Will Sandy Steal Your Dividend?
Hurricanes are expensive. Analysts estimate Sandy's price tag at $10 billion-$20 billion, and utilities will swallow a sizable chunk of those costs. But all utilities are not created equal. Keep reading to discover how some companies weather the storm, while others see their financials fly out the window.
Not in Kansas anymore
Although bad weather is not a novel occurrence, the proliferation of superstorms has heated up only in the past 20 years. Up until 1992, commercial insurance was widely available at affordable rates. Utilities paid a reasonable premium, and could rest easy as hurricane season rolled around.
But Hurricane Andrew was the final straw for insurers. Storms were becoming bigger, more random, and (most importantly) much more expensive. Insurers pushed premiums through the roof, and utilities were left without a safety net.
Since then, utilities have reverted to two different tactics to keep their coffers in order:
- Self-insure: Utility companies create "storm reserve accounts" with rainy day funds for weathering the worst that Mother Nature has to offer. According to an excellent report by the Edison Electric Institute, this amounted to about 20 cents per month for a typical residential consumer of NextEra's (NYS: NEE) Florida Power & Light in 2004.
- Cost defer: With a clever sleight of hand, utility companies can request permission to defer the costs of a storm, usually over two to three years. Since storm damage can cost more than a company's annual net income, this allows companies to swallow significant costs without killing their quarters. The eventual cost recovery sometimes comes from a "special surcharge" on customers' bills, but it's also sometimes paid off through an extended earnings drain.
When a hurricane hits, utilities know that what matters most is to get things running ASAP. With no power, there's no income. And in this case at least, a penny earned is worth more than a penny saved.
By Tuesday evening, superstorm Sandy had blacked out 8.5 million homes from Maine to North Carolina. First Energy's (NYS: FE) Jersey Central Power & Light swelled its 400-person staff by more than 300%, pulling in crews from as far away as Florida and Iowa. Northeast Utilities' (NYS: NU) Connecticut Light & Power brought in 2,000 technicians to fix lines, and an additional 700 arborists just to clear trees. Consolidated Edison (NYS: ED) even turned lower Manhattan into a game of "Dance Dance Revolution" with its failed attempt at a controlled blackout.
A pinch of perspective
So is Sandy the superstorm that the mass media has made it out to be? Let's compare:
81 major storms (1994-2004)
$2.7 billion (total)
Hurricane Katrina (2005)
Hurricane Irene (2011)
Superstorm Sandy (2012)
$10 billion-$20 billion (estimated)
Con Ed CEO Kevin Burke has said that Sandy is the "worst storm in our history," which will most likely be true, considering the utility's jurisdiction.
Con Ed chose tactic No. 2 after 1992, and defers costs to weather each storm. In its most recent quarterly statement, the company recorded deferred costs of $121 million, and its New York utility subsidiary put off an additional $78 million. This doesn't make the problem disappear, but it does mean the company has a system in place that could swallow significant sums of Sandy's damages. This'll depend on whether Con Ed gets approval to pass on Sandy's tab to customers, or whether it'll have to carry the costs itself.
But considering the increasing irregularity and severity of storms, storm reserves are the only sure way to have money in the bank for the next thunder and lightning show. Here's a look at where some companies currently stand:
Connecticut Light & Power (Northeast Utilities)
Dominion (NYS: D)
Duke Power[Duke Energy (NYS: DUK) ]
Florida Power & Light (NextEra)
Progress Energy Florida (Duke Energy)
Foolish bottom line
Storms and hurricanes are unavoidable costs for utilities. What investors need to understand is how each company is ready to address those costs after a Katrina, Irene, or Sandy take their toll. 8.5 million people had no power at the peak of Sandy's temper tantrum, but the effects of this storm will be felt for years to come. For prepared utilities, costs will be controlled. For those burying Sandy's impact in their books - don't expect to see sunshine on the next pages of your portfolio.
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The article Will Sandy Steal Your Dividend? originally appeared on Fool.com.Justin Loiseau has no positions in the stocks mentioned above, but he does use electricity.You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Dominion Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.