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Beyond Sandy: Utilities Pick Up the Pieces

By Roger Conrad on November 2, 2012

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With Hurricane Sandy pummeling the East Coast earlier this week, it’s become increasingly clear we’ve entered a period of ever-nastier storms that can strike violently anywhere and during any season. That means more costly cleanups and escalating challenges for the power, gas, water and communications companies who have to pick up the pieces.

In my July 6 Utility & Income article “How Utilities Cope with Weather-Related Disasters,” I highlighted the carnage left behind by the summer storm that meteorologists dubbed “The Super Derecho,” which struck 10 Midwest and Mid-Atlantic states in late June–killing more than two dozen people, knocking out power to 4.3 million customers and wreaking billions in economic damages.

It’s still too early to gauge the final impact of Hurricane Sandy. But from initial indications, the human and economic toll is in a far different league than the Derecho. Indeed, it’s likely to prove more akin to the destruction the Gulf Coast suffered in 2005 during the twin strikes of Hurricanes Katrina and Rita.

New Jersey Governor Chris Christie says the federal government’s response to Sandy was vastly superior to what’s pretty universally acknowledged as a lack of coordination in 2005. But that still couldn’t prevent record flooding of lower Manhattan that shut the New York Stock Exchange for two days this week, or a death toll that’s already hit 98 and continues to rise, or power outages to some 8.2 million customers over 20 states, or what’s now estimated to be $60 billion in property damage from the storm.

Now with floodwaters receding and mercury dropping with the season, the question is how long it will take for things to return to normal, at least for those not left homeless by the devastation. And much of that burden falls squarely on providers of essential services.

At no time are utilities more in the spotlight than when they’re responding to disasters. How effectively they do so is not only critical for the customers they serve, but also for investors who own their stocks and bonds.

When Hurricane Katrina all but wiped out New Orleans, Entergy Corp’s (NYSE: ETR) headquarters was flooded, and the company put its local unit into bankruptcy, as it made repairs and waited for rate relief and insurance to cover the cost. In the end, it was the utility’s size and diversification that kept it in sound financial shape and able to do the job. That included solid performance at regulated utility operations in Arkansas, Louisiana, Mississippi and Texas, as well as profitable nuclear power plants selling energy into wholesale markets in the Northeast US.

By contrast, much smaller Empire District Electric Co (NYSE: EDE) was laid low by the 2010 storm that all but wiped out the town of Joplin, Missouri. And despite restoring its dividend at a lower rate this year, it’s still struggling to build back its balance sheet strength. One reason: State regulators still haven’t allowed it to recover $6.2 million in storm recovery costs.

Larger companies have a much better chance of following Entergy’s long but ultimately successful recovery, and avoiding the turmoil still faced by Empire. But a lot will also depend on cooperation from regulators, which in turn will be shaped by customer perception of utilities’ effectiveness with post-storm efforts.

Progress Report

Starting with communications, Verizon Communications’ (NYSE: VZ) key switching facility in lower Manhattan sustained damage due to flooding from the storm surge. The company, however, was apparently effective by running its network in “a limited way,” particularly for mobile disaster recovery efforts. As of Wednesday, the company reported 94 percent of its towers from Maine to Virginia–the area affected by Sandy–were operational despite continued disruptions in electricity supplies from the power grid.

That’s a sharp improvement from the knockdown rate of 25 percent of cell towers reported by the Federal Communications Commission (FCC) following the storm. And it’s reportedly a superior effort to that of rivals AT&T (NYSE: T), Sprint (NYSE: S) and Deutsche Telekom’s (Germany: DTE, OTC: DTEGY) T-Mobile USA, the second-, third- and fourth-ranked US wireless companies that collectively have much less of a regional presence in the areas hit by Sandy.

T-Mobile and AT&T are now sharing networks to limit interruptions, which should help both stay in customers’ good graces. Meanwhile, Cablevision (NYSE: CVC), Comcast (NSDQ: CMCSA) and Time Warner Cable (NYSE: TWC) have reported no major damage to systems and say they should be able to restore service once electricity is back up.

That’s actually a pretty benign post-storm picture for communications services providers. The same applies to investor-owned water utilities in the region.

As is the case nationwide, most water and wastewater systems from Virginia to Maine are owned and operated by municipalities and other government authorities. That’s the case in New York City, Philadelphia, Washington, D.C. and most other major cities in the region. And we’ve yet to get a full damage report from them.

Aqua America (NYSE: WTR), however, reports less than 50 of its half million customers in the storm’s path had service impacted, and then only temporarily by “lower than normal pressure.” That includes the roughly 56,000 users it has in New Jersey, 30,000 in Virginia and 362,000 in southeastern Pennsylvania, a clear demonstration of the strength of the company’s system.

American Water Works (NYSE: AWK), the country’s largest investor-owned utility, reported similar storm results for its more than 640,000 customers in New Jersey. So apparently did much smaller Middlesex Water (NSDQ: MSEX) in New Jersey, Delaware and Pennsylvania.

We’ve yet to hear definitively from several other water utilities operating in the area, so there’s always the possibility that some fared far worse. But the definite upshot so far is there’s not much risk to water companies in the aftermath of this storm, other than trying to recover potential damages to facilities that did not have a direct impact on service.

Power Company Purgatory

That leaves power companies. Four days after the storm, the US Department of Energy reports that 45 percent of customers who lost power have had service restored. That’s actually running behind the 51 percent rate achieved four days after Hurricane Irene, when 4.5 million customers in a dozen states still had not been re-connected.

There have been bright spots. Expectations were high, for example, that Dominion Resources (NYSE: D) would pull out all the stops to restore service following the storm. And aided in part by the fact that the full fury did not fall on Virginia this time, the company did not disappoint. More than 75 percent of the 322,000 affected customers were back up on Tuesday, less than a day after the storm passed through. As of Friday, the company had completed restoration efforts and was sending its crews north.

Exelon (NYSE: EXC) also appears to have navigated the worst of the storm damage. The company not only serves Chicago, but also Philadelphia and Baltimore, two major cities in the storm’s path. A poor response to storm damage in Maryland, where nearly 300,000 lost power during the storm, would almost certainly have invited regulatory retaliation. Less than two days after the storm’s initial impact, however, the company had restored power to all but 64,592 users, and full restoration appeared imminent.

Sandy also forced the temporary shutdown of half-a-dozen nuclear power plants for issues related to flooding. Exelon’s 43-year-old Oyster Creek facility drew the most scrutiny, but the procedure appeared to go smoothly, with no danger to the plant or surrounding area. Other affected plants are either restarting or soon will be.

More surprising has been the much improved performance of Northeast Utilities (NYSE: NU), at least so far. A better response was essential to avoiding severe financial penalties, as the company remains under intense scrutiny for its response to Irene. Unfortunately, it’s by no means out of the woods yet, with an estimated 350,000 homes and businesses in Connecticut without power as of Thursday evening. And if it fails to meet its target of Nov. 6 for most restoration, regulators will almost certainly be in its face with real penalties.

Pepco Holdings (NYSE: POM) has also been roundly praised for improved response in the District of Columbia and its Maryland suburbs, including from D.C. Mayor Vincent Gray. That could also prove critical to its ability to sustain dividends going forward, with several key rate cases still being decided. Less sure, however, is the financial impact from damage to its Atlantic City service territory.

Also less certain is what awaits Consolidated Edison (NYSE: ED) and Public Service Enterprise Group (NYSE: PEG), the utilities serving New York City and its New Jersey suburbs, respectively.

American Electric Power (NYSE: AEP) and First Energy (NYSE: FE), meanwhile, felt the full force of Sandy when it collided with another system to produce a massive blizzard. Some 22 percent of the state of West Virginia lost power from the storm, immediately creating life-threatening conditions for many.

New Jersey was the worst affected state in the union, with some 2.6 million homes and businesses blacked out by Sandy’s initial blast as the storm made landfall. By Thursday evening, Enterprise had restored power to about 920,000 of the 1.7 million affected, including 85 percent of the City of Newark. Management, however, was still warning customers that full restoration could take another week, a state of affairs that’s sure to make at least some customers unhappy with temperatures expected to fall in coming days.

Con Ed faced an even greater hurdle, as flooding inhibits efforts to reconnect densely populated lower Manhattan. But the company announced today that it would be able to get electricity back to the entire island by tomorrow. That’s well ahead of earlier projections, though it won’t include about 130 buildings along the East River that suffered major flooding.

Like Entergy following Katrina, AEP and First Energy have vast service territories, much of which were not affected by the storm. Investors in both companies, however, should carefully watch events in states where they were impacted, such as First Energy in New Jersey. And even before the storm, West Virginia had a reputation as having a challenging regulatory environment.

The bottom line: As was the case following the Super Derecho, Katrina and every other major storm, it’s critical for utility stock investors to keep an eye on how companies they own are responding to their challenges.

That’s not just essential for assessing the immediate impact on returns from one of the most destructive storms ever to hit the continental US. It’s also a pretty good clue for just how well utilities are positioned to handle the increasingly difficult weather conditions that lie ahead. And that in turn is shaping up to be a primary factor determining how profitable or unprofitable their stocks will be over the long haul.

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