GOLD CORPORATE FINANCE WINNER………Just before Hurricane Katrina made landfall last year, New Orleans-based Entergy Corp. evacuated its corporate staff, including treasury, with the expectation that employees would be able to return in a few days. What played out in the weeks that followed exceeded any worst-case scenario company executives had anticipated. The $10.1 billion utility group's operations in Mississippi, Louisiana and Texas were severely damaged by Katrina and then a few weeks later by Hurricane Rita, causing nearly 2 million customers to lose power. Compounding Entergy's woes was the fact that its 40-person treasury staff was forced to scatter across seven states, dealing with their own storm losses. "The piece that had not been imagined was that people not only couldn't go to work at their office, people didn't have their homes either," says Entergy Treasurer Steve McNeal.
Even so, the treasury team soon found itself at the center of the company's efforts to arrange a $1.5 billion emergency financing to begin to address the imperative to restore service and other liquidity needs. Everybody in treasury wanted to help get the operation back on its feet, and by the end of the first week, two-thirds of the staff were already calling in to see what they could do to help. But the situation was about to become even more challenging: A rise in natural gas prices that began prior to Katrina worsened in the storm's wake, requiring significantly more cash to fund purchases of natural gas to fuel generating stations and significantly more bank credit to support the collateral requirements of Entergy's northeastern nuclear businesses. A few weeks later, Rita would rip into the company's Louisiana-Texas service area, adding to the liquidity crunch.
Prior to the hurricanes, the company's strategy was to retain minimal working capital, making external sourcing vital to any recovery plan. It was determined that financing efforts would be guided by two goals: First, the company would strive to maintain its credit ratings at current levels, and second, any financings had to be callable to give the company the flexibility to take advantage of more attractive refinancing alternatives or respond to a reduction in cash needs. "We were determined not to do financings that would be restrictive or have covenants in them that wouldn't have been there before the storm," says McNeal.
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The overall financing plan had several parts to meet the needs of various subsidiaries. The company first reached out to its bankers at Citigroup and negotiated a $200 million private placement "bridge" bond. Within the next two months, a series of bond financings totaling $500 million were sold and a $1.5 billion revolving credit facility was put in place, with an identical pricing grid to Entergy's pre-Katrina facility, to offset potential negative mark-to-market exposures from rising gas and power prices. The company increased its equity with a mandatory convertible offering valued at $500 million. "The biggest challenge in these transactions was getting stability with the rating agencies where they could affirm a rating and we could go to the market," explains assistant treasurer Frank Williford. Treasury made sure someone was always on hand to answer rating agency questions and provide details.
It took eight months for all treasury employees to return to Entergy's New Orleans offices, but it was the plan that the team put into place in those first eight weeks after the hurricanes that helped put the company on a more stable footing. Even though the company was initially put on a negative credit watch by the rating agencies and its smallest subsidiary went bankrupt, the parent company managed to maintain its ratings, and its debt and equity offerings were well received by the market. The Entergy team gives credit to its relationships with its entire bank group, led by Citi, which helped find the best financing solutions in the fastest amount of time. "Every institution in our bank group contacted us to offer their assistance after Katrina," says McNeal. "Knowing they would stand by us gave us the confidence to aggressively approach the captial markets."
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