A Hard Rain's A-Gonna Fall

By Eugene Bukoveczky | September 05, 2008 AAA

Earlier this week, shares of Florida's largest power utility FPL Group (NYSE:FPL) experienced a one-day loss of 3.6% following the release of some updated earnings guidance. Citing economic weakness in its service area, the company scaled back its 2009 earnings per share forecast range by 10 cents from $4.15-4.35 to $4.05-4.25. Consensus analyst expectations had been running at $4.24 per share for 2009.

While a reduction of between 2-4% to the forecast could be arguably interpreted as just a bit of fine tuning, the magnitude of the negative reaction suggests that some investors may have other reasons to turn thumbs down on FPL Group - reasons that are weather related. (For more on analyst expectations, be sure to read Analyst Recommendations: Do Sell Ratings Exist?)

Gustav Skips Oil & Gas, Wrecks Power Grid
While damage to the oil and gas infrastructure may have been minimal in the wake of hurricane Gustav, its now evident that significant damage was done to the state's electricity grid - a grid that is largely owned an operated by New Orleans-based Entergy (NYSE:ETR). With 191 power lines and 210 substations damaged, and 13 of 14 main lines providing power to New Orleans out of commission, the company warned that repairs to its system would be "difficult and slow". Since Gustav struck, Entergy shares are off about 6%.

Florida's FPL in Hurricane Alley
Like its Louisiana counterpart, FPL has also absorbed significant hurricane damage in the past, and could so so again in future. In 2004 and again 2005 hurricanes caused substantial damage to the company's Florida Power & Light unit, the source of three-quarters of its operating revenue. The final recovery costs from the damage exceeded the company's storm and property insurance reserve by around $868 million. This prompted the company to issue $652 million in secured storm recovery bonds in May 2007. With three hurricanes and tropical storms (Hanna, Ike and Josephine) now heading toward the U.S., investors may be taking heed of the fact that FPL's service area stands smack in the middle of hurricane alley. (Learn about one way that companies can hedge against undesireable weather in Introduction To Weather Derivatives.)

Mid-Atlantic Also In Harms Way
With tropical storm Hanna now expected to produce high winds and dump massive amounts of rain along the East Coast from the Carolinas up to Maine, one has to wonder whether a bit of hurricane-related concern may also have prompted a recent 6% drop in the shares of Pennsylvania's largest electric utility, First Energy (NYSE:FE). In 2001, 2003 and again in 2004, this mid-Atlantic state was hit by a sucession of extreme weather events including Tropical Storm Allison (the nation's costliest) and hurricanes Isabel, Frances, Ivan and Jeanne, all of which caused severe flooding and widespread tornados. Another potential mid-Atlantic power provider is Dominion Resources (NYSE:D) which operates a sizable power grid serving Virginia and North Carolina. It's shares are down over 4% in the last couple of days.

The Final Word
While a study just released (Sept 3, 2008) by the Geophysical Fluid Dynamics Laboratory of the US National Oceanic and Atmospheric Administration (NOAA) did note that there was a "statistical correlation" between the rise in sea surface temperatures and Atlantic hurricane activity, it concluded that it was premature to conclude that greenhouse warming had any discernable affect on such activity. Nevertheless, the study did predict that it would be "likely that hurricanes in the future will be more intense on average and have higher near-storm rainfall rates than present-day hurricanes".

With homage to Bob Dylan, it looks like "A Hard Rain's A-Gonna Fall" and it could just wash away the future earnings growth potential some of the nations biggest power utilities.

For related reading, be sure to check out Preparing For Nature's Worst.

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