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

Okay. Great. Good morning, very excited for our next panel with ConEd, and we've got the CEO, Tim Cawley here. Tim, thanks for joining this morning.

Good morning. Thanks for having me, Steve.

Yes, you bet. And as always, we are going to start with a poll question. So Tatiana, let's get our question.

So here's a big picture one, and it's on the risk side. So what's the biggest risk to utility stock? Is it -- we still have -- keep having a bull market, no one wants to own them? Is it commodity price inflation pressures? Is it climate event risks? Or is it rising interest rates? I feel a little worried after reading all these off. But great. Well, Tim, I'll let you could answer that later on if you want as well. But let's start the discussion just with a quick snapshot of ConEd and what are the key investment highlights for folks here on the call today?

Sounds great. And really great to be here, and we'll get to know each other in person at some point post-COVID. In New York, things are picking up and I'm an optimist, but it feels like we're heading in a really good direction. So for ConEd, really a story about durability, reliability and financial stability. We've been at this -- in this great region New York City for just about 200 years. So the next few years, we'll cut the ribbon on that. Longest continuing listed stock on the New York Stock Exchange, long streak of dividend increases 47-years, the longest such streak of any utility and an S&P. And we are really proud of our ability to deliver world-class electric reliability to our customers, we serve 3.5 million customers. And when you look at our reliability from a frequency of [indiscernible] standpoint, how many times my lights go out. We are 8 times more reliable than the national average. And when you think about other services that you consume, there aren't many things you consume that are 8 times better than the average. And so we're really proud of that. And that's the result of diligence and investments and some really great engineers and operators. We serve this incredibly resilient region, and COVID has really locked New York City and the surroundings, but feel very good about the comeback there. Steve, we have a really strong ESG story. Environmental stewardship goes way back, we stopped earning call over 50-years ago. We introduced energy efficiency at that time. We all know nuclear. We are through our clean energy businesses, the second largest solar producer in North America and the 7th largest in the world, we've got a really great team there. We're focused on climate change, we did a groundbreaking vulnerability study and followed that with an implementation plan that the New York Times called the Gold Standard for the utilities really proud of that work, and that will be iterative and ongoing. In the ESG realm, under social, our employees in the public are top of mind, deliver the best safety performance in our history last year. And we're using innovation, Steve, one example is we've introduced remote methane detectors. So we put a device at the entry point of the pipe in buildings that detects natural gas alarms to our control center. And so whether your home or not or whether you smell gas or not, we're going to respond, and it's really a game breaking safety breakthrough. We're using our smart meter network communications to deliver that capability. From a governance perspective, we have a really talented, diverse board. They are focused on cyber, long range planning, climate change. And recently introduced executive comp metrics around diversity and inclusion for the company. We get to serve this great state and they -- New York State and the city are -- have really robust, ambitious climate change goals. And that will provide us with great opportunity for investment. We think we're uniquely qualified to lead that transition. So whether it'd be EV infrastructure, battery storage, energy efficiency, transitioning to a [indiscernible] gas system. We really have a robust pipeline of investment. Transmission will invest $1 billion over the next 5 years on helping the grid move from where it is today to a place that allow for the delivery of greater renewables to the load center. Another $1 billion in solar and wind for renewables. And a bunch more transmission behind that, we'll likely talk about that later. So the transition to clean energy is really our path forward and we'll provide great investment opportunity, allow us to, sort of, clean up the environment, address climate change and provide strong returns for our investors.

Thanks, Tim. You know, that was actually a great intro and a lot of interesting things that you're doing. I was just thinking about it, ConEd stock price doesn't really, kind of, trade so well relative to some of the story you just -- and investors talked about there. What's your perspective on maybe the disconnect there? Is it just New York regulation and the like and -- or are there other things that you think you can do to kind of help, kind of, connect that investment story with where the stock value trades?

Yes. Really great question, Steve. So I think there are a few things. New York regulation is tough, we are working on that. I would say that the balance off of COVID has been disruptive, for sure, and the regulatory treatment that we received thus far. We are working, we have a petition to recover late payment charges. And that's a big -- that has been a big drag over the last -- since March of 2020, about $50 million in revenue in 2020. And this year, as we close out the year, it'll approach $70 million. So we have a petition for that, that's being reviewed by the Public Service Commission. But that has certainly been a recent drag. I think in addition, you know, I mentioned the Clean Energy businesses, it's our sense that the value there is not fully reflected in the stock price. And part of that, we think, is a lack of recognition of the robust pipeline and the delivery and the path of that pipeline. We have about 2,700 megawatts in operation today, the second largest in the United States, and this is growing. You heard President, Biden talk about solar as a huge component of this clean energy transition. So in addition to the 2,700 megawatts, we've got a pipeline of about 3,000 megawatts of mostly solar and some storage. And early, late and sort of middle stage prospects, but the team has delivered on this. So we're going to try, we had the [G-Day] in August, we'll try to provide more disclosure and transparency on that pipeline to get it -- it's value better reflected in the stock price. I think the other thing that might be missed somewhat is our leading position on climate change, vulnerability and the programs we're putting in place to address it. So for us, it's really a two-pronged approach. The first is to reverse -- mitigate the climate change, and that's really clean energy transition, EV, storage, energy efficiency, renewables. And the other is to come to recite the fact that independent of how successful we are in reducing carbon emissions. Climate change is going to impact us over the next few decades, that's what IPCC says. That's what our climate change vulnerability said, we worked with Columbia University, who did some really in-depth analysis about local climate change and importantly, its impact on our infrastructure. And I'll give you a wonderful instance. So today, in Central Park, about four days a year, it hits 95 degrees. The study would tell us in the 2,030s, that will be 11 days and a decade later, maybe 23 days. So hotter, longer heat waves will have an impact on not only electricity demand, but also it will impact our equipment. Cables and transformers are limited by heating, and they typically cool at night and then in a three-day heat wave or four-day heat way and get back at it. So we'll have to watch that from a flooding perspective, if you look back 30-years sea level rose 0.3 feet. The study tells us that moving forward 30-years, 1.3 feet. So really [indiscernible]. So we're planning where do we put submerse equipment, we'll invest in a piece of infrastructure, call it, a transformer that will serve our customers for 40-years. And so we want to make sure when we put it in, the sea level rise won't impede its ability to serve reliably. So we're really looking at that. So in terms of resilience and climate change mitigation, we think there's a real opportunity for investment to allow society to meet its goals and to provide the resilience system that, frankly, New Yorkers expect and deserve.

Well, that's helpful, thanks. And so maybe just circling back, Tim. Obviously, you've been at ConEd a long time, but still relatively newer as CEO. So I'd be curious, kind of, a little bit of maybe what you view as your charge? What are you doing differently in terms of focus of the company? Than the past and would be helpful to, kind of, get a sense of that?

Yes. And I'll start with what's the same, and we serve 3.5 million customers, densely populated 10 million people, so complex energy systems, so safety, reliability, customer service, that's table stakes, and it's our focus every day. What I would add on to that are a few things, particularly off of last year's events, a renewed focus on diversity equity inclusion. We have had strong programs here, and we have an incredibly diverse workforce, but there's always more work to do, and we're really focused on that. I talked about the clean energy commitment that is our path forward. And so it will provide for our ability to help society achieve its goals and provide significant investment opportunity. And so we're pursuing that. And then lastly, frankly, looking at profitability for the shareholders, really focusing on ways to invest and execute programs that are accretive and that can help move returns, sell a shareholder returns up. And so I've been working with the team on all three of those areas. And I said on the front-end, the table stakes is safety, reliability and the customer experience. But I would say those three have been the adders. And it's been a unique time since I sat here in this seat, we've been in this COVID period, feel like we're getting out of that. But -- and I look forward to that very much. But those are the things that I'm focused on.

Okay. You know, maybe since -- I mean, this group, I think, cares about all three of those things. But the last thing in terms of improving profitability and returns at ConEd, could you maybe talk a little bit more of the types of things you're focused on there? Is that -- I mean, obviously, maybe getting the regulatory recovery of delay payments is an obvious one, but I'd be curious on other things you might be looking at there?

Yes. So a big piece of this, you know, our regulated utilities is 85% or 88% or 90% of who we are, what we are by almost any measure, and we're investing over $3.5 billion a year. So we will likely remain that way, notwithstanding the fact that we're investing in transmission and renewables. So we've really got to get that construct right. I'll tell you, we -- a few months ago, we had a number of penalty proceedings coming off of storms and things like that. That is all pushed behind us now. So that's sort of -- we've got a clear slate. And we're working with the regulators on really making the case for us to be the investment leaders in achieving their goals. I'll give you two examples. So we'll invest $1.5 billion in energy efficiency over the next five years. And we get a return on that and we can earn incentives. We're performing well in that space. And we've really built the team up to deliver on that. Under the electric vehicle space, 1% of vehicles in the region now are electric, and that's going to grow incredibly. And so were recently approved to invest $350 million in a make ready program. And again, effectively, what that does is subsidize private building owners to install EVs. We cover some of the costs, we earn on the investment. And so those are examples where we can help society achieve its goal, while improving a shareholder returns. We'll be filing for a rate case likely in January of 2022 or thereabouts, our three-year rate case currently ends in December of 2022. It's a year period, so we'll get in with the filing in early 2022. And we anticipate we'll continue to invest in the core at about $3.5 billion. And then we will propose additional programs for both resiliency, and that could be undergrounding parts of our network, so that the trees don't impact reliability during storms. And that would be a long March, but that would be an investment opportunity. And the other is in the clean energy space, more EVs, more storage, more energy efficiency. And so with that additional ability to invest, we think it will enhance shareholder returns.

So maybe some upward bias to that capital program, if you can get support for these investments?

That's right. And that's where we're pulling together now, that's where the proposal is headed. We've not finalized anything, but directionally, you're right, Steve.

Okay. So you have a new governor and [Komo] is now gone. Just what does that mean in terms of just New York policy and/or New York, the regulatory environment? Are you seeing any changes? I know it's still quite early.

Yes. It's early yet. And Steve, we will always have to and want to work with elected and other key stakeholders. We're in the fabric of New York State, New York City. And we have a big impact on the economy and the safety and the well-being of customers. And as we transition, that engagement is even more important than it ever was as we transition to clean. So we'll work with all of the elected. Obviously, Governor [Hocol] is there. We'll have a new mayor in January as well. And so we'll connect with them. So early yet, I would say for Governor Hocol, a very visible an apparent commitment to the clean energy goals that were set forth under the prior administration. As I mentioned, I think earlier, signed a bill that in 2035, you can only buy a zero-emission vehicle in New York, and that's a pretty aggressive. Approved two renewables plus transmission projects to bring renewable energy into New York City. So she's very early put her mark down that she's supportive of this clean energy transition, and we feel good about that. But other than that, really early to tell, we look forward to a really productive relationship with [indiscernible].

Okay. And then maybe just on the regulatory side. So first of all, on the late payments issue you brought up was -- any sense of chances that you'll succeed or get recovery of that?

Yes. So we're optimistic. We filed the petition in April, and we've had some discussions with PSC staff on that filing. The filing really calls for in rough numbers, $50 million of foregone late payment charge revenue from 2020. And this year, we've not really applied late payment charges. And so it's -- the run rate is about $6 million a month or about $70 million for the year. So it would be a recovery of the loss revenue last year. And a make-whole for any revenues we didn't see this year. And so we're hoping for a decision soon, but it's really in staff in the commission's hands at this point. So I would say cautious optimism on that front. And then on the uncollectible balance, the uncollectibles have risen significantly of 60-day arrears, Steve, we usually sort of pre-COVID the churn is about $400 million in 60-day arrears, people getting a little bit behind and cycling through that process. It's up closer to about $1.1 billion now. And so we do have a change of law provision, a rate case that allows us to reserve for collection later. And in all likelihood, that collection would be, sort of, adjudicated during the rate case, and we determine the level and the period over, which we collect that -- those are collectibles. So we're cautiously optimistic on the late payment charges, hoping for a decision soon. And then on uncollectibles likely unwind and set the parameters in the next rate case.

Great. Okay, and then I know one of the things that strategically, you've been very focused in New York is to get some ability to invest in the regulated business in renewables, I guess, particularly solar. Any update on where that stands? And where are you -- would that be something the commission needs to approve? Or does that require a law?

Yes. So Steve, it could go either way, and I'll, sort of, close with -- what the path might be for. We are still making our strong case for this. And just to frame up the case, it was my length. To frame up the case, New York State set the ambitious goal of 70% renewables by 2030. We are currently at about 25% renewables. And if you take a step back from the 25%, virtually all of that is hydro that's been around forever. So in terms of wind and solar, we've moved the needle a little bit in the state, but not significantly. And there are big plans underway 4,000 megawatts of offshore wind have been awarded, certainly not permitted or built and lots of others solar in the state. But we -- between now and 2030, to achieve the goal, about $40 billion of investment, 2,000 megawatts a year. And so the fact that, sort of, the pace that curve keeps getting steeper and steeper. I started on this when we were 10-years out and the curve was a little bit flatter, each day that passes, more and more per day need to be added. So we think that's favorable for our case. We continue to think that it's in the -- it benefits our customers economically. And that's really -- if a private developer puts a solar field out there and signs a 20-year PPA, that solar will produce megawatts for many years beyond that. They will re-contract that and effectively, customers pay twice for the investment. If we rate base the investment for 30-years, 35-years, they're going to get every last megawatt out of that field, they're going to get the interconnect. There are some cases where panel technology advances so quickly that people change panels out. It's cost-effective, given the greater output from an existing field and rack system. So the point is because of that residual value, customers will pay less, if we rate base this investment. So cheaper for customers, we're the second largest in the country. We know how to do this. And the rate of installation is through the roof to achieve 70% by 2030. We think all that pushes for us to take a piece. And so there is some legislation in [ebony] that's being considered -- has been considered was reintroduced this year to allow for utility ownership. The PSC, I think, I could imagine, I think, there's a possibility that they could open up some slice of this to try us out. And that might be our door in. Give us a few 100 megawatts and see how you like it. Because we're really not going to disrupt the markets. We got out of generation, Steve, because when they -- when we sort of -- in the competitive opportunities proceeding, we sold our generation, a generation owner and transmission owner doesn't feel like a level playing field, because you could, sort of, tilt the market. With renewables, that's not the case. There's no market power.

Yes.

You get what you get in, the sun, the wind. So we continue to make our case and trying to get allies in the environmental community who have expressed interest, not full endorsement, but certainly, top of mind for them is this incredible pace of renewables that will be needed to achieve the goal, top of mind for them is gold achievement. So this all hands our deck approach is what we've been selling, and we've at least peaked their interest.

Okay. And you mentioned in your preamble that you are investing in batteries, and you are -- assume, I mean, you are allowed to invest in batteries even though you can't do solar?

Yes. And it's in pieces, Steve. So we'll be part of the largest battery storage project in New York State, working with another company, 100-megawatt site as a story of queens and somewhat ironically, it's at the site of a retired fossil fuel plant.

Yes.

And so we'll invest there. We're going on the market through a PSC order to bring in another few 100 megawatts that are cost effective. And part of this is to prime the engine, the straight economics for battery storage given the compensation in the energy markets is not there yet. And so we're helping to put the gap and provide financial security on our balance sheet. We earned on the investment in the lease. And so we can. And then in the Clear Energy business, we've got a really leading edge battery team, where we're often coupling solar with storage at scale, and that is proving to be a productive endeavor. So we're doing large-scale storage and smaller scale. But in order to get -- to address the intermittence and see what is renewables storage will be a key component and both within the utilities and the clean energy businesses we're pushing forward there.