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dislocation (more metrics can be found in our Alternating Currents Weekly). We rate ED Underweight to take advantage of this sector dislocation. ED on its own is fundamentally overvalued. ED trades at a 0.5x premium to its peers despite having slower than average growth prospects, increasing regulatory complexity, and the overhanging risk of fines for the Harlem explosion. Table 1: ConEd key stock data Industry US Electric Utilities Market Cap (mn) $22,400 Price $74.07 Total Debt / 2019 EBITDA 3.88 % of sell-side rated Sell 26.3% Short interest % of float 3.94% Source: Bloomberg and BofA Merrill Lynch Global Research estimates Not your grandmothers ConEd - increasing complexity changes investment story ConEd is facing very slow growth electric demand growth in its utilities with 0.2% y/y growth in its CECONY subsidiary through 20201 and -0.1% growth in its O&R subsidiary. To offset this slow growth, ConEd has been increasing the complexity of its business by purchasing gas and electric transmission assets which have higher growth potential but face more market risk (most notably the JV with Crestwood in the Stagecoach midstream pipeline system). Furthermore, the regulatory regime in New York is undergoing a fundamental shift as the Reforming Energy Vision (REV) program is implemented. REV seeks to fundamentally change how utilities are compensated by creating more of a ‘platform’ for energy delivery. Slow growth, changing business mix, and new regulatory constructs add considerable risk to what used to be a “go to” vanilla regulated utility. An overvalued Sector and Potential Catalysts For a long time, ConEd was viewed as the quintessential utility and, during the run-up in Utility valuations in 2016 its shares outperformed despite its weakening fundamentals. As the story becomes more complex and the utility sector adjusts to lower valuation we would expect ED to underperform with a similar symmetry to other utility stocks. Latest reports: Recent BofA Merrill Lynch Global Research Reports Title: Subtitle Primary Author Date Published Utilities: Fed promises more hikes: utes face more downside Brian Chin 15 December 2016 risk in early 2017 Utilities: Alternating Currents Weekly Brian Chin 18 December 2016 1Q17 risks: Risks to our thesis are primarily macro related. If utility sector valuations remain disconnected from historical fundamentals for the quarter or if rising interest rates significantly reverse course our Underweight rating on ConEd could not materialize. Company Description: Consolidated Edison (ED) is the owner of Consolidated Edison Company of New York (CECONY) and Orange & Rockland Utilities (O&R) providing electric, gas and steam service to 3.5 million customers in New York City and the northern suburbs. ConEd also has a transmission segment with gas pipeline, storage, and electric transmission. Finally, ConEd has three competitive energy businesses: ConEd Development (energy infrastructure), Energy (wholesale services), and Solutions (retail services). Bankof America <> Merrill Lynch Top 10 US Ideas Quarterly | 03 January 2017 7 HOUSE_OVERSIGHT_014628