ConEd May Find Sandy's Silver Lining

 | Nov 16, 2012 | 4:30 PM EST  | Comments
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Hurricane Sandy changed everything for Consolidated Edison (ED). While power has been restored to most of ConEd's service territory, many customers connected to the utility continue to have challenges restoring water-soaked motors, electrical systems and equipment. Nevertheless, Sandy provided new lessons for customers and regulators. It also provided a framework to rethink ConEd's power-distribution system.

The public is more keenly aware of how dependent it is on the reliable delivery of electric power. Reliability is now at the forefront of most consumers' minds as policymakers assess options to prevent a repeat of the massive power outage. One option is to consider building a more robust power-distribution system.

If all stakeholders agree, ConEd will undertake large-scale reliability improvement projects. The utility is in a position to be one of the first to develop and implement a state-of-the-art power grid. The investments will likely be significant, but all stakeholders are motivated to absorb prudently incurred costs.

ConEd will likely invest heavily in smart-grid technologies. The objective will be to increase reliability through redundancy, isolation, switching and electronic reporting. This means ConEd will likely invest in new distribution systems that will attempt to automatically self-heal. In cases where self-healing fails, the system will attempt to isolate trouble spots to small areas, provide rapid reporting and offer managers control at the meter.

Upgrading ConEd's system will be expensive, but it will provide new growth opportunities. Regulated utilities normally receive prudent returns on investment from state regulators. ConEd and New York are no exception. Investors should benefit from additional investments, as well. Not only will ConEd implement new micro-grid technologies, it will likely beef up infrastructure with new capital spending plans. Utility investors can expect prudent returns on most of those investments.

With an enterprise value of approximately $27 billion and a market capitalization of $16 billion, ConEd is one of the nation's ten largest utilities (though it is not the largest). It is, however, the nation's largest electric-distribution company. Unlike traditional utilities, it is not saddled with money-losing power plants. It does not need to be concerned about the price of fuel, electricity or other commodities. Most important, it is not burdened by proposed rules from the Environmental Protection Agency.

Despite its size, ConEd is investor-friendly. As Jim Cramer has previously pointed out, ConEd's dividends have a long history of stability and growth. Currently, the dividend yield is 4.4% and it has a healthy payout ratio. With new capital investments, the dividend looks solid.

Like Duke Energy (DUK), SCANA (SCG) and Southern (SO), ConEd is mostly regulated. While it owns some unregulated subsidiaries, the largest assets are local distribution utilities in New York, New Jersey and Pennsylvania. Consolidated Edison Co. of New York is the most familiar, which delivers electricity, natural gas and steam to customers in New York City and Westchester County. Rockland Electric Co. and Pike County Light & Power Co. deliver energy to customers in seven New York counties, northern New Jersey and parts of Pennsylvania. Because they are regulated, most investments are placed in the state's rate base and they provide investors with reliable returns.

ConEd's growth so far has been limited by geography. Before Hurricane Sandy, the communities the utility served had to grow for ConEd to grow. As such, there seemed to be a practical limit to growth, particularly with a national economy in the doldrums. Hurricane Sandy extended that limit as new opportunities suddenly appear. And growth helps shareholders.

It is hard to find anything good out of a terrible event like a hurricane. But there will be opportunities to build something better, which can provide consumers with safer and more reliable sources of electric power.

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