16 billion due to massive capex. This negative free cash flow isn't a warning sign—it's the intentional result of investing ahead of rate base growth, with the promise of future regulated returns.

Outlook, Rate Cases, and the Path Forward

Management's guidance through 2028 provides unusual clarity for a utility. The November 2025 joint proposal for CECONY's electric rate plan, if approved, will implement base rate increases of $222 million (Year 1), $473 million (Year 2), and $329 million (Year 3), but critically, these will be "shaped" to produce consistent 2.80% annual bill impacts. This shaping mechanism is crucial as it smooths customer rate shock while ensuring Consolidated Edison recovers its $13.2 billion three-year capital program. The authorized 9.40% ROE and 48% common equity ratio provide a clear earnings trajectory that analysts can model with high confidence.

The gas rate plan proposal includes a unique feature that directly addresses the weld investigation risk: $33.30 million in annual gas revenue requirement (totaling $100 million from 2026-2028) will be recovered through a rate adjustment mechanism but remains subject to refund pending resolution of the non-conforming welds issue. This structure allows Consolidated Edison to begin earning on gas infrastructure investments while sharing investigation risk with customers. If the NYSPSC ultimately finds no material impact to gas main operations—as management asserts—the company keeps the revenue; if not, it refunds customers. This is a creative regulatory solution that de-risks the most significant near-term uncertainty.

Demand forecasts support the capex program's necessity. CECONY increased its five-year firm peak gas demand forecast from 0.10% to 0.20% annual growth, while OR's gas demand forecast flipped from -0.10% to +1.20% growth, reflecting new business development. Electric demand is rising steadily, and the NYISO has identified bulk power system reliability needs in New York City beginning summer 2026, driven by generation deactivations and project delays. This external validation transforms Consolidated Edison's capex from discretionary spending to mandatory reliability investment, strengthening the regulatory case for recovery.

Risks and Asymmetries: What Can Break the Thesis

The gas weld investigation represents the most immediate risk. Since January 2023, CECONY has identified non-conforming welds and contractor misconduct involving duplicate weld films. Two contractor employees were indicted for wire fraud in August 2025. While management states that "given the nature of the non-conforming welds identified, CECONY does not anticipate significant impact to the operation of its gas and steam mains," the NYSPSC investigation remains open and the company has not accrued any liability. The $100 million subject-to-refund mechanism in the gas rate plan proposal creates a defined downside, but a worst-case scenario involving extensive remediation could pressure cash flows and delay other capital projects.

The income tax accounting audit presents a more insidious risk. Since January 2018, the NYSPSC has investigated the Utilities' understatement of federal income tax expense for ratemaking purposes related to plant retirement cost of removal. As of September 30, 2025, CECONY has accumulated $1.042 billion in income tax regulatory assets that are not earning a return. Management's strategy is to obtain an IRS private letter ruling confirming this constitutes a normalization violation curable through future rate increases rather than a write-off. If the NYSPSC orders a write-down instead, the hit to equity would be material—potentially 3-4% of total equity—and would permanently impair future earnings power. The fact that these assets earn no return creates a $50-60 million annual drag on earnings that will persist until resolved.

Political pressure on rates has escalated from rhetoric to direct intervention. President Trump's statement that "we have to get Con Edison to start lowering their rates" and Mayor-elect Mamdani's similar demands create headline risk, but the structure of utility regulation limits their practical impact. Rates are set by the NYSPSC through formal rate cases, not political fiat. However, sustained political pressure could influence commissioner appointments and make future rate cases more contentious, potentially compressing the authorized ROE below the current 9.40%. Every 50 basis point reduction in allowed ROE translates to approximately $100 million in lost annual earnings potential, highlighting the sensitivity of earnings to regulatory decisions.

Customer accounts receivable have ballooned to crisis levels. CECONY's aged receivables (over 60 days) reached $1.511 billion at September 30, 2025, compared to $408 million pre-COVID. While the November 2025 joint proposal includes reconciliation mechanisms for uncollectibles with annual caps of $8.5-17 million for electric and $1.5-3 million for gas, amounts exceeding these caps are deferred as regulatory assets for future recovery. This structure delays cash collection and increases working capital needs, explaining why operating cash flow is strong but free cash flow remains negative. If collection efforts fail to reduce aged receivables, liquidity could tighten just as capex peaks.

Competitive Context: Why NYC Density Trumps Scale

Comparing Consolidated Edison to its ostensible peers reveals why traditional utility metrics miss the point. PSEG serves 2.4 million electric customers across New Jersey with operating margins of 27.03% and ROE of 12.58%, both superior to ED's 25.34% and 8.84%. However, PSEG's customer density is a fraction of ED's, and it lacks the steam business that provides $517 million in high-margin revenue. More importantly, PSEG's rate base growth is driven by offshore wind investments that carry development risk, while ED's capex is focused on reliability upgrades with near-certain recovery.

National Grid operates at massive scale across the UK and US Northeast, with 100% gross margins (due to different accounting for pass-through costs) and 7.87% ROE. Its US operations face similar regulatory dynamics, but its international diversification creates currency risk and caps the upside from New York-specific load growth. ED's pure-play focus on the world's most important urban market means every dollar of data center load growth flows directly to its bottom line, while NGG must share gains across multiple jurisdictions.

Exelon (EXC) and Duke Energy (DUK) are national-scale utilities with 10+ million customers each, but their geographic dispersion reduces customer density and increases exposure to regional economic cycles. EXC's 1.78x debt-to-equity ratio and DUK's 1.70x are both significantly higher than ED's 1.10x, reflecting the higher risk profile of their diversified operations. ED's lower leverage and concentrated territory create a more predictable earnings stream, justifying a premium valuation multiple despite slower absolute growth.

The real competitive threat comes not from other utilities but from energy service companies (ESCOs) and distributed generation. In New York, customers can choose alternative electricity suppliers, potentially saving 30-50% on commodity costs. However, they cannot bypass Consolidated Edison's delivery network, which represents 60-70% of the total bill. This structural reality means ESCOs compete for the low-margin commodity portion while ED retains the high-margin, regulated delivery monopoly. As data centers and commercial buildings install on-site generation, they reduce commodity purchases but increase reliance on ED's grid for backup and ancillary services, potentially creating new revenue streams.

Valuation Context: Pricing in Regulatory Certainty

At $100.36 per share, Consolidated Edison trades at 17.55x trailing earnings and 17.86x forward P/E, with a 3.39% dividend yield and 59.09% payout ratio. These metrics sit squarely in the middle of its peer group: PEG trades at 20.08x earnings with a 3.02% yield, NGG at 19.27x with 4.10% yield, EXC at 16.89x with 3.40% yield, and DUK at 19.52x with 3.44% yield. The valuation implies the market is pricing ED as a "average" utility, neither discounting for its unique risks nor premiuming its irreplaceable assets.

The enterprise value of $62.72 billion represents 3.78x revenue and 10.54x EBITDA, both reasonable for a regulated utility with stable cash flows. The price-to-operating cash flow ratio of 7.82x is attractive relative to PEG's 14.16x, suggesting the market may be undervaluing ED's cash generation ability. The key valuation driver, however, is the regulatory compact: the market is assigning a 9.4% cost of equity (the authorized ROE) to ED's rate base growth, implying mid-single digit earnings growth that supports the current multiple.

What matters most for valuation is not the absolute multiple but the sustainability of the dividend. With a 59% payout ratio and $3.61 billion in operating cash flow covering $1.82 billion in annual dividends, the dividend appears secure even if earnings growth stalls. The negative free cash flow is a function of elevated capex, not operational weakness, and will reverse as rate base growth slows and depreciation catches up. Investors should focus on the spread between authorized ROE (9.4%) and the dividend yield (3.4%)—the 600 basis point gap represents compensation for regulatory and execution risk.

Conclusion: The Regulatory Tightrope Is the Investment Thesis

Consolidated Edison's investment case distills to a single question: Can management maintain its regulatory compact while investing $13.2 billion in critical infrastructure over the next three years? The Q3 2025 results suggest yes—earnings grew 19%, rate plan revenues are flowing through to margins, and the balance sheet is strengthening. The gas weld investigation and income tax audit create near-term overhangs, but the proposed subject-to-refund mechanism and management's confidence in IRS normalization relief provide paths to resolution.

The political pressure from Trump and Mamdani is noise, not signal. Rates are set by the NYSPSC through rigorous rate cases that have already approved 9.4% ROE and shaped bill impacts of 2.80% annually. The real risk is that sustained populism influences future commissioner appointments, compressing allowed returns. However, the objective reliability needs identified by NYISO for summer 2026 and the mandatory nature of grid upgrades create a powerful countervailing force that favors continued reasonable returns.

For investors, the asymmetry is attractive: downside is limited by the regulatory asset recovery mechanisms and dividend yield, while upside comes from successful navigation of current investigations and execution on the electrification-driven load growth forecast. The stock at $100.36 prices in neither the potential acceleration from data center demand nor the risk of regulatory capture. The critical variables to monitor are the NYSPSC's final decision on the gas rate plan proposal and the trajectory of aged receivables collection. If both trend favorably, Consolidated Edison's unique position as the gatekeeper of New York City's energy future will translate into predictable, growing cash flows that reward patient utility investors.