Utilities Face Severe Earnings, Cash Hits After Sandy
For the second consecutive fall, Northeast U.S. utilities face the perfect financial storm, says Morningstar's Travis Miller.
For the second consecutive fall, Northeast U.S. utilities face the perfect financial storm following Hurricane Sandy's landfall on October 29. We estimate repair costs from Sandy will easily dwarf the $1 billion price tag we estimated utilities in the region faced following the August 2011 Hurricane Irene disaster. In addition, with 8.2 million customers without power as of midday Tuesday according to news reports, utilities face lost distribution and generation revenues that will affect fourth-quarter earnings.
Despite the significant near-term cash and earnings impact we anticipate, we don't expect to make any changes to our fair value estimates even for the hardest hit utilities such as ConEd (ED), Public Service Enterprise Group (PEG), FirstEnergy (FE), Exelon (EXC), Dominion (D), PPL (PPL), Northeast Utilities (NU), or Pepco (POM). We likely will reduce our full-year 2012 earnings estimates for most of these utilities once we know the full impact from repair costs and customer outages.
Based on past storms and our initial conversations with management teams, we expect regulators will allow most of the affected utilities to defer and later recover from customers most of the storm costs, resulting in minimal cash losses. If bills become extreme, regulators might also allow securitization. Usage-decoupled rates at hardest-hit ConEd should minimize its outage-related revenue losses, but the utility still faces a repair bill and potential fines we estimate could be several hundred million dollars. It could cost more than $100 million alone to fix a substation that exploded. Most other utilities in the region have usage-based rates and face lost revenues from outages along with repair costs.
For power producers in the region such as PSEG, Exelon, FirstEnergy, Entergy (ETR), and NRG Energy (NRG), we expect the storm will reduce fourth-quarter earnings but won't lead to any changes in our fair value estimates. With transmission and distribution networks out of service, utilities' power plants won't be able run even if they are operable, reducing gross margins. Already low usage levels during the fall shoulder season and planned maintenance outages will minimize the impact.
We estimate 30 of the 104 U.S. nuclear reactors were in the storm's path, including 13 reactors that Exelon owns or co-owns. Its Oyster Creek (N.J.) plant, which is its smallest and is set to retire in 2019, was the only one that experienced an official Nuclear Regulatory Commission alert event; however, we don't expect the outage to have any material additional costs. Its Salem (N.J.) plant co-owned with PSEG shut one reactor due to the storm surge; its other Salem reactor already was in a refueling outage. We expect the storm's impact, including costs at its PECO (Pa.) and Baltimore Gas & Electric distribution utilities, will have a small impact on Exelon's fourth-quarter earnings but no long-term earnings or shareholder value impact. We expect more details when Exelon reports third-quarter earnings Nov. 1.
Entergy's two-unit Indian Point plant, which is the closest to New York City, shut down one unit due to what it said were external grid problems, but did not suffer any material damage. The storm could strengthen arguments on both sides of the plant's contentious relicensing effort. On the one hand, the plant demonstrated its ability to withstand an historic weather event. On the other hand, Sandy could add to the fear that the next big storm could create a nuclear disaster.
Some of these same utilities still have not fully recovered costs from Hurricane Irene. Northeast Utilities still doesn't have final approval for the $290 million of 2011 storm costs it incurred at its Connecticut utility. As part of its regulatory settlement tied to its NSTAR merger, the utility won't be able to recover $40 million of those storm costs and won't fully recover the rest until 2020. Early estimates from Northeast Utilities' management team suggest costs from Sandy will be well less than last year's total.
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Travis Miller does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.