You're reading an article by Simply Safe Dividends, the makers of online portfolio tools for dividend investors. Try our service FREE for 14 days or see more of our most popular articles

Power Outages Increase Political Scrutiny of Con Edison But Dividend Profile Remains Stable

Con Edison faces intense political pressure following Tropical Storm Isaias, which hit the East Coast on August 4.

Isaias caused the second largest number of power outages in Con Edison's history; only Superstorm Sandy in 2012 caused more outages.

Over 10% of Con Edison's customers lost power. Within that group, 25% of customers were still without power after three days, and 10% had no power after five days.

Not only were New Yorkers upset by the lengthy outage, but many of them were confused by information displayed on the utility's outage map and received erroneous restoration messages.

Frustrated by the widespread power outages, New York Governor Andrew Cuomo threatened the state's utilities at a recent press briefing:

“Can a private company even possibly be responsive enough to the people? I’m not sure...I want the utilities to know we do not abide by the concept that anything is too big to fail. If you’re not serving the people of the state…they will revoke the license, and the license is your franchise.”

Governor Cuomo wants to propose new legislation that would increase financial penalties for outages, require more accurate communication with customers during storms, and make it easier for New York to revoke a utility's operating contract if it fails to meet storm response requirements.

Governor Cuomo's executive power is limited, so he can only change the state's regulation of utilities through legislation. If his proposals move forward, the earliest any legislation would get done is likely early next year.

These threats, especially risk of a government takeover, get your attention. However, they've happened before, and it's hard to say if they are much more than posturing.

Con Edison has been in business for nearly 200 years and delivers more than 40% of the electricity consumed within the state of New York, so it's hard to imagine the government being a better operator of energy services at this scale.

For now, we don't expect the governor's proposed legislation to have a material impact on Con Edison's dividend profile, leading us to reaffirm the company's Very Safe Dividend Safety Score.

However, regulators could become more difficult to work with when Con Edison files future rate cases.

In these procedures, utilities request to raise customer bills to cover their rising costs and negotiate the return their investors earn on their capital spending.

Reducing the utility's allowed returns would further slow Con Edison's low single-digit pace of earnings growth.

But a reduction large enough to threaten the dividend would seem counterproductive; fewer investors would want to own ED's stock, raising the firm's cost of capital and the rates it needs to charge customers to recover these costs.

As for the financial impact of Isaias, we don't see it threatening the dividend either. Con Edison estimated the storm's costs will be up to $150 million.

For context, the utility's 2019 operating income totaled $2.8 billion. Con Edison's electric rate plans also provide for recovery of most of these costs.

But perhaps the utility will be forced to take additional preventative measures so it can more quickly restore power during the next severe storm.

Con Edison reviewed three options on August 20, but most aren't practical solutions.

The utility could remove all trees that are near power lines, but no one wants to do that.

Alternatively, Con Edison could underground its entire system. However, studies have shown it could cost around $50 billion, not including the $15,000 to $20,000 each customer would need to pay to install new equipment in their homes and businesses to connect the new underground lines.

The third option is having more crews on standby to aid in storm restoration. This seems like the most practical idea, but the cost of retaining thousands of additional workers would be very high.

Simply put, achieving greater resiliency is hard. Finding the right balance between benefits and costs is just as difficult, regardless of political pressure.

Con Edison's payout ratio sits at the high end of management's 60% to 70% target range, so there's not a lot of flexibility if the utility is forced to shoulder more preventative costs on its own.

The payout ratio could also move higher if Con Edison sells its gas transmission business. Management has expressed interest in this idea to continue focusing Con Edison on cleaner energy businesses.

Regulated utility Dominion Energy took a similar action this summer which prompted a dividend cut, but this outcome seems unlikely for Con Edison.

Most notably, gas transmission represents less than 3% of the utility's earnings and assets compared to nearly 25% for Dominion. The impact on Con Edison's dividend coverage would be relatively muted.

Overall, we believe Con Edison remains positioned to continue its 46-year dividend growth streak. However, dividend increases will likely be minimal the next few years.

We will continue monitoring Governor Cuomo's proposed legislation, but we don't expect sweeping changes to Con Edison's business.

Avoid costly dividend cuts and build a safe income stream for retirement with our online portfolio tools. Try Simply Safe Dividends FREE for 14 days

More from Intelligent Income

Idea Lists

Latest