Consolidated Edison, Inc. (ED) Earnings Call Transcript & Summary

Well, welcome, everybody. It's the first session of the day for the Citi's Global Energy and Utility conference. My name is Ryan Levine. I cover the utility and energy infrastructure space. I'm pleased to be joined here with Con Edison's CEO, Tim Cawley. And yes, maybe I'll hand it off to Tim if you have any opening comments.

Yes, Ryan, thanks a lot. Very great to be here. And as we sort of work our way out of the pandemic, very optimistic about our future, incredible people, incredible service area to provide vital services to. We've been doing it for over 200 years. Or almost 200 years. We are steady at the helm, 47 years of dividend growth. And I think, really, our focus will be on -- continue to be on delivering safety, reliability and customer service to this great region. Also look to help the region transition to this clean energy future. We think we're well positioned to do that, and it will provide us with some really great investment opportunity. And also, given all that has occurred over the last year regarding systemic inequality, really working to build on a strong, long foundation here at Con Edison to redouble our efforts to read the workplace certainly in society of those issues. And have articulated a number of goals around that space. But maybe best to open it up to the discussion, and we'll be able to cover around that way.

Okay. Great. Maybe to start off from a high level. You've been you've been in the current seat for about a quarter now as the new CEO of Con Ed. What are your reflections on the first few months? And what are your -- what are you hoping to accomplish?

Yes. So yes, the first quarter has gone quickly. I'm 34 years at Con Edison right out of college. So lots of experience in the company, and I sort of carry that into this first quarter. And frankly, 2020 was a very challenging year, a year like no other from so many perspectives. But as I mentioned, I'm really encouraged about the company or service territory and our future as we move forward. A few reasons for that. The first is it really does feel like we're moving past this pandemic. New York City and the area is incredibly resilient. You'll find the Great Recession, we were amongst the first to recover. And while we need to stay focused on all of the safety guidelines, that's the public service announcement I always make. The size and recovery of all around us. I think on Monday, subways are open 24/7, ballparks will fill more broadway shows are opening. So you can feel the level of energy and sort of return happening to our region. The employment base in New York City is really strong, and part of that is because it's expanded and evolved. And people will, I think, in the next normal take on different roles and work schedules, but it will be a strong vibrant economy in New York. We are a cultural Mecca. More and more technology is moving into the area, higher ed, high tech. And we continue to obviously be financial and media centers of the world. The second piece of optimism I hold is societies and New York state, frankly, and Con Edison's desire for a clean energy future. It's a driving force in everything we do. And Ryan, when you think about big disruptions such as the pandemic, and frankly, they may be no bigger than the pandemic policymakers can often take that hit and reflect and rethink about what the priorities are coming out of that event. And I think with regard to the desire for clean energy transition, policymakers and society have only redoubled their conviction that this is the right thing to do. So rather than backing off of that coming out of this hard period, I think there's more conviction around it. And I think that feels right for con Edison, and it certainly feels right for the area. And the other piece of the clean energy transition that I'm optimistic about is that not only will it be good for the earth, but it can help revitalize the economy, lots of good jobs in that space. We recently did a solar project on top of niche housing and effectively, Nitro residents can subscribe for lower fees by participating in the clean on each transition. And Nitro residents are actually trained to be the workers in that new industry. So it's about jobs, it's about availing low and moderate-income customers to this clean energy transition and using good space on Nitro roofs to reduce this renewable energy. We think we're really going to be a leader here and we have the expertise and the balance sheet to do so. And my third piece of sort of optimism as I come out of the first quarter, is our people. Ryan, they built cease to amaze me, I feel incredibly proud to be part of this team, their resiliency, innovation, dedication to the customer through all of this has been, frankly, incredible. It hasn't wavered. So a lot of challenges we're coming out of, but I think I walk into a period with great optimism for society, for our investors and for our employees as we move forward.

Appreciate that. So you touched on the clean energy ambition. What do you see as the pathway to get greater participation for your utilities in the state's clean energy and?

Yes. And I would say that we are already extensively involved in that. It's sort of foundational to who we are, environmental excellence and a commitment to the environment. And I think there's more we can do so in terms of the -- we're already participating in that pathway, our energy efficiency programs and investment and earnings of that investment have grown considerably over the last few years. We have a very talented team that can deploy this energy efficiency to the benefit of our customers. We'll invest $1.5 billion by 2025. And uniquely, that investment used to be an expense pass-through and has since changed to what looks like rate base over a 10-year depreciation period. So we're able to deploy the capital, help investors save money, help the environment and earn for our investors at high levels of investment. We're also going to invest about $350 million in total in EV makeready programs. So Ryan, in this city of ours, about 20,000 vehicles are registered as electric vehicles. And really low, if you've driven the New York traffic, 20,000 vehicles like no vehicles. And there's great ambition to grow that significantly to get the clean energy future we're looking for, really need to hit 3 sectors: We need power generation, and there's a renewable piece that I'll talk about, renewable generation. There's building heating, and that's really the electrification of heating. And then there is electrification of transport. And we have lagged many areas in the country. California really leads the way. And so the issue with the lag is this range anxiety. If folks can't find chargers, they're reluctant to get a car for fear getting stuck. And so we'll invest $350 million in Make Ready effectively putting the infrastructure in to serve these chargers and the building owner to take advantage of that incentive simply has to make those charges accessible to the public. And so we're getting big interest in that. And once the charges come out, people will be relieved at that range anxiety, and I think we'll see a lot more EVs on the road. So that all goes to say, we're already playing a big role. We're also doing a lot on battery storage, Ryan. New York state has a goal of 70% renewables by 2030, and much of that will be wind and solar, which is intermittent. You get what the sun and the wind provide and so to keep the grid reliable and firm, you need things like battery storage. We are working with a partner to develop the largest battery storage project in New York state. It will be placed in Queens in a storage. And the irony here is that storage site will be at a location of a former fossil fuel power plant. So it really points to the start transition the region is going through. We'll work with that partner. We'll invest and earn on that investment over a 7-year period. And then the last piece that I'd want to talk about -- we haven't taken a foothold yet, but we continue to make a strong case is on large-scale utility ownership of large-scale renewables. These are large solar fields, in particular. And as I said, New York state has a goal of 70% renewable by 2030. And today, as we sit here, about 25% of New York State's energy is produced by renewable power. And of that, most of it, 22% of the total, most of the 25%, is Canadian hydro. So we really haven't moved the needle a whole lot on the renewable front, 3% consists of solar and wind. There is more and more being procured, but there's a far way to go to make the 70/30 goal, 70% renewable by 2030, we estimate around 2,000 megawatts of renewable will be needed in the state per year between now and 2030. And so we think for a few reasons, we should help participate in that help the state achieve its goal. The first is it's good for customers from a cost perspective. We would competitively source these things. We would get a regulated return on it and the customers would benefit from the full life of that asset. So after -- typically, a private developer would sign a 20-year purchase power agreement. After 20 years, that site is still producing electricity. And effectively, that power would be recontracted, the customers would pay a second time for those assets. Under our model, customers would get every bit of good out of that asset to the bitter end. And so in addition to that residual or tail life value, which is significant for customers, if we change technology out, the customers would benefit from that. The capacity of solar panels is getting better and better every day. So in 15 years, you might change panels out and increase production by X percent. And again, customers would benefit from that. And the last piece about customer benefit in New York state would be New York state residents and customers would get all of the benefit, and that power would stay in the state. That may not be the case with 20-year contracts and others. So we're -- there are bills that are being considered in the state Senate and assembly. We're getting some support or at least interest to explore from some labor unions and some environmental groups. So the path forward is not fully clear on how we can participate more in that space, but we continue to make the push. As I've said, given the very aggressive goals New York state has, every day that passes, we think our case becomes more compelling, which really should be all hands on deck. And I'll add one more thing, Ryan, and then I'll let you in. Transmission is another key to unlocking this clean energy transmission. We'll be participating in some transmission projects in Brooklyn and Queens to alleviate some peaker units that will be retired because they will make emissions limits. And maybe I'll stop there and we can pick that up in another time or in-depth later in the discussion.

Yes. I appreciate that comprehensive answer. Maybe touching on the last point around transmission. So last week, you announced the 600 -- my memory serve me the $600 million transmission projects for your clean energy solution to address congestion issues with some peaker going offline, more broadly around transmission investment opportunity. Are there other opportunities that you see to augment your baseline plans to help address reliability for customers and other needs? Or this more discrete in nature given the project scope?

No, I think it's broad, and I'll sort of hit on 2 specific projects that we're into and then talk about the broad nature of the investment level needed in New York state to move renewables to where they need to be. So the first you mention is New York Energy Solutions. We're part of Transco. Those are the investor-owned utilities formed a holding company, and we'll invest -- we are investing and building now in a project that will move power from the northern part of the state into the load center. New York City and Long Island consume about 40% of the power in the state. So a pretty big state geographically. But our small footprint is where the energy density is. And we need to move power from where it is -- renewable power, upstate New York into this region. So that's a $600 million project. We own about 46% of that project, and that will go into service in 2023. You mentioned the peaker units, and I did as well. So these peaker units come on. They don't run a lot, but they are high emitters of Nox. And the DEC came in and said, if you can't meet these standards by '23 and '25 -- 2023 and 2025, you'll need to retire. It will cause about 1,400 megawatts of these peaking units to retire. We just got approval in between rate cases to do 3 transmission projects within the areas of Brooklyn and Queens and a little bit in Staten Island to address the loss of that generation. So one project will go into service in 2023, the remaining two in 2025. The total investment is about $780 million. And that's a really good example of the investment level that will be needed to transition the grid from what it does today to what we will need it to do in the future. And then I'll spend one more -- half a minute on the broad transmission need, the joint utilities filed in the proceeding started by our regulator. And the real question to be answered was, if we're going to put 70% renewables by 2030 and emission-free electricity sources by 2040, 100%, what does the grid need to do from a transmission and a distribution perspective? And the answer is across the state, about $12 billion of investment in transmission, $12 billion. And in our region, we think it's about $4 billion of that $12 billion. And a big piece of that is the state as part of their initiative -- their transition initiative to a clean future, the state has embarked on 9,000 megawatts of offshore wind. And part of that transmission need, part of that $4 billion is, how do you land 9,000 megawatts into New York City and Long Island and then move it throughout the grid? We envision transmission hubs that would basically bring these leads into a central substation and disperse it from there. We think that's the most economical and efficient way to do it, and that would be part of the $4 billion. And Ryan, I, sort of, should be clear, the manner in which that work gets digged up and awarded is not fully clear yet. So we may get some of it. Much of it might be competitively bid. And it might be public solicitations. But sort of the gist of what I'm saying is the scale of investment in our space is going to be very big over the next decade or two.

Are you playing a role in, I guess, PJM is running a process to review the transmission needs for offshore wind. And there's some debate around some type of backbone system versus more spaghetti like distribution? You mentioned hub and, but how does that play into the broader conversation with the grid operators and other parties?

Yes. And I think, Ryan, I'll answer sort of generally. The first few win projects that are being developed, is already awarded about 4,200 megawatts and $1.2 billion in two lots. But the first lot that's been awarded really will be a generator lead connecting in conventionally to our system to substations or system. Much like any other lead would connect in the interconnection process. And when you look forward and you plan for the longer term, individual generator leads for 9,000 megawatts is not the most cost-effective or reliable system that we can build to. So the early -- the origins will be generator leads coming in, but there's got to be a broader view of what's going to be out there and how to best receive it. And that's where we come up with the transmission hubs. And in many places, Ryan, they've started with leads and then as there's some critical mass of generation at sea, you begin to do a sort of a bus bar at sea, if you will, an interconnection so that you can flow power to multiple points on the grid, and that will get built out. So we know the goal of the state is 9,000 megawatts. There's been awards for over 4,000. And we said if all this is coming, let's plan for it. And frankly, we think the hub sort of -- this receiving hub is efficient for bidding as well. It's a common bid. People are getting -- going to get out to that bus far on the substation at a common location, and it will make comparisons of competitive bids easier to do.

Okay. That's helpful. Maybe switching gears slightly. So you recently, I guess, impaired the stage coach asset. Was the genesis of that impairment? Was it purier accounting? Or does that signal that a sale is imminent, given the improved strength in midstream capital market activity and some of the and rights of some of your partners in that project?

Yes. So we invested in 5 or 6 years ago. And that team, at that point, we really viewed midstream gas as part of the solution to the clean energy future, a bridge fuel. That thinking has changed on our part and many others, particularly in the Northeast. And so really, this midstream gas is not part of our long-term strategy. And we don't have a lot of it. We've got really stage coach and MVP. And so we're really considering strategic alternatives now. We're in the throes of the process to see what we'll do with it. And as you said, we recorded impairment. And the range of our outcomes for earnings in 2021 really considered the strategic option. So from high to end low, whether we hold it or sell it. But we're in that process now and would expect to make an announcement we will make announcement at the proper time once that disposition is settled.

Okay. That's helpful. And can you just remind us that your partners have a ROFR or ROFO? Or how does -- how do the contractual arrangements work there?

Yes. So we've been largely locked step with our partners on the process. So I think they have a ROFR. I would have to check. But I can tell you, Ryan, that the discussions with, our partner, have been really positive, and we're working toward a mutually beneficial solution at the end of the day.

Okay. And then maybe in terms of -- we start off with COVID related recovery as where you're in the office in person, curious what the long-term plans are for Con Ed as an organization around O&M cost management as more and more people are returning to the office. From a footprint need and cost management, how you're envisioning that post-COVID?

Yes. And just to frame it a little bit. So obviously, we provide essential services to this great city in the region. Notwithstanding the horrific impact of COVID. About half of our folks never stop doing precisely what they do. We spread them out, we staggered chips, but the people who fixed gas lines and install them and repair the electric cables and the overhead lines, they continue to do what they were doing. So about half we spread them out. We staggered chips. We made sure we filed CDC guidelines, but they kept doing what they're doing. The other half, very quickly were able to support the operations remotely and we'll start to bring those folks back. And we have a team. We have a pandemic team that's been around for a long time that really helped us react quickly last march to this virus and its impact. And we also have a team looking at sort of return to the next normal. And some of that might have an impact on real estate footprint going in both directions, we might need more -- a little more space in some facilities. We might have to adjust ventilation in some facilities, and we're working through some of those things. And then it might call for certain folks or certain folks working from home more than they do now. Our contact center is one example. We have historically had our folks in on-site in the call center activities. And we've been really effective in a remote stance. So there might be a percentage here for contingency and security, but many of those folks might continue to work from home, and that would shrink footprint on certain of those. Really not anticipating sale of properties, but in some cases, we lease properties here and there, we would take a look at leases moving forward. And we have a team, frankly, looking at that, Ryan. No decisions made yet firmly, but we've got a close eye on that.

Great. And then maybe in terms of the regulatory outlook, how are you thinking about approaching the relationship with the state and city differently than your predecessors? Or how are you envisioning the key priorities from those relationships?

Yes. I wouldn't say differently. We understand great value in working closely and collaboratively with lawmakers and policymakers and elected officials and other key stakeholders, and we'll continue to do that. I think we -- it's our belief, and frankly, in our nature to be incredibly transparent about issues and we think if we share transparently and provide input and keep line the communication open, it can help with regulatory outcomes and frankly, outcomes for our customers. When we make a case hard, I went on a little bit about large-scale renewable ownership. We really do think that's in the best uses of our customers, and that's why we won't let it go. And so I would say the same approach with a focus on transparency and over lines of communication with all those folks, key stakeholders.

In terms of maybe a broader kind of perspective, is there more appetite for acquisitions or divestitures on a go-forward basis. You highlighted several times appetite for more renewable. I think you're referring mostly to New York state, but to be part of the Kone portfolio with the shift towards clean and green. Where are your priorities lie on that front?

Yes. Commercial acquisitions, I would say, and I will always say, we'll look at it. I think it would have to work for our customers. It would have to work for our shareholders. So there have to be real value out of the synergy there. I think would have to be sort of practically doable. If we were ever to think about an M&A, would we see it through the end I think we'd be focused on ensuring that a partner had the same sorts of values and interests. We are really committed to a clean energy transition. And so any partner would either have to be on that road or be willing to aggressively get on that road. And I don't think that's unique in our industry. The -- I think people are in different places at the starting gate, but a desire to move ahead is there. We would want to make sure the desire and pace was equivalent. So we're always looking at these kinds of things. And I would say, good for shareholders, good for customers, doable and sort of consistent minded with regard to our values, particularly as it relates to green and the clean energy transition.

Okay. And then just in terms of the surcharge proceeding or petition filed last month to get recovery in September. Maybe more broadly, how are you looking at a post pandemic world around trying to address some of the regulatory mechanisms you have around bad debt expense and other issues?