Category: Financial Markets

narrow moat ratings after Category 4 Hurricane Ida impacted significant portions of Entergy’s service area, including the New Orleans area. On Aug. 29, Entergy disclosed that Hurricane Ida caused all eight transmission lines that provide power to New Orleans to fail. This subsequently caused a load imbalance causing all generation to cease operations. 

While it is too early to estimate any financial impact from Hurricane Ida, the storm has drawn comparisons to Hurricane Katrina, the last Category 4 hurricane to impact the area. The combination of damage from Hurricane Katrina and Hurricane Rita, which struck the region shortly after Katrina, led to $1.5 billion total restoration costs for the repair of Entergy’s electric and gas facilities. This excluded lost revenue due to customer outages and Entergy’s inability to recover fixed costs through base rates.

Near-term liquidity constraints following Katrina and Rita led Entergy’s subsidiary, Entergy New Orleans, to file voluntary Chapter 11 bankruptcy. The subsidiary exited bankruptcy in May 2007 and eventually recovered most of the restoration costs through insurance proceeds and regulatory approval of storm restoration cost securitization, which was authorized by state law.

Company’s Future outlook

Entergy’s last traded price was 111.69 USD, whereas its fair value estimate is 110.00 USD, which makes it an overvalued stock. Entergy New Orleans contributed $49 million of Entergy’s $1.1 billion consolidated net income in 2020.  It is estimated that every $250 million of disallowed restoration costs reduces fair value estimate $1 per share. Entergy New Orleans had roughly $1 billion in total rate base at year-end 2020, representing approximately 3.5% of Entergy’s $28 billion rate base. Hurricane Ida increases Entergy’s regulatory risk as regulators likely will scrutinize the company’s storm response and restoration costs. 

Company Profile

Entergy is an integrated utility with approximately 22 gig watts of regulated utility-owned power generation capacity. It has shrunk its merchant generation business and plans to retire its remaining operating merchant nuclear unit in Michigan in 2022. Its five regulated integrated utilities generate and distribute electricity to about 3 million customers in Arkansas, Louisiana, Mississippi, and Texas.

(Source: Morningstar)

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