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

Good Morning everyone, Thank you for joining us. Today, we are really excited to kick off the JPMorgan Energy Conference. I'm Jeremy Tonet. I cover the utilities and midstream here for JPMorgan. And to start things off, we're keeping it local, and we're really excited to be joined by the Head of CECONY, Matt ketschke. And so we have a series of questions for a fireside chat. If the audience does have anything they like to work into the conversation, please let us know raising hand or sending in the iPad, and we can look to work that in as we can. But Matt, maybe.

Great, Thanks Jeremy, pleasure to be here, so Con Ed is actually at this point the oldest and longest traded company on New York Stock Exchange. So long history serving New York City. Our company now at this point, after completing the sale of our clean energy businesses this year to RWE has really refocused around regulated utilities. So two regulated utilities in Con Ed, Con ED of New York, which is the company I work for and run. We run electric gas and steam service for New York City and Westchester County and then Orange and Rockland Utilities, which provides electric and gas and Orange and Rockland. And then we have a competitive trend developer focusing on the FERC-regulated electric transmission. With the refocusing around New York, that's really given us the opportunity to lean in to New York's clean energy ambition. So New York has very, very aggressive clean energy goals, full economy-wide decarbonization by 2050 which really allows us to focus around climate change and the infrastructure is going to be required to help decarbonize the New York state economy. That's going to change a lot of things on how Con Ed works. So we expect by some time in the next decade around the late 2030s that New York City will go from being a summer peaking utility where air conditioning load drives our peak load to a winter peaking utility. And that, over the next 30 years, electric demand capacity that we're going to have to serve will pretty much double as you think about decarbonization of both heating and how people heat their homes and buildings and transportation. So that's significant growth opportunities for the regulated utilities in New York. In our current plan, where we look to spend about $15 billion over the next 3 years really on energy delivery infrastructure. and really building some large projects, large interconnections to allow for the integration of offshore wind and for electrication of transportation.

Got it. That sounds like quite the sizable build-out to achieve such a change. Maybe kind of building on that a bit, Con Ed has a clean energy commitment that's going to impact 3 services you provide electricity, natural gas and steam. And Con Ed recently a 20-year gas long-term plan here. Could you walk us through some of the approaches that you're considering in decarbonization in delivery of service? And kind of what are the next steps in this direction?

Yes. So Today, we provide 3 commodities, electric gas and steam for Con Ed New York and gas and electric for Orange and Rockland. And really the trajectory of all 3 are different as you think about decarbonization. So as I mentioned, for electric, really, this is more and more end-use energy being delivered through the electric delivery system. That makes a significant infrastructure build-out for electric delivery. That really is everything from transmission, transmission substations, distribution level, up to the customer, including things like electrification and heating and transportation and incentive programs to help customers adopt that. So significant growth on the electric side. As we think about gas, it's a little different story. So today, we deliver gas in CECONY to about 1.1 million gas customers. It's an incredibly important system, hugely important for how New York City, Orange and Rockland, Westchester County's function. But as you think about decarbonization, how that system is utilized is going to have to change. Last month, we published our 10-year gas long-range plan, which really looks at potential trajectories for the gas system and how we think about that system going forward. That study map those 3 pathways. One was kind of a steady-state pathway or today cage pathway. The next two were pathways that gave options for potentially achieving the state's climate goals and decarbonization goals, which really has zero net carbon emissions from natural gas or from the gas delivery systems going forward. those trajectories count on some different things, adoption of different technology, particularly the availability of low carbon fuels. And can we have low carbon fuels that flow through our natural gas delivery system. Alternatively, potentials for a hybrid pathway, which allow -- would allow for both electric and gas utilization or a really deep decarbonization pathway, which essentially says that you would, over time, shrink the footprint of the natural gas system and essentially almost completely phas it out, except for a very small handful of very hard to electrify customers. These are really pathways. We do not have a strong view on one or the other. They're very much going to be driven by policy in New York State and how policymakers continue to evolve this. And it's going to require significant intervention by stakeholders, government, regulators on how we think about moving that system forward because today, it still is an incredibly important system and the safety and reliability of it is really important how New York City functions.

So this next question, I'm particularly interested in being a resident of steam town. I'm curious on the steam service, how do you see that evolving over here? Similar path? What does that look like?

Yes. So steam system is a really interesting system. So Con Ed operates what is the largest steam system in the United States district heating system. So there's about 1,500 customers who are relatively small number of customers, but a lot of really iconic buildings, Grand Central Station, Empire State Building, Chrysler Building. Our steam system, we think, provides a very important role in the decarbonization of New York City's energy economy. A lot of the buildings we start over steam would be very hard to fully electrify. It's hard to win in place with the Empire State Building and you completely retrofit that building and remove it and make -- remove all of the existing steam circulating heat that's in there and replace it with electric. So we think the role of the steam system will be essentially to decarbonize to get the steam production facility, which as a resident of steam town, one of the biggest ones is right near where you live. So today, the majority of the team we produce is actually produced an extremely efficient combined cycle units that make both steam and electric production. As we think about that system going forward, we think we can decarbonize at the steam production level by using different technologies, high-efficiency heat pumps, carbon capture potentially, hydrogen and electric boilers that are fueled with ruble energy. The combination of those things gives us an opportunity to essentially decarbonize at the production facility, which we think is a lower total cost than decarbonizing and some of these hard to decarbonize buildings.

Got it. Makes sense to try to take the optimal approach there. We've read a bit about CCS in the city and making concrete blocks, so excited to see how this all evolves. But maybe shifting gears a little bit. If you could talk about New York City's decision to ban gas hookups for new buildings. And how should we think about parsing the impacts from decreased investment in your gas delivery system versus valuing growth that could accrue on the electric side at the same time?

Yes. So both New York City and New York State at this point have passed laws that essentially eliminate the ability for new customers to connect to the gas delivery systems. So for New York City, New York City Council voted in 2021 to ban new gas connections for 7-story buildings or less, so buildings less than 7 stores in 2024 and then over 7 stories in '27. And then the state passed a law for buildings over 7 stores in 2026, statewide and over 7 stores in 2029. So really, we're looking at the end of this decade, depending on the building type, all new construction would be all electric. And we have been supportive of that. It is easier to build new with fully electrified buildings. The technology is available. There are good options. So we think if you really want to change the trajectory of fossil fuel use, one of the best place to start is don't build new. So we have been supportive of this. And generally, for our business, what we've been saying is that we believe that continued investments could be necessary in the natural gas system to make sure that we maintain the safety and reliability of that very important system that serves over 1 million customers today while we transition, perfectly fine with that new customers, and those new customers will be served by our electric delivery system.

And so how does this affect, I guess, gas investments overall in the plan going forward? Or looking at electric versus gas, is it all kind of just net out? Or how should we think about...

So in aggregate, there's probably more investment required overall. One of the key elements that we're going to have to continue to work with state regulators on is how we think about the value the gas system provides, the levels of investment that are still required. In our current rate plans, we're investing almost $1 billion a year in that gas delivery system because in the short term and the medium term, it's still going to be necessary. Our gas delivery system delivered more natural gas last year than any time in our history. So the transition is coming, but it's not here tomorrow. That said, we expect investments of probably close to $65 billion over the next 10 years in our energy delivery systems to maintain safety and reliability and to build the kind of capacity that's going to be necessary as you think about electrifying transportation, heating in addition to all of the other end-use energy uses that Electric provides today.

Got it. That's helpful. And then Con Ed recent filed some utility thermal networks. What is the investment potential? And how do these networks fit into a clean economy? Are there a possible clean energy solution for large business owners here?

Yes. So this was really an attempt by the state to look at piloting shared thermal energy networks, essentially shared heat pump network. So the state passed the law and directed the state public service commission to essentially run pilots to look at the possibility of a business model that would function around shared energy network. These are a little different than the thermal networks for our steam system. These essentially be circulating water that would be at constant temperature that then buildings could tap into with a heat pump to run their heat pumps. So they really are kind of conjoined to electrification. It's using essentially the constant temperature of the ground or shared heat from waste heat from buildings or places like data centers. t heat other buildings. We are going to propose 3 pilots for Con Ed of New York and one pilot for Orange and Rockland. The Orange and Rockland -- sorry, two pilots for Orange and Rockland, Orange and Rockland pilots about $45 million, and the CECONY pilots are about $260 million. So in total, about $300 million worth of investment opportunity to prove out these technologies. We have filed a petition for that, and it would be pending the New York's Public Service Commission to approve our petition. That's kind of the regulatory process are following. And if approved, we would expect the projects to start construction sometime around the first quarter of 2024.

Got it. That's very interesting. We've been talking to some thermal energy storage operators in our research, and it seems like optimizing key energy to reduce waste can be really a key way to optimize energy transition. So the exciting stuff there.

So one of the key elements in this is that you really want to be as efficient -- as you think about decarbonization, can you be as efficient as possible? Heat pumps are a very efficient way to produce heating, but they don't perform as well in cold temperatures. So being able to tap into waste heat from some other part of the city and share it with somebody who needs it on the coldest days.

That's helpful. And moving along here, the joint proposal in your CECONY rate case includes significant CapEx plans, important to your clean energy commitment. Can you talk about where these things currently stand with that rate case?

Yes. So I get this question a lot. So our rate case, we have a joint proposal and have had a joint proposal pending final approval by the commission for several months now. We anticipate it would be approved within the next month or two. Really, the New York state has bitten off so much in its clean energy ambition that has showed up in the regulatory docket, that they are just really backed up at this point with significant proceedings as they kind of try to move some of these things through. So expectation is in the next couple of months, we should see a final approved joint proposal.

Got it. And then at the same time, this team rate case, you could just update on the status there?

Yes. So we're pending final approval in electric gas. Steam, we had not filed for steam rates in about 9 years. So we stayed out for a very long time on stream, really was time to file rates really in support of all the things we talked about, about steam decarbonization plan and how we think about the steam system moving forward. So we filed for rates in November, working through the process. We filed our testimony and staff filed their counter testimony along with the feeders i think one of the main areas of contention between our file testimony and staff is around a revenue decoupling mechanism. So steam is the only commodity that we currently have, and I think the only service provided in New York State that is not revenue to couple it at this point. So our electric system and gas system, both have rates that are revenue to decoupled, essentially volumetrically decoupled. Steam doesn't have the same thing, and that is one of the main areas that we need to work to get to a consensus around.

Got it. That's helpful. And then going back to the joint proposal briefly. Do you see any potential stumbling blocks or obstacles there? It's just kind of a matter of time of price...

I think it's timing and process. I don't see any stumbling blocks. Historically, New York State once you get to a joint proposal, they move through. But the regulatory docket New York with everything they've kind of bid off around decarbonization, what's called the Climate Leadership and Community Protection Act, CLCPA and how they implement the climate change requirements have really backed up the regulatory docket and put a lot of pressure on the staff.

Got it. That makes sense there. You provide service to the most densely populated city in New York -- North America. Can you -- can your grid handle this transition to the clean energy economy. With all the electric vehicles, heat pumps and other distributed resources just seen such a massive undertaking. How do you feel about, I guess, achieving this all?

Yes. So it is. It's a huge undertaking. I am confident that we can deliver on what the expectations are. But it's going to require significant levels of investment significantly above where we've historically been for our electric gas services in New York City. So I said we're in the range of $65 billion, $68 billion of potential investment over the next 10 years. If I look at -- at this point, in the last 10 years, Con Ed built one new substation. We're going to build 4 in the next 5 years. We just completed a new transmission feeder. That was part of what was called a reliable clean cities project, and we have two more pending. And those were transmission feeders that were acquired inside the city to allow for the retirement of fossil fuel peaker generators inside New York City. So investments, they're going to be coming much faster than they had in our history. It's going to require us to ramp up. We're actually in a kind of a hiring spree right now. So we're going to add about 1,000 new employees in this year alone. It's kind of about 14,000 people. We're looking to hire 1,000 again this year. So it's a significant step up in the level of activity, but it's all the things we know how to do really well. I mean, I'm extraordinarily proud to work at Con Ed, the women and men I work with every day, power this great city. We know how to get it done, but there's going to be a lot of work for the next decade and beyond.

Got it. It sounds like if any from the audience has friends and family looking to enter the industry, now it's a good time to get going to join. Switching gears a little bit here. You received approval outside of your rate case for an $810 million Brooklyn Clean Energy Hub to address reliability needs and to ease a possible plug-in for offshore wind development. And I believe your proposed $1.1 billion Eastern Cleans project will address the needs of JFK as it electrifies much of its services. How do you approach meeting such needs, whether it's off our wind development or a large commercial enterprise going all electric, given your grid is comprised of 80-plus networks across New York and Westchester, it seems like there's a lot to undertake there. How do you guys go about?

Yes, there is. So we do a very base up planning process. So we have 80-plus networks that we serve, which are essentially local distribution areas that roll-up then to substations to transmission substations and to the amount of both transmission and generation capacity inside New York City. So that kind of bottom-up approach allows us to say where do we see needs today and where do we see needs in the future? Because these are not things that you can necessarily build quickly. So kind of a bottom-up approach and then an economy-wide top-down approach and make sure that those two things converge. We're going to have, again, significant build-out. And one of the things for people who followed New York State historically -- historically in New York State, the vast majority of the CapEx that utilities deployed was approved in the rate case process. Increasingly, because of the speed at which this transition is happening, we are seeing things both inside and outside the rate case process. So for Con Ed, has meant that we have about an $810 billion substation in Brooklyn. That's really a multi-value construction project that's going to both serve load for an increasingly dense electric load, particularly in Central Brooklyn. Central Brooklyn has kind of built out significantly. We see increased demand for both electrification heating and transportation in Brooklyn, need for more capacity and the ability to integrate offshore wind. So New York has a goal of 9 gigawatts of offshore wind coming in particularly into load centers. So -- and that was a project approved outside of the rate case process. And we are pending another project for about $1.1 billion near Kennedy Airport, very similar. Kennedy Airport has aggressive goals to decarbonize and electrify a lot of their operations and then that transfers out to some of the freight and all the handling facilities that are just outside the airport property. That's going to require another $1.1 billion substation. Again, all of this is happening outside the rate process, which will -- rate case process is different than what's historically happened in New York.

Got it. That's helpful. And maybe picking up with offshore wind a little bit. I know Con Ed isn't a developer here, but there's been a lot of notable developments in the industry. It seems like the first wave is facing some growing pains, if you will, with cost creep and other issues. And just wondering any thoughts you'd be willing to share with regards to how you think the industry matures or even if there's renegotiation of rates, how that could impact your service to -- or any thoughts on those?

Yes. So I think the offshore wind developers have run into some headwinds around, I think, issues that we've all heard about supply chain inflation, some growing pains there. I don't see this as being a technical hurdle overcome. There are significant developments that have already happened in Europe. We're kind of following the development process has gone on there. So I think it really is getting the economics of these straightened out with the regulators who approve them, figuring out ways that they can move forward. For a state like New York that is looking to fully decarbonize electric supply by 2040, offshore wind is going to be a necessary component of how we think about doing that. And for Con Ed and for Orange and Rockland, we are not the offshore developers, but it is important for us to work with them on the integration peace. So we do see significant investment opportunity in how you develop some of the both transmission and distribution system that's going to be required to integrate the offshore wind into our system.