Nearly a week after Hurricane Irma made landfall in Florida, analysts said investor-owned utilities there will not take major storm-related hits to third-quarter earnings and should have regulators' support to recover the costs of restoring and rebuilding grid infrastructure.
As of the morning of Sept. 15, about 1.8 million customers across investor-owned, cooperative and municipal utilities were still without power, according to the Florida Division of Emergency Management, down from a peak of 6.7 million outages on Sept. 11.
Florida Power & Light Co., or FPL, said the eastern portion of its service territory will be restored by Sept. 17 and the western portion by Sept. 22. Duke Energy Florida LLC, or DEF, expects its western customers to have power by Sept. 15 and Sept. 17 for its central and northern accounts. Tampa Electric Co. promised to restore all 730,000 of its customers by Sept. 17.
With this work continuing, industry observers project the utilities' parent companies will likely report lower earnings in the third quarter as a result of lost sales. But each subsidiary will be able to bounce back, due to both storm reserves and cost recovery mechanisms.
"Overall in the past, [hurricanes] haven't had a negative impact on Florida utility earnings," Dennis Sperduto, an analyst with Regulatory Research Associates, said in an interview. "Florida overall has an excellent regulatory climate as far as utilities are concerned."
This is due to several reasons, Sperduto and others said. Utilities often have storm cost recovery reserves, which they can access when paying for restoration work. FPL, which serves 4.9 million customers, also has a $1 billion reserve amortization balance that can reduce the probable Irma surcharge on monthly bills and spread it out over time.
Utilities can also file a securitization request with Florida regulators, which if approved would allow for the issuance of bonds for a certain amount of storm costs. Proceeds from the bonds would go back to the utility to pay for restoration work, with customers paying interest in principle on the bonds over five to 10 years. Sperduto predicted that FPL and DEF "may very well turn to that option because of the severity of the storm."
Cost recovery
As part of recent settlements with the Florida Public Service Commission, companies can collect up to $4 per 1,000 kWh of usage on residential bills; the three utilities affected by Irma will presumably petition the PSC to exceed this cap to pay for restoration and rebuilding efforts. According to Sperduto, the limit "is for a much less severe storm," adding that "I don't see any major problem with the commission authorizing more than that cap."
Once utilities determine storm costs, it is "highly likely" the PSC will authorize a monthly surcharge, Sperduto said. But it is unclear the length of the time period over which costs can be recovered: normally 12 months; Sperduto anticipated that in light of Irma, an extension will be applied.
"Florida really doesn't want to discourage utilities from responding quickly and adequately and safely during future storms, so I don't think there's much of a chance that they're going to nitpick on costs," Sperduto said of the state's PSC. However, he added, "I don't think prudence is going to end up being an issue unless the utilities really drop the ball."
John Bartlett, a portfolio manager and electric utility analyst with Reaves Asset Management, cited the "very constructive relationship between utility and regulator in the state of Florida... there is a lot of trust and mutual respect."
 |
Bartlett expects a two-pronged prudence review, with the commission examining how long utilities took restore service to customers and how much they spent to do so. With these in mind, the PSC will then review the companies' capital expenditure budgets to determine how Irma efforts fit into utilities' plans for system maintenance, and invest new money into the grid.
"What really gets under people's skin is outage duration. And so a look at outage duration is really paramount in the commission's mind, and that's what really gets scrutinized the most," Bartlett said in an interview. "If you go back to 10 years or so, FPL did get in a bit of a tight spot with the commission with respect to outage duration and hurricanes. That is what begat the whole process of doing the storm hardening, to try to get some of those outage duration times down."
Sperduto and Bartlett both said restoration costs would be categorized on balance sheets as operations and management, and that rebuilds, as capital expenditures, would go into rate bases.
Future outlook
Utilities' grid investments have paid off, Bartlett said. He largely praised their Irma efforts, saying of FPL in particular that "it was shocking how quickly they recovered." That utility announced its pace of restoration to be roughly four times faster than after Hurricane Wilma in 2005 and that nearly three-quarters of its affected customers have their electricity back. Reaves holds investment positions in FPL parent NextEra Energy Inc.
Irma's third-quarter impact "appears limited to temporary demand weakness, with minimal long-term earnings ramifications," Morgan Stanley Research analyst Stephen Byrd wrote in a Sept. 14 note.
The third-quarter effect on NextEra will be "isolated," Byrd said, with future impact "likely to be minimal to zero." Bartlett said FPL "has the most flexibility to manage their costs" because of its securitization option.
DEF has a $132 million storm reserve, which Byrd says must be fully drawn down before requesting to replenish it. He added that parent Duke Energy Corp. could be exposed to a potential earnings per share drag from storm recovery costs, not in Florida, but at its Carolina utilities.
Duke Energy Carolinas LLC has a smaller storm reserve of $25 million, Byrd said, while Duke Energy Progress LLC does not maintain one. The parent company said it has repaired 368,000 outages in the Carolinas and expects to address the remaining 14,000 by Sept. 15.
Regulatory Research Associates is an offering of S&P Global Market Intelligence.