Morningstar | Con Ed Reports Strong 2018 Results; Modest Exposure to PG&E Would Not Affect Our FVE
We are reaffirming our fair value estimate of $78 per share after no-moat Consolidated Edison reported solid 2018 earnings and initiated 2019 earnings guidance. Adjusted earnings per share for 2018 were $4.33 versus $4.12 last year and beat our estimate and the consensus by $0.03. Our 2019 EPS estimate of $4.30 is in the lower half of the new EPS guidance range of $4.25-$4.45.Although Con Ed closed on its Sempra acquisition of solar assets in December, it remains heavily dependent on its regulated utility businesses. In 2018, over 90% of adjusted earnings before holding company expenses were from its New York state regulated electric, gas and steam utilities. Regulated utilities contributed $4.03 to consolidated EPS in 2018, $0.11 more than our estimate and $0.23 better than 2017. The improvement in earnings was due in large part to higher electric and gas revenue from the base rate increases in January 2018. Colder-than-normal winter weather lifted steam sales versus the mild winter weather in 2017.
The clean energy business segment contributed $0.20 per share, flat with 2017 and less than the $0.25 we had estimated. Transmission contributed $0.15 per share in 2018 versus $0.11 last year. The results were in line with our estimate. Parent company drag was a loss of $0.05 per share versus $0.01 last year and our break-even estimate.
Con Ed’s exposure to the PG&E bankruptcy is a modest concern. Con Ed sells 680 megawatts of solar capacity to PG&E under long-term power purchase agreements. The bankruptcy is an event of default under the PPAs, and distributions to Con Edison have been suspended. We estimate PG&E-related projects would contribute roughly $0.09 per share in 2019. There is a chance the PPA revenue will be reduced to market rates due to the bankruptcy, reducing the earnings contribution by a small amount relative to Con Ed’s total earnings. However, this would not have a material impact on our fair value estimate.
Consolidated Edison is a holding company. Through its subsidiaries, the company is engaged in provision of energy services. The company's subsidiaries include: Consolidated Edison Company of New York, Inc.'s principal business operations are its regulated electric, gas and steam delivery businesses; Orange & Rockland Utilities, Inc.'s principal business operations are its regulated electric and gas delivery businesses; Con Edison Clean Energy Businesses, Inc. develops, owns and operates renewable and energy infrastructure projects and provides energy-related products and services to wholesale and retail customers; and Con Edison Transmission, Inc. invests in electric and gas transmission projects.
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