Entergy Begins Rebuilding After Katrina, Rita

Entergy Corp., its Gulf Coast operations shredded by Hurricanes Katrina (search) and Rita, will be leaning heavily on a broad slate of merchant and utility assets to rebuild the local power grids from which it grew.

Meanwhile, investors are watching the New Orleans-based company's progress closely to see whether the repairs also put its shares back on the track that carried it from just under $18 in 2000 to a pre-hurricane high in August of $78.43. It closed Friday at $71.68.

"We still have a lot of work to do," said Morgan Stewart, a company spokesman.

Key to Entergy's recovery are the earnings potential of its nuclear fleet, record-high natural gas prices facing rival energy providers, and the earnings strength of its utilities, analysts said.

It also depends on whether Entergy can isolate the rest of its operations from its battered Gulf Coast subsidiaries, whose huge losses tipped its New Orleans utility into bankruptcy on Sept. 23.

Katrina, which struck Aug. 29, was the worst storm in Entergy (ETR) history, knocking out power to 1.1 million of its 2.7 million customers. It also sent the stock tumbling 8% to $70.55 a share, leaving it with a 1.6% loss for the quarter just ended.

But the drop is widely seen as temporary.

Heavy damage, strong foundation

"Underneath all of this near-term uncertainty ... remains a fundamentally strong, diversified energy utility," Jon Kolb, an analyst with Zacks Equity Research, wrote in a research note.

Kolb reiterated his "market-neutral hold" recommendation for the stock the day after Katrina hit and set a six-month target price of $77.25, down from $80 to reflect the effects of the storm.

"I figured six months out ... it will be the second quarter 2006. The company should really return to where it was" by then, he said.

Entergy estimates damage from Katrina could top $1 billion, excluding lost revenue from power outages. Hurricane Rita, second only to Katrina in terms of damage, may add up to $550 million more, the company warned.

Rita plunged 766,000 customers into the dark. All but 79,000 now have power, many in homes too badly damaged to reconnect.

Investors will likely have to wait until Entergy's third-quarter earnings report on Nov. 1 to get a full picture of the hurricanes' toll on its bottom line.

Following Katrina Entergy officials said the company's cash and liquidity positions were strong enough to survive the resulting damage. But the company also said it could no longer affirm its 2005 earnings guidance of $4.60 to $4.85 a share.

A poll of analysts by Thomson First Call expects the company to deliver third-quarter earnings between $1.47 and $1.77 a share, up from $1.39 a share for the same period a year ago.

Nuclear defense

Entergy's 10,000-megawatt nuclear generating business, the nation's second biggest after Exelon Corp. (EXC) , will be an important financial buttress for the company if bullish calls on natural gas prices prevail in the coming months.

"The performance of the merchant nuclear fleet has been an important beneficiary of the strong commodity market, and looks to add a significant earnings upside surprise in the coming quarters," said Daniel Ford, an analyst with Lehman Brothers, in a research note.

Nuclear operators are on better footing heading into the heating season than utilities that rely on high-priced natural gas to run their power plants.

Severe supply disruptions in the Gulf of Mexico have sent natural gas prices soaring, with the November-dated futures contract hitting an all-time high this week of $14.75 per million British thermal units on the New York Mercantile Exchange.

"We estimate Entergy's nuclear businesses to capture significant upside as natural gas prices remain strong," UBS said, adding "We expect the nuclear earnings to offset the loss of the utility business in New Orleans and Louisiana in 2006 and 2007."

Citing this "tremendous" earnings leverage, UBS raised its outlook for the company to outperform from neutral and lifted its price target to $87 from $75 a share.

Utilities' performance

Entergy's utility business, which includes Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans, on the other hand, faces an uphill battle repairing their badly damaged power systems.

Fitch Ratings on Thursday revised its rating outlook for Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and Entergy Mississippi to negative from stable.

"The incremental costs from the second hurricane will further increase consolidated debt and reduce cash flow from operations," Fitch said.

But most analysts seem confident that the utilities' financial struggles won't wound the parent company.

"The earnings power at the utility, while more conservative and stable than the merchant fleet, will continue to provide solid earnings, even accounting for the total disappearance of [Entergy New Orleans]," Ford predicted, referring to the unit's bankruptcy filing.

"The bankruptcy can be a blip on the screen," said Kolb.

The utilities, while separate subsidiaries, are linked to Entergy Corp. through the utilities' participation in a shared money pool and their reliance upon the parent company's $2 billion credit facility as their primary sources of short-term financing.

Entergy's available financial resources are extensive, UBS noted, and could prove useful to the utilities as they seek to resolve their financial woes.

The company has said it has cash on hand, and more than $2 billion of revolving credit facilities, roughly $800 million of it untapped. Entergy and its utilities collectively are also cleared to issue $2.6 billion in short- and long-term debt.

Standard and Poor's credit analyst John Kennedy expects Entergy Corp.'s financial means to be adequate to "contain the obligations" of Entergy New Orleans at the subsidiary level.

Entergy New Orleans has already tapped its parent for $60 million to continue restoration efforts after a bankruptcy court judged ruled it could draw on a $100 million Entergy Corp. credit line.

Still, the New Orleans unit, hardest hit by Katrina, is also the smallest of Entergy's five utilities, representing just 7% of Entergy's overall sales and 3% of its earnings in 2004.

The utilities are likely to feel the impact of the storm for some time in terms of lost power sales. Over 121,000 of Entergy's 190,000 electric customers in Orleans parish will be off line indefinitely, their homes and businesses too badly damaged to receive electricity, the company said.

Entergy Texas has restored service to over 200,000 customers, more than two-thirds of its customer base while another 58,000 customers could be off line for an extended time, the company said.

And while Entergy Gulf States, with 350,000 customers in Louisiana, emerged relatively unscathed by Katrina, it took a direct hit three weeks later from Hurricane Rita.

Entergy Gulf States' debt rating was placed under review for possible downgrade by Moody's Investors Service last week, reflecting damage Rita caused to the utility's power system.

"The extent of damage appears to be among the worst experienced by any investor-owned utility as a result of a hurricane in recent times," the ratings agency said of Entergy Gulf States.

Regulatory relationship

There is some concern among the ratings agencies that Entergy Gulf States in particular may be unable to recoup storm costs at the state level since it is operating under a rate freeze in Texas. Having its service territory split between Louisiana and Texas only makes regulatory proceedings that much more complicated for the unit.

Entergy Gulf States may also face financing issues in the wake of the storms. The utility has a $340 million limitation on borrowings from the Entergy system money pool, a $200 million existing authorization for the issuance of additional public debt, and no bank credit facilities of its own, Moody's pointed out.

"Entergy Gulf States is expected to need to significantly increase its funded debt to finance at least part of its restoration costs, increasing leverage and lowering cash flow coverage metrics," the ratings agency said.

Fitch agreed that regulatory recovery could pose a problem for the unit, adding that this puts Entergy Gulf States "at greatest risk of a rating downgrade." Credit ratings downgrades increase the utility's borrowing costs.