Consolidated Edison (ED) ("Con Ed") is one of the largest utility companies in the United States and serves over three million customers in the Northeast US. The majority of those customers were directly in the path of Hurricane Sandy and Con Ed suffered their worst outage in their history as more than one million customers lost power. In comparison, the previous worst storm, Hurricane Irene, had approximately 200,000 outages. Currently the vast majority of customers have had power restored except for those with internal equipment damage. Immediately following the storm I wrote that Con Ed would be one of the most logical Hurricane Sandy losers and the stock is now down nearly 12% in the past three months. There are fiscal cliff dividend taxation concerns but the primary catalyst was the storm. With most of the electrical cleanup behind us I wanted to take the opportunity to review recent events for Con Ed and see if the selling is overdone. It is not very often that such a stable company goes from a 52-week high to a 52-week low in such a short period of time and I believe it is time to reconsider a long position in Con Ed.
Con Ed will face significant rebuilding costs as it essentially utilized a years' worth of inventory in a short month. Crews had to be called in from around the nation to help in the restoration effort and such urgent work rarely comes cheap. Earnings will be pressured in the near-term but one would expect the company to receive financial assistance given the magnitude of the storm. Recently Con Ed was subpoenaed by the New York State Attorney General Eric Schneiderman regarding the company's response to Sandy. This investigation is independent of Governor Andrew Cuomo's more serious inquiry.
Cuomo was extremely critical of utilities during the storm and has stated "In the context of the ongoing emergency, such a failure constitutes a breach of the public trust. Under such circumstances, I would direct the Public Service Commission to commence a proceeding to revoke your Certificates [emphasis added]." Under the Public Service Law utilities can be fined or even have their operating certificate revoked. I believe that the probability of a fine for Con Ed is low and the chance of a revocation is very remote. Con Ed had much of its equipment and headquarters in the heart of the flood region and it is difficult to imagine the company being prepared much better given the forecast for the storm. It is very easy to be critical of the power companies when you are in the midst of the storm but upon review of the massive damage I believe that Con Ed did a respectable job.
Before the storm I was not very bullish on Con Ed as it was trading near its 52-week high, the P/E was nearing twenty, and the yield was dropping towards four percent. The combination of these factors was causing me to look elsewhere for a new utility stock that could potentially replace Con Ed in my Great Recession II portfolio. Fast forward to today and the stock is at its 52-week low, the P/E is at 14, and the yield has climbed up to 4.5%. Con Ed still has some room to fall further but I would consider adding to a position at these prices.
National Grid's (NGG) Long Island Power Authority ("LIPA") also received a subpoena and could be far more vulnerable than Con Ed. Con Ed was far more proactive in shutting down its equipment ahead of the storm and was able to communicate with the public much more effectively than LIPA was. LIPA also had critical equipment that was outdated prior to the storm but did not take corrective action to prepare for the storm. It has even been reported that LIPA utilized memo pads to track storm damage. If true it is difficult to argue that they were prepared. The chief executive of LIPA, Mike Hervey, has already resigned following the hurricane and a governance shakeup is likely at the company. National Grid is actually trading near its 52-week high and has quickly recovered from losses sustained in the after-math of the storm. Given the two companies' responses to the storm it is surprising that National Grid's stock has performed so well while Con Ed has declined so precipitously. It is important to monitor the investigation situations closely but I would consider selling NGG and going long ED.
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Additional disclosure: Short ED Dec $60 Calls. Please refer to profile page for disclaimers.