On Aug. 29, 2005, Hurricane Katrina slammed into the city of New Orleans, Louisiana. The result was the worst natural disaster in the history of the US. Less than a month later Katrina was followed by Hurricane Rita, which inflicted further damage on the Big Easy and even more destruction on Texas’ Gulf Coast.

The energy utility at the epicenter of that disaster was Entergy Corp (NYSE: ETR). The company avoided major damage to its nuclear power plants and other key facilities. But its transmission and distribution system suffered some $2 billion in damages across three states and, even six months later, tens of thousands of its pre-storm customers were still not connected to power and gas.

At the height of the crisis Entergy put its New Orleans utility unit into Chapter 11, as it waited for federal disaster relief, state regulator-approved bond issues to finance costs and insurance to fund its massive recovery efforts. Throughout, however, the company’s overall health remained solid, its credit rating stable and its dividend intact.

Today, Entergy faces several challenges, including low wholesale electricity prices in the Northeast and Midwest, where it sells power generated from the nation’s second-largest nuclear power plant fleet. The company is locked in a court battle with the Vermont state government over the Nuclear Regulatory Commission’s March relicensing of the Vermont Yankee nuclear power plant. And anti-nuclear forces are challenging its attempts to relicense its Indian Point nuclear plant in New York and Pilgrim nuclear plant in Massachusetts.

The company’s utility operations in the areas ravaged by Katrina and Rita, however, are now bright spots, in large part due to the boom in plastics and chemicals triggered by suddenly prolific supplies of natural gas liquids. Industrial sales surged another 9 percent in the first quarter of 2011 throughout Entergy’s regulated service territory, pushing up regulated utility earnings 24.7 percent.

The upshot: Entergy remains a solid company now despite its nuclear challenges, just as it was in 2005 in the face of the worst natural disaster ever faced by any US utility. The stock price was volatile then, as it has been in recent weeks, due to investor fears and rock-bottom expectations. The company’s financial health and earnings power, however, are undimmed now as they were then. Investors can rest easy Entergy’s long-term wealth-building power is intact.

That’s a stark contrast with what’s facing investors in the latest US utility to be hit with a natural disaster: The Empire District Electric Company Ltd (NYSE: EDE). The company has been on the Utility Forecaster Dividend Watch List for many months, mainly because earnings from its Missouri, Kansas, Arkansas and Oklahoma gas and electric utility operations didn’t cover its dividend.

This week, management announced one more payment at the old quarterly dividend rate of 32 cents on Jun. 15 to shareholders of record Jun. 1. But the company will make no more payments for the rest of 2011 and will reduce the quarterly rate to just 25 cents per share per quarter starting in 2012.

The reason given in the company’s press release–and reiterated during a conference call held Thursday–was financial damages from the devastating storms hitting Joplin, Missouri. The devastation from recent storms hitting the area has been well photographed and will require a massive relief effort.

Empire District estimates that approximately 8,000 to 10,000 residential, commercial, and industrial customers will be unable to take service for the “foreseeable future,” in addition to those who lost service but can be restored. The company estimates this will result in the loss of “approximately 10 to 15 percent of load.” It also projects storm repairs will cost between $20 million and $30 million, an unknown amount of which may not be covered by insurance.

Human suffering from severe property damages, loss of life and injuries is horrific wherever it occurs. And certainly, it’s crass and stupid to compare relative suffering from such tragedies. Clearly, however, the raw dollars of financial damages from the Joplin disaster pale before what happened in Louisiana and Texas in 2005.

So what allowed Entergy able to keep its shareholders whole during that disaster, while Empire was forced to take such drastic action this week? In the words of Empire President and CEO Bill Gipson, the dividend cut was “a hardship for many of our shareholders and are sorry for that. This catastrophic event has impacted many lives in our community.”

One reason is size. Entergy is a far larger company, with nearly $12 billion in market capitalization currently. In contrast, Empire has only $790 million. Larger size means greater ability to absorb major shocks to the system, from greater financial resources to a larger employee pool with which to respond to disasters. That’s a major argument for utility mergers, particularly those that increase regional scale.

The other is a stronger financial position before the crisis occurred. Entergy covered its distribution by a comfortable margin before Hurricane Katrina. It suffered a shock in the third and fourth quarters of 2005, largely because of a steep drop off in sales.

By early 2006 earnings recovery was well underway, and disaster relief was beginning to flow. But it was superior financial power that allowed the company to bridge the gap seamlessly, even while it continued its Herculean efforts to restore its system. Impressively, it was able to hold the line despite the carping of credit rating agencies that repeatedly threatened downgrades.

In contrast, Empire District has had little or no financial cushion for several years. Even after a solid 31.8 percent jump in first-quarter earnings over last year’s levels–and long-awaited rate hikes in Arkansas, Missouri and Kansas–the company still failed to cover dividends with earnings, instead posting a payout ratio of 104.7 percent. Even with the likelihood of insurance coverage of damages and lost businesses, the disaster to Joplin, Missouri was just too great a blow to absorb and maintain its dividend at the same time.

By a more cynical read, management was heading for a dividend cut even if its utility service territory had been spared from damages. Even as the company’s costs have continued to rise, regulators in its states have become less and less willing to pass them along to ratepayers in one of the country’s most depressed regions.

This spring the staff of the Missouri Public Service Commission recommended a range for the company’s return on equity with a midpoint of just 9.1 percent. That’s well below the national average and is a clear sign that officials want Empire District to suffer along with its customers.

It’s a vicious cycle common during recessions. It’s also perfectly understandable now, given that regulators are appointed by politicians and the country is gearing up to enter one of the most contentious election cycles in decades.

It’s also the rate-payers who wind up suffering most from this kind of rate-making. Cutting allowed returns always dries up new system investment in states. And, in particularly egregious cases, it can be years before confidence is restored enough for it to resume at a healthy rate.

Unfortunately for Empire District shareholders, however, they’re the first to suffer here. And until the company can rebuild its system and get some recovery of the costs to do it, management will be unable to pay any dividend, regardless of what it’s saying now.

Interestingly, Entergy and Empire District share regulation in Arkansas and their service areas are similar in many ways. And Entergy has suffered from stingy regulation in the past, notably with dividend-busting disallowances of costs when it was building nuclear power plants in the 1970s and ’80s.

Today, however, Entergy is a large and strong company that proved during Hurricane Katrina it’s capable of absorbing the hardest of knocks. That’s a fact New Yorkers worried about the Indian Point nuclear plant should consider before throwing stones. Empire District, in contrast, is small and financially stretched–and therefore extremely vulnerable to adverse events.

So what can we learn as investors from these two utilities? First, size has some very real advantage in a scale industry such as utilities, provided management can handle complexities like multiple regulatory jurisdictions. More important, however, is the importance of a financial cushion to protect against disasters.

For many years, Empire District offered a dividend yield as much as 2 percentage points higher than Entergy. But earnings rarely covered that dividend, which was rarely increased. In contrast, Entergy has consistently covered its payout comfortably, and increased it as well.

That remained the case this year. But the yield gap nonetheless closed to less than half a point this year, as investors simultaneously worried about the future of nuclear energy (Entergy), even as they bought stocks with the highest yields heedless of the health of the underlying business (Empire District).

The fall of Empire this week unmasks the height of their folly. The key to avoiding their fate is simple: Make sure the companies you own have strong balance sheets, cover their payouts comfortably and can take a punch. And no matter how attractive a yield looks, ignore it unless there’s a solid cushion–that is unless you want a speculation.

The Utility Forecaster Dividend Watch List uncovers other companies whose vulnerability to dividend cuts is equal to or greater than that of Empire District before this week. For the latest, see the June 2011 issue, which will be available to subscribers at www.UtilityForecaster.com Saturday morning.