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Morningstar | Con Edison Reports Solid 2Q in All Segments; Insurance Expected to Cover Recent Steam Explosion

We are reaffirming our $75 per share fair value estimate and no-moat rating for Consolidated Edison after the company reported solid second-quarter 2018  adjusted earnings of $0.61 per share versus $0.58 per share in the year-ago period. Con Ed reported adjusted EPS growth in the recently ended quarter of $0.02 at its utilities, $0.01 in its clean energy business segment, and $0.01 at Con Edison Transmission versus second-quarter 2017. These favorable variances were partially offset by $0.01 per share higher expenses at the parent.

Con Ed reaffirmed its full-year earnings guidance of $4.15-$4.35 per share, and our 2018 earnings estimate of $4.25 per share is unchanged. Con Ed also reaffirmed its 6% annual rate-base growth target through 2020, and our rate-base estimates are in line with Con Ed’s targets.

Total estimated costs associated with the repair and system upgrades after the April 2017 power failure that caused significant New York City subway delays were $264 million, unchanged from the first quarter. The total deferred asset associated with the power failure was $232 million, also unchanged since the last update. Although it is certainly possible that New York regulators could later deny some of these deferred costs, we do not believe this would have a material impact on our fair value estimate or change our forecast of 3.5% annual dividend increases over the next five years.

In our opinion, it was also positive that Con Ed did not take a reserve for the July steam main explosion in Manhattan and that the firm expects insurance to cover most of the expenses associated with the incident. Incidents like this, in densely populated areas of New York City, have been very expensive for Con Ed in the past.