TEXT-S&P revises Entergy outlook to stable from negative
June 20 - Overview -- There have been meaningful improvements at Entergy Corp.'s regulated electric utility subsidiaries that are balanced by the ongoing challenges at the company's merchant generation operations. -- We are affirming the 'BBB' corporate credit rating on Entergy and all its operating subsidiaries. We are revising the outlook to stable from negative. -- The stable outlook reflects the sustained and consistent level of improvement at the company's regulated utility operations, balanced by the dual challenge of ongoing moderation in power prices and of effectively managing the relicensing process of two of its larger merchant nuclear plants. At the same time, the stable outlook incorporates our expectation that Entergy's financial risk profile will remain in the "significant" category, generating about 20% adjusted FFO to debt, which incorporates the challenges the company is encountering at its merchant power generation operations. Rating Action On June 20, 2012, Standard & Poor's Ratings Services affirmed its corporate credit and issue ratings on Entergy Corp. and its subsidiaries Entergy Arkansas Inc., Entergy Gulf States Louisiana LLC, Entergy Louisiana LLC, Entergy Mississippi Inc., Entergy New Orleans Inc., Entergy Texas Inc., and System Energy Resources Inc. At the same time, we revised the outlook on the ratings to stable from negative. Rationale The outlook revision on Entergy and its affiliates to stable from negative recognizes a sustained and consistent level of improvement at the company's regulated utility operations, balanced by the dual challenge of dealing with the ongoing moderation in wholesale power prices and of effectively managing the relicensing process of two of its larger merchant nuclear plants, Indian Point Units 2 and 3. These factors support the company's business risk profile, which is firmly in the "strong" category. The moderation in wholesale power prices has caused the contribution of the regulated utility business to increase to as much as 75% of operating income and cash flow and we expect this trend to persist over the intermediate term. Despite the declining contribution of the merchant generation business we do not view the overall level of business risk as declining. Nevertheless, given the combination of Entergy's "strong" business risk profile and "significant" financial risk profile we expect that current ratings can accommodate some of the uncertainty that surrounds the relicensing process as long as Entergy continues to effectively manage its regulated utility operations and prudently manage its merchant generation operations by, among other things, preserving its consistent merchant hedging strategy while ensuring adequate liquidity. Entergy has already received a license extension for two of its nuclear plants: Vermont Yankee in early 2011 and Pilgrim in June 2012. The operating licenses for Indian Point Units 2 and 3 expire in 2013 and 2015, respectively, and while Entergy has filed for extensions for both plants with the Nuclear Regulatory Commission (NRC), the company is having difficulties in renewing some of the related water discharge permits. Despite these snags, Entergy has continued to consistently hedge the output of its merchant power plants on a rolling three-year basis, ensuring at least a base level of cash flow stability that we expect will support the company's financial risk profile. Entergy's financial risk profile remains toward the lower end of the significant category, allowing the company little flexibility at the current rating level. A meaningful reduction in cash flow stemming from the potential shut-down of Indian Point Units 2 and 3 when their licenses expire combined with further softness in the wholesale power markets that result in adjusted FFO to total debt below 18% on a sustained basis would lead to a downgrade of one notch. Entergy's strong business risk profile incorporates the company's regulated utility operations in four states (Louisiana, Arkansas, Mississippi, and Texas) which provide regulatory and operating diversity. The service territory has demonstrated some consistent improvement over the past few years, with the number of customers increasing by about 1% annually. At the same time, Entergy has effectively managed its regulatory risk, enabling its regulated utilities to earn at or close to allowed returns. In Louisiana and Mississippi, the utilities operate under formula rate plans that allow for changes in base rates to ensure that the companies are earning within the allowed range of returns. In addition, these companies can use various riders to recover fuel costs and, importantly, invested capital in a timely manner. In Arkansas and Texas, the utilities continue to operate under traditional ratemaking frameworks. Entergy has been able to achieve constructive regulatory outcomes in Arkansas, but continues to face hurdles in Texas, where it filed for a new base rate increase of $112 million in November 2011. Entergy's merchant generation operations consist of about 5,000 megawatts (MW) of nuclear generation assets, mainly in the Northeast U.S., and about 1,600 MW of coal- and gas-fired plants. The three largest nonnuclear units are in Louisiana (RS Cogen, 213 MW), Arkansas (Ritchie Unit 2, 544 MW), and Rhode Island (Rhode Island State Energy Center, 583 MW). Despite the combination of weakening wholesale prices and license-renewal issues, Entergy has consistently hedged the output of its merchant generation assets on a rolling three-year basis, selling both energy and capacity. As of March 31, 2012, Entergy had sold forward 89%, 84%, and 49% of the energy of its merchant nuclear generation fleet for 2012-2014. While Entergy has been hedging the output of the merchant nuclear plants at declining prices over the past few years, the actual hedged prices currently remain higher than market prices. Entergy is dealing with two main difficulties: ongoing moderation in wholesale power prices and effectively managing the relicensing of two of its larger merchant nuclear units, Indian Point Units 2 and 3. The decline in natural gas prices is behind the consistent lower wholesale power prices in the New York and New England independent system operator regions, causing a corresponding drop in operating income and cash flow of the merchant power plants to about 20% to 25% currently from about 40% of the total a few years ago. Given the ongoing low natural gas prices, we expect the moderation in wholesale power prices to persist for the intermediate term. Just as importantly, Entergy is in the process of relicensing its two largest merchant nuclear units, Indian Point Units 2 and 3, which, at 2,069 MW, represent about 40% of the total nuclear merchant generation capacity and contribute about one-half of the merchant generation operating income and cash flow. The operating licenses for Indian Point Units 2 and 3 expire in September 2013 and December 2015, respectively, and Entergy is in the process of obtaining updated water intake and discharge permits for the two plants as part of the license renewal process with the NRC. The Indian Point units provide a material portion of the merchant generation operating income and about 10% to 15% of total consolidated operating income. If both units shut down at their respective license-expiration dates, absent further softness in the wholesale power markets, we expect that the reduction in cash flow, while not insignificant, will not be sufficient enough to impair overall credit quality. Entergy received a 20-year license extension for Vermont Yankee in March 2011, although it still needs a certificate of public good from the Vermont Public Service Board, and a 20-year license extension for the Pilgrim nuclear plant in June 2012. We view Entergy's consolidated financial risk profile as significant. For the 12 months ended March 31, 2012, adjusted FFO was about $2.65 billion, while capital spending totaled $3.2 billion, leading to adjusted FFO interest coverage of about 4x, adjusted FFO to total debt of 18.4%, and adjusted debt leverage of 61.5%. These measures are weaker when compared with one year ago, in large part reflecting the continued weak wholesale power prices. Liquidity Entergy's liquidity is "adequate" under Standard & Poor's liquidity methodology criteria. We base our liquidity assessment on the following factors and assumptions: -- We expect the company's liquidity sources (including FFO and credit facility availability) over the next 12 months to exceed its uses by more than 1.2x. -- Long-term debt maturities are manageable, with about $200 million maturing in 2012, $707 million in 2013, and about $135 million in 2014, including maturities of securitized debt. -- Even if EBITDA declines by 15%, we believe net sources will be well in excess of liquidity requirements. -- The company has good relationships with its banks, in our assessment, and has a good standing in the credit markets. Entergy has $4.3 billion in available revolving credit facilities, with $3.5 billion available to the parent and the balance available among the operating subsidiaries as follows: -- Entergy Arkansas: $228 million; -- Entergy Gulf States Louisiana: $150 million; -- Entergy Louisiana: $200 million; -- Entergy Mississippi: $70 million; and -- Entergy Texas: $150 million. Total undrawn capacity as of March 31, 2012, was $2.825 billion, with $2 billion available to Entergy and about $800 million available to the operating subsidiaries. Most of Entergy's revolving credit facilities mature in March 2017. In our analysis, based on information available as of Dec. 31, 2011, we assumed liquidity of about $6 billion over the next 12 months, consisting mainly of FFO, cash on hand, and availability under the revolving credit facilities. We estimate the company could use up to $4.5 billion during the same period for capital spending, debt maturities, and shareholder dividends. Entergy's ability to absorb high-impact, low-probability events with limited need for refinancing, its flexibility to lower capital spending, its sound bank relationships, its solid standing in credit markets, and its generally prudent risk management further support our description of liquidity as adequate. Outlook The stable outlook on Entergy and its subsidiaries reflects the company's strong business risk profile and our expectations that Entergy's consolidated financial risk profile will remain in the significant category over the next 12 to 24 months. Our baseline forecast is for adjusted FFO to total debt just over 20% and adjusted total debt to total capital remaining at 60%. A meaningful reduction in cash flow from the potential shut-down of Indian Point Units 2 and 3 when the licenses expire combined with further softness in the wholesale power markets that drives adjusted FFO to total debt below 18% on a sustained basis would lead to a downgrade of one notch. Given Entergy's current business mix and its credit protection measures that are toward the lower end of the significant category there is no consideration for any upward rating momentum. Related Criteria And Research -- Standard & Poor's Standardizes Liquidity Descriptors For Global Corporate Issuers, July 2, 2010 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Analytical Methodology, April 15, 2008 Ratings List Outlook Revised; Ratings Affirmed; To From Entergy Corp. System Energy Resources Inc. Entergy Arkansas Inc. Entergy Texas Inc. Entergy New Orleans Inc. Entergy Mississippi Inc. Entergy Louisiana LLC Entergy Louisiana Holdings Inc. Entergy Louisiana Capital I Entergy Gulf States Louisiana LLC Corporate Credit Rating BBB/Stable/-- BBB/Negative/-- Ratings Affirmed GG1B Funding Corp. Corporate Credit Rating BBB/Stable/-- Entergy Corp. Senior Unsecured BBB- Entergy Arkansas Inc. Senior Secured A- Recovery Rating 1+ Preferred Stock BB+ Entergy Gulf States Louisiana LLC Senior Secured BBB+ Recovery Rating 1 Preferred Stock BB+ Entergy Louisiana Holdings Inc. Preferred Stock BB+ Entergy Louisiana LLC Senior Secured A- Recovery Rating 1+ Senior Unsecured BBB Preferred Stock BB+ Entergy Mississippi Inc. Senior Secured A- Recovery Rating 1+ Preferred Stock BB+ Entergy New Orleans Inc. Senior Secured BBB+ Recovery Rating 1 Preferred Stock BB+ Entergy Texas Inc. Senior Secured BBB+ Recovery Rating 1 System Energy Resources Inc. Senior Secured BBB+ Recovery Rating 1 1 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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