Dr. Feelgood

Hurricane Katrina Impact on Entergy (ETR)

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.

Hurricane Katrina Impact on Entergy (ETR)

"...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.