Hurricane Katrina Impact on Entergy (ETR)

At least 1 electric utility company is seriously damaged by the ravages of Hurricane Katrina, writes utility analyst Sandy Cohen. While we do not want to be ghoulish, obviously, Entergy, based in New Orleans, with a service territory that encompasses New Orleans, Louisiana and Mississippi (and Texas) is seriously affected by the aftermath of Hurricane Katrina.

Just this morning, Entergy, understandably, issued a press release that explained why the company could no longer stand by its previously revealed earnings guidance (ETR News Release On Financial Guidance).

Entergy has much larger fish to fry than worrying about its shareholders, as is appropriate. And expenses incurred by Entergy to repair and restore its service territory should be able to be recovered fully through regulatory means ... and therefore the costs might be deferred (meaning not show up as a hit against earnings). But, nevertheless, a large portion of its service territory has been destroyed (the Gulf Coast of Mississippi and New Orleans), and there has to be doubt as to when ETR may ever recover the cash costs of these efforts. Plus, lost revenues may never be recovered.

Therefore, ETR faces a question as to timing of recovery of cash costs of repairs and rebuilding (whihc would hurt cahs flow more than reported earnings), but also a reduction in revenues and earnings that derive from electricity USAGE ... and this could be much delayed recovery, and may in some cases never return to previous levels.

Comments

[Dr. Feelgood:]

"...and there has to be doubt as to when ETR may ever recover the cash costs of these efforts."

Really? ETR's shareholders may have to eat the costs of repairing and rebuilding?

48% of ETR's customers are in MS and LA. Of the 996k LA customers, approx. 350k are in N.O. There is already a regulatory mechanism in place in MS and LA to recover storm costs. Certainly recovery may be delayed, in which case we can reasonably expect storm cost securitization, but is there a threat of no recovery?

Sure N.O. is unique. There is no storm cost recovery in place at this moment, plus how can you recover cash from a smaller (and probably poorer) area. Look for federal assistance here. But there's no way policymakers are going to let investors hold the bag on this.

ETR will take a short-term hit, and cash and profitability metrics will suffer. But there's no long-term threat. The company had $2.9 billion in cash flow last year. $65 million came from N.O. And approx. 30% of of cash flows are from its non-reg nuke fleet, which is printing money.

2005 Sep 07 09:51 AM

[Sandy Cohen:]

Dr. Feelgood,

There is a long term risk ... anytime any utility seeks regulatory assistance, no matter how justified, there is always a hit.

I am certain that ETR will get full, or nearly full, recovery of its costs to make any necessary repairs and rebuilds. But there is certainly a reasonable question as to the time frame over which ETR can recieve such recovery.

Here are some questions to ask:

1) How many people will move back to New Orleans or the Gulf Coast of Mississippi and rebuild?
2) WHEN will those people move back to rebuild?
3) How many companies will move back to rebuild?
4) When will those companies move back?
5) How much does insurance cover?
6) Exactly how and when will Federal ro State money flow directly to ETR, as opposed to ETR funding the costs out of its own pocket initially?

If you do not know the answers to those questions, and maybe many others, then there is real risk over the next 6-18 months.

Also, if there is no electric service being provided for the next ... I dunno, 2-3 months ... then ETR and its shareholders are losing not just the profits from those sales, but also the revenues that cover ETR's already sunk capital costs. And ETR is likely going to continue to pay its employees wages and benefits as well. Those are likely NEVER going to be recovered (not sure any regulator will allow recovery of lost revenues due to business interruptions).

Finally, if ETR permanently loses 1/3 of its customers in New Orleans, let's say, then the customer base over which the revenues needed to cover ETR's base costs, plus its restoration costs, is WAY smaller. Why does this matter? because politcally, the cost of electricity would rise 50% for each customer BEFORE ETR's storm costs, just to allow recovery of the already sunk costs, and then even more for recovery of any additional costs ETR is likely to incur to make repairs. For persepctive, Progress Energy just got recovery of about $237 million for its storm costs from last year (and they were just ONE utility affected). I would say the Florida utilities conservatively spent $600 million to $700 million due to the hurricanes of last year. This disaster will dwarf the costs of last seasons several hurricanes, in my opinion ... and the costs will mainly be on just ONE company, not 4, and will have to be spread over MANY fewer customers. That creates a real politcal issue.

The risks are real, and until the costs of the storm are understood, and until the number of customers there will be are known, and until ETR actually asks for recovery, there could be an overhang on the stock.

And by the way, where do you think the Federal monies go first? To ETR, with all that cash, and cashflow? Or to people and businesses that are REALLY wiped out?

2005 Sep 08 05:31 PM

[Dr. Feelgood:]

Sandy, thank you for the thoughtful reponse.

My thoughts:

1) Recovery: immediately cash flow will be impacted by higher expenses, lost revenues. Recovery will happen, at both a state and federal level. Absolutely the feds will pay. There may be short-term cash impact, but ultimately ETR will recoup its costs: Congress appropriated $400 MM for ConEd to rebuild post-9/11. We'll seem the same level of assistance here, and this will keep the ratepayers in the rebuilt New Orleans, from shouldering a disproportionate amount of the costs.

2) Timing of recovery. I agree it's unknown. ETR is already deferring its costs, and we expect to see securitization next year.

3) New Orleans. It's clear that it will be rebuilt to some degree. When, how, who, I agree with you are questions no one knows the answers to. However, the severly damaged portions of the Gulf Coast, including N.O., account for less than 10% of ETR's total retail load. I think this lost load is a short-term not long-term issue. 72% of ETR projected 2005 earnings were coming from regulated utility operations. More than 1/2 of that amount is from Entergy Arkansas and Entergy Gulf States. A portion of the 10% missing load today will come back as the refineries come back on line, as the rebuilding starts, and as people settle in other areas outside of N.O. that are in ETR's service territory. What's the long-term impact? Negligible in my mind.

The biggest issue I see for ETR is the short-term cash flow impact. They'll get the money back, from the feds and the rate base, and they'll securitize if the recovery is too delayed. Sure this is a political process, but the mechanisms for storm cost recovery are well established, as is the process for monetizing such costs. ETR will probably have to cancel its share repurchase.

Even if N.O. is only partially rebuilt, I don't see it as an issue for the company. ENOI contributed less than 3% of OCF in 2004. In the long-run, ETR is a monopoly utility in growing markets with no signs of competition on the horizon. Almost 30% of earnings are from its merchant generation portfolio which includes low-cost generation in regions with lower reserve margins. I can see lower earnings for the next 24 months, but if one's investment horizon is longer, I think these guys are a great buy.

2005 Sep 13 10:40 AM

[wgroup:]

"Entergy's financial reserves for storm damage have been depleted by previous storms and are currently at a deficit of $80 million."

(biz.yahoo.com/ap/05090...)

"The timing of remaining share repurchases under our $1.5 billion buyback program may be more heavily weighted toward the end of 2006 as infrastructure investments take center stage over the next few months,"

Entergy is tapping nearly every state and federal office to consider "long term commitments" and to help the utility and Gulf states recover from the storm, Denault said.

"Our goal in all of these efforts is to help policy makers recognize and consider the longer term issues that must be addressed," Denault said, referring to coastal restoration, infrastructure upgrades, and federal funding to help customers pay energy bills.

(CBS MarketWatch Story)



Um, isn't the CFO in effect implying that ETR is seeking public money and/or taxpayer-funded assistance so it can resume its share buyback program in a year or so?

Isn't that in effect getting taxpayers to subsidize the share buyback?

2005 Sep 07 12:04 PM