Hurricanes, Florida, and Utilities

09/17/2004 12:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Florida utilities are very popular among investors, and it is not surprising that many are worried about how these companies will fare in the wake of Charley, Frances, and Ivan. Roger Conrad, the leading advisor in the utility sector, addresses these concerns.

"Florida continues to dig itself out of the rubble of Hurricanes Charley and Frances, and now a third catastrophic weather system, Ivan is causing additional damage. The cost of cleaning up the mess will place an unprecedented burden on the state's residents and businesses, insurance companies, and particularly power utilities.The big three investor-owned utilities are FPL Group (FPL NYSE), Progress Energy (PGN NYSE), and TECO Energy (TE NYSE). These companies have been in a state of full mobilization for nearly a month. All three managed to get the bulk of their customer bases up and running quickly after Charley, though more remote users waited up to two weeks to come back on line. They've done an even better job responding to Frances.

"Meanwhile,  Ivan will increase the scope of the outages and damage, but with their armies of workers in the field, all three Florida utilities are well prepared. It also looks like Entergy (ETR NYSE) and Southern Company (SO NYSE), which serves the Panhandle, is going to bear the brunt of Ivan and we'll have to see how much damage is sustained before I can make a judgment on the impact. But I'd note that both companies have done a good job in the past of dealing with storms and their aftermath, both are very strong financially

"Meanwhile, who'll pay the massive cost for the post-storm cleanup effort? The answer to that question is critical to the financial fortunes of these utilities. We would recall that in the aftermath of Hurricane Isabel, which knocked out power to virtually the entire state of Virginia at one time, Dominion Resources announced it would not ask ratepayers to shoulder the cost of the cleanup through a rate increase. Dominion was able to do this because of its extremely strong financial position, and because the cost of cleaning up after Isabel was small relative to the company's overall earnings. With the exception of TECO, Florida's utilities are perhaps even stronger financially than Dominion.

"Florida also maintains a Storm Reserve Funda legacy of 1992's Hurricane Andrew to which all of its utilities contribute. The reserve, however, appears to have nowhere near the funding necessary to clean up after Charley, Frances, and Ivan. And insurance isn't likely to cover much either. The utilities are almost certainly going to need some help, either from ratepayers or from taxpayers in the form of direct state and/or federal assistance. I'm betting we'll see a great deal of the latter. Given that Florida Governor Jeb Bush’s brother is in a tight re-election race, it's a safe bet that cash will flow freely to the state in coming months. Even if government contributes, there will still be a need for rate increases in the coming months. It's hard to imagine TECO Energy, in particular, being able to absorb cleanup costs without making such a request. The good news is Florida has a history of treating its utilities very fairly, and I expect this time will be no different.

"The popular misconception is that utilities can be heavily damaged financially by storms. In reality, that almost never happens. Even in the wake of the extremely deadly Hurricane Andrew, FPL Group bounced back quickly. While the situation bears watching to ensure government and regulators perform to expectations, I don't see any major fallout for these utilities resulting from this catastrophe. In fact, they could wind up gaining. Government may decide to bury lines and pass along the cost of the investment in the form of rate increases. Should the worst-case scenario occur, and the government not provide financial assistance, FPL is the best positioned to absorb the blow and TECO is the worst. Progress would take a hit, but its dividend would still hold. The hit to Southern would likely be minor. Again, this is very unlikely, in no small part because the utilities have contributed to the Bushes' campaigns. We are particularly optimistic regarding FPL and would use any weakness in the stock due to hurricane fears as a chance to snap up the share on the cheap."

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