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ConEd's NY rate case proposal leaves analysts wary of return potential

A three-year proposal for Consolidated Edison Co. of New York Inc.'s electric and natural gas rates is somewhat disappointing on the surface but leaves room for an earnings boost if the company can achieve incentives, analysts said.

After three months of settlement negotiations, the joint agreement proposes a 48% equity ratio and an 8.8% return on equity over 2020 and 2022, according to the filing from the Consolidated Edison Inc. subsidiary and intervenors in its rate case Oct. 18. The return on equity level surprised some analysts because it fell from the 9% set out in current rates.

The agreement is "slightly negative" for ConEd, Guggenheim Securities said in an Oct. 21 research note. "The joint settlement proposes a 20 [basis point] reduction in ROE vs current rates, while we anticipated ROE to remain flat at 9%," Guggenheim said. "In our view, we didn't think ConEd would settle below 9% for a multiyear agreement."

Altogether, the ROE and equity ratio levels, combined with a $32.55 billion rate base for gas and electric, create about 10 cents in earnings headwinds through 2022, Guggenheim wrote. Still, Guggenheim sees positives in the fact that rate base growth remains intact for ConEd and the company can point to the stability of a multiyear stipulation.

While Mizuho Securities analysts agreed in an Oct. 21 research note that the ROE and equity ratio of "8.8 and ... 48 isn't that great," they also noted that the proposal would allow ConEd to earn annual incentives of about $92 million, or about $70 million for its electric utility and $22 million for its gas utility.

The utility can also earn up to 9.3% in ROE before it is required to share its earnings with customers.

"The question will be, can management earn above the allowed ROE and earn all the incentives which we estimate have the ability to add 50 [basis points] to its earned ROE?" Mizuho said in a note to clients. Mizuho expects a $4 upside for the company if the utility can earn all the performance incentives laid out in the joint proposal. Conversely, the company may be in for a $4 downside if the utility under-earns by 50 basis points, the note said.

Mizuho raised its price target for ConEd to $93 per share from $92 per share and tweaked its earnings expectations for the company based on the proposal. It raised the estimate for 2020 earnings by 2 cents per share, left the 2021 EPS forecast unchanged, and lowered the 2022 estimate by 4 cents per share.

The joint proposal still needs New York Public Service Commission approval before the rates could go into effect. If approved, ConEd of New York's electric base rates would rise by $113 million in 2020, followed by increases of $370 million and $326 million in 2021 and 2022, respectively. Gas base rates are scheduled for annual increases of $84 million, $122 million and $167 million during the three-year period.

The higher gas rates would in part go toward pipe replacement, a major focus for ConEd in recent years. The company agreed to remove from service 270 miles of 12-inch and smaller cast iron and unprotected steel gas mains during the rate period. If the company fails to hit annual targets for removing the leak-prone pipe, it will take a negative rate adjustment equal to 15 basis points for the rate year and apply the penalty to the benefit of customers.