Wall Street analysts are skeptical that tensions between Entergy New Orleans LLC and the city officials who regulate it will lead parent company Entergy Corp. to divest the utility.

The full New Orleans City Council on Sept. 23 voted unanimously to launch investigations of the company's Hurricane Ida response and the future ownership of the city's utility, and to direct Entergy New Orleans to delay implementing any new rates, according to the recommendation of its utility commission on Sept. 22.

Ahead of regulators' decision, Entergy proposed four possible scenarios for the future of its New Orleans subsidiary, including divesting the utility altogether. But analysts see the divestiture option as a long shot.

CreditSights Senior Analyst Andrew DeVries said in a Sept. 22 report "we see zero chance for a potential sale/spin of [Entergy New Orleans.]"

Similar to rumors of state takeover of Pacific Gas and Electric Co.'s Northern California service territory two years ago, "we do not see politicians wanting to be in charge of something with so much risk involved, so we see a very small chance of a municipalization at [Entergy New Orleans] happening," CreditSights wrote.

"We also don't see any company wanting to take on the continual headaches from [Entergy New Orleans'] hurricanes/service territory given ESG concerns and very little earnings upside," DeVries added, noting a "common playbook" for recent utility M&A is to acquire a company with a coal-heavy portfolio to replace those assets and grow rate base developing renewables and gas-fired plants.

Entergy New Orleans owns 754 MW of capacity, according to S&P Global Market Intelligence data, consisting almost entirely of gas.

Glenrock Associates analyst Paul Patterson said the conflict between the utility and New Orleans regulators was disappointing but not surprising.

"The company is incentivized to invest in infrastructure," Patterson said in an interview Sept. 23. "The company doesn't make money by holding back on investment."

Patterson said he thinks it may be too early to guess at what a resolution might look like between Entergy and the city.

"Is it going to be a little bit rocky? I think this is part of the reality that happens from time to time with utilities when there's a reliability issue," Patterson added. "There are no easy or simple answers. ... Each one of these proposals has pluses and minuses, depending on where you sit. I think we have to wait until the dust settles."

Guggenheim Securities, LLC analyst Shahriar Pourreza estimated that if Entergy chose to spinoff the New Orleans utility, which accounts for approximately 5% of earnings, it could result in proceeds of $800 million to $1 billion that could help offset the parent company's broader need for $2.5 billion in equity. The spinoff would not help Entergy's earnings per share, but would likely be flat or dilutive, analysts wrote in a Sept. 21 report.

But such a move could "de-risk" Entergy's overall profile, analysts suggested.

Entergy New Orleans is "the smallest and least favorable regulatory jurisdiction for [Entergy] and we find it difficult to see a scenario where a sale process would yield sufficient proceeds to constitute adequate 'fair value' for [Entergy] but the transaction would present an opportunity to improve the average regulatory construct in the [Entergy] portfolio and de-risk from a headline and credit perspective," analysts wrote.

"While we found the immediate responses from [Entergy] consistent with prior proceedings on storm response, the regulatory jurisdiction in New Orleans remains a tough one," analysts said in an update Sept. 23. "We recognize however that fact finding and investigatory proceedings take time and present headline risk."

Entergy New Orleans notified the city council it had exhausted its storm reserve funding to offset costs of Ida restoration, the report noted.

Entergy is "among the first" utilities to face growing push-back by regulators of higher electric prices, Mizuho Securities USA LLC Managing Director Paul Fremont wrote in a Sept. 21 report.

"The utility sector, faced with rising costs of renewables, grid hardening and growing signs of inflation, may be approaching an inflection point with regulators," Fremont wrote.

In New Orleans at least, tensions are rising between the company and its regulators, who accused the utility during meetings this week of not investing enough in grid hardening to help prevent major storm outages.

"Please stop acting like you're the victim," City Council President Helena Moreno said during the meeting. "You are the Goliath, you are a powerful Fortune 500 company, with all the resources in the world with record profits last year of $1.4 billion."

Shares of Entergy declined more than 7.5% over the first four days of the week, closing at $102.61 Sept. 23, compared to a 1.0% decline by the S&P 500 Utilities Index over the same period.

Ida struck Louisiana as a Category 4 storm Aug. 29, causing more than 1 million customer outages — "second only" to 2005's Hurricane Katrina — including a New Orleans citywide blackout, and up to $2.6 billion in damage, the company said.