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Entergy Facing Up to $1.1B in Katrina Costs; New Orleans Unit Files for Bankruptcy

Total restoration costs for the repair and/or replacement of Entergy's electric and gas facilities damaged by Hurricane Katrina and business continuity costs are estimated to be in the range of $750 million to $1.1 billion, the utility said last Tuesday.

Meanwhile, on Friday, Entergy said its New Orleans subsidiary -- Entergy New Orleans Inc. -- filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The move is aimed at protecting customers and ensuring continued progress in restoring power and gas service to New Orleans after Hurricane Katrina, Entergy said.

Entergy announced its preliminary estimates of storm restoration costs associated with Katrina. Limited access to heavily flooded areas continues to hamper Entergy's ability to fully assess the extent of damage to certain portions of its infrastructure, the utility said. As a result, Entergy noted that the initial restoration estimates are subject to change.

Restoration and business continuity cost estimates for the various utility jurisdictions affected by the storm are as follows:

The cost estimates do not include other potential incremental losses that cannot be estimated at this time.

Simultaneous with the voluntary petition for reorganization filing, Entergy New Orleans filed a motion with the bankruptcy court for "debtor-in-possession" financing that contemplates Entergy Corp. making loans up to $200 million to Entergy New Orleans to address Entergy New Orleans' current liquidity crisis.

The petition also requests that up to $150 million of these loans be approved on an interim basis. These funds will enable Entergy New Orleans to meet its near-term obligations, including employee wages and benefits, payments under power purchase and gas supply agreements, and its current efforts to repair and restore the facilities needed to serve its electric and gas customers.

Entergy "trusts that the bankruptcy court will act swiftly to approve its debtor-in-possession financing for Entergy New Orleans," the utility said.

Entergy New Orleans, which provides electric and natural gas service to customers within the city of New Orleans, is the smallest of Entergy's five utility companies and represented about 7% of the consolidated revenues and 3% of its consolidated earnings in 2004. Neither Entergy nor any of Entergy's other utility and non-utility subsidiaries were included in the bankruptcy filing.

"We took this action after careful review of the various options available to preserve Entergy New Orleans' business over the near- and long-term," said Dan Packer, Entergy New Orleans' chairman. "Due to our parent company's financial support, we can focus on the city's reconstruction and rebirth, as those restoration efforts continue today."

Entergy said the filing also is intended to address the "very legitimate concern" expressed recently in a letter by U.S. Sens. Mary Landrieu and David Vitter from Louisiana to President Bush that the potential bankruptcy of Entergy New Orleans would stall or cease restoration efforts in the city as a result of creditor disputes that could arise in such a filing.

In making the filing for debtor-in-possession financing, "it is Entergy's hope and desire that Entergy New Orleans will be able to continue its restoration efforts for the immediate future." The court has set the petition and motion for hearing on Monday, Sept. 26.

As the City Council of New Orleans stated in a letter of support to Entergy Chief Executive Officer J. Wayne Leonard recently, any long-term solution, that provides for a financially viable utility at Entergy New Orleans and protects customers from the massive restoration costs they can ill afford to pay, must involve a substantial federal financial commitment, Entergy added.

In a related action, a bill was introduced by Landrieu and Vitter in the U.S. Senate on September 22 that could provide $250 billion of financial aid to Louisiana, of which $2.5 billion was earmarked to cover restoration costs of in-state utilities, including Entergy's Louisiana subsidiaries.

Entergy said federal resources, in addition to reimbursement of certain costs covered by insurance, are critical to restoring the system and restoring Entergy New Orleans' financial health. Entergy is working with public officials at the federal, state and local levels to try to secure vital government assistance.

Entergy also announced it had taken steps in advance of the bankruptcy filing by Entergy New Orleans to mitigate any effects of the filing on the parent and its financially stronger subsidiaries. Prior to the Entergy New Orleans' bankruptcy filing, Entergy obtained amendments to the $2 billion bank revolving credit facility and other bank facilities to eliminate the bankruptcy of Entergy New Orleans as an event of default under the terms of those bank agreements. "Therefore, this bankruptcy filing by Entergy New Orleans will not trigger a default under these bank facilities or other financing obligations of Entergy and subsidiaries that are not party to this bankruptcy filing."

As of 9 p.m. CDT Monday (Sept. 19), Entergy had restored power to approximately 874,000 of the 1.1 million customers who lost power at the peak of the storm. Entergy expects to restore power to all those customers who can take service in the nonflooded areas of New Orleans and surrounding parishes within two weeks.

Some customers in the most devastated areas of greater New Orleans and surrounding parishes, estimated to be in the range of 150,000 to 170,000, are unable to accept electric and gas service, and therefore cannot be restored at the current time. Restoration for many of these customers will follow major repairs or reconstruction of customer facilities, and will be contingent on validation by local authorities of habitability and electrical safety of customers' structures.

In areas where demolition is required before reconstruction can occur, Entergy will coordinate with parish officials to make every effort to have electric and gas facilities ready to serve customers as their communities are rebuilt.

Looking at estimated revenue impacts, Entergy said revenues are expected to be lower at both Entergy Louisiana Inc. (ELI) and Entergy New Orleans as a result of the 150,000 to 170,000 customers that are unable to accept electric and gas service for a period of time that cannot yet be estimated. Included in this customer estimate are 115,000 to 130,000 customers located in Entergy New Orleans' service territory, with the remainder in ELI's service territory. The majority of these customers are residential, and the balance is primarily commercial.

Average annual nonfuel revenues associated with these customers are estimated to range from $50 million to $60 million for ELI and $160 million to $190 million for Entergy New Orleans. However, Entergy noted that it cannot estimate the actual revenue impact of customers who are currently unable to accept electric and gas service. This is due to a range of uncertainties, in particular the timing of when individual customers will return to service.

The company noted that the lower revenues from the most severely impacted areas could be partially offset by potential sales growth in other Entergy service areas. This growth could come from evacuees moving into neighboring cities in Entergy's service territory such as Baton Rouge, LA and Jackson, MS or from temporary facilities constructed by federal and local agencies.

Entergy plans to pursue a broad range of initiatives to recover storm restoration costs and incremental losses. Initiatives include obtaining reimbursement of certain costs covered by insurance, obtaining assistance through federal legislation targeting Hurricane Katrina relief, and pursuing recovery through existing or new rate mechanisms regulated by FERC and local regulatory bodies.

FERC Chairman Joseph Kelliher recently said FERC would be willing to consider requests filed at the Commission for cost recovery in the wake of Katrina if such filings are jurisdictional to the federal agency.

Meanwhile, Cleco Corp. is estimating that the damage from Katrina will cost Cleco between $100 million and $125 million. But Cleco's liquidity "is more than adequate to fund the restoration costs," said Cleco CEO Michael Madison.

Madison noted that since Cleco still has weeks worth of work left to fully restore its system to the condition it was in prior to the storm, it's difficult to accurately forecast total restoration costs.

"Generally we've found that 60-70% of storm restoration costs are capitalized," said Madison. "The regulatory treatment of the costs has not yet been determined, but for past storm costs the Louisiana Public Service Commission has allowed Cleco to amortize storm recovery operating expenses over multiple years in order to minimize impact to the company."

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