CHICAGO–(BUSINESS WIRE) — As patience runs short and tensions run high, Fitch expects utilities in Superstorm Sandy’s path to encounter increasingly negative headlines, with power outages extending from hours to days, and in some cases, expected to be one week or more.
Fitch has concerns about the timely and full recovery of storm costs and capital investments by affected utilities. New York Governor Andrew Cuomo has already stated that he will hold the utilities accountable.
More than 8 million customers lost power across the nine states hit by Sandy, although the most severely affected are the New Jersey utilities, the largest being Public Service Electric & Gas, and New York’s Con Edison and LIPA, which together experienced service outages to more than 6 million customers.
Unlike other recent storms in the northeast and mid-Atlantic regions, substantial damage was done to the service area, with transportation and recreation infrastructure ravaged by flood waters, leading to a protracted period of recovery for businesses and residents in the affected areas.
In the storm’s aftermath, the incumbent utilities preparation and response efforts will be closely scrutinized. Fitch believes that given the unprecedented nature of the storm and the extensive damage rendered to other infrastructure, particularly along the coastline, the damage was unavoidable and the utilities acted prudently.
Fitch expects some earnings impact from the storm due to lost power sales from the service interruption and the destruction of many businesses. However, the accounting treatment of actual storm costs will likely be to defer and capitalize such costs, and not directly affect earnings.
It is too early to determine the storm-related costs and to what extent the utilities will be allowed full and timely recovery of prudently incurred costs. Disallowance of such costs, future rate case outcomes that punish the utilities through reductions in authorized returns on equity (ROEs), or long deferral periods that pressure cash flow could result in rating pressure.
Fitch currently has Stable Outlooks on Public Service Electric & Gas and Con Edison, the two investor-owned utilities most affected by Sandy. Fitch expects the utilities will be able to recover storm-related costs, and lost power sales are not expected to have a material impact.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.