Mississippi Business Finance Corporation — Moody’s upgrades Entergy Texas to Baa2 and changes the outlooks for Entergy Arkansas and Entergy Mississippi to positive.
Rating Action: Moody’s upgrades Entergy Texas to Baa2 and changes the outlooks for Entergy Arkansas and Entergy Mississippi to positive.Global Credit Research – 28 Jan 2022New York, January 28, 2022 — Moody’s Investors Service (“Moody’s”) today upgraded the long-term ratings of Entergy Texas, Inc. (ETI), including its issuer rating to Baa2, from Baa3, and first mortgage bond rating to A3, from Baa1, due to improved legislative and regulatory support for the company. The outlook for ETI is stable.Simultaneously, Moody’s affirmed the long-term ratings of Entergy Arkansas, LLC (EAL), including its Baa1 issuer rating and A2 first mortgage bond rating, and Entergy Mississippi, LLC (EML), including its Baa1 issuer rating and A2 first mortgage bond rating. Moody’s also changed the outlooks for EAL and EML to positive, from stable, reflecting our expectation that both utilities will generate and maintain stronger financial metrics, including ratios of cash flow from operations before the changes in working capital (CFO pre-WC) to debt around 20%.A complete list of rating actions can be found below.Upgrades:..Issuer: Entergy Texas, Inc….. Issuer Rating, Upgraded to Baa2 from Baa3….Pref. Stock Preferred Stock, Upgraded to Ba1 from Ba2….Senior Secured First Mortgage Bonds, Upgraded to A3 from Baa1….Senior Secured Shelf, Upgraded to (P)A3 from (P)Baa1Affirmations:..Issuer: Entergy Arkansas, LLC…. Issuer Rating, Affirmed Baa1….Senior Secured First Mortgage Bonds, Affirmed A2….Senior Secured Shelf, Affirmed (P)A2..Issuer: Entergy Mississippi, LLC…. Issuer Rating, Affirmed Baa1….Pref. Stock Preferred Stock, Affirmed Baa3….Senior Secured First Mortgage Bonds, Affirmed A2….Senior Secured Shelf, Affirmed (P)A2..Issuer: Independence (County of) AR….Senior Secured Revenue Bonds, Affirmed A2….Underlying Senior Secured Revenue Bonds, Affirmed A2..Issuer: Mississippi Business Finance Corporation….Senior Secured Revenue Bonds, Affirmed A2….Underlying Senior Secured Revenue Bonds, Affirmed A2..Issuer: Pope (County of) AR….Senior Unsecured Revenue Bonds, Affirmed Baa1Outlook Actions:..Issuer: Entergy Arkansas, LLC….Outlook, Changed To Positive From Stable..Issuer: Entergy Mississippi, LLC….Outlook, Changed To Positive From Stable..Issuer: Entergy Texas, Inc…..Outlook, Changed To Stable From PositiveRATINGS RATIONALEETI’s upgrade reflects an improved legislative and regulatory environment, following the recent authorization to securitize over $250 million of storm costs and expedited cost recovery of the Montgomery County Power Station (MCPS), a gas-fired combined-cycle plant which commenced operations and was reflected in rates in January 2021. These cost recovery provisions should help the company to generate CFO pre-WC to debt above 15% over the next several years, commensurate with Baa2 integrated peers.EAL’s positive outlook considers Arkansas’ supportive legislative action that was enacted in March 2021, which clarified and extended the utility’s formula rate plan (FRP) provisions, along with our expectation that the company will generate stronger financial metrics, including a ratio of CFO pre-WC to debt around 20% over the next 2-3 years.Similarly, EML’s positive outlook reflects our expectation that the company’s ratio of CFO pre-WC to debt will be sustained around 20%, while operating within a FRP framework that provides timely, predictable and consistent recovery of costs and investments.All three companies benefit from strong legislative and regulatory support and improving financial metrics. Financial metrics are increasing, organically, following material cash outflow during 2018-2020, which included over $800 million in aggregate customer rebates due to the 2017 Tax Cuts and Jobs Act. These refunds have largely been completed, which allows for a natural uplift in cash flow generation. We expect financial metrics to improve further, due to ongoing rate increases that reflect each utility’s growing rate base as well as timely recovery of operating costs.For ETI, annual capital cost recovery occurs through distribution and transmission cost riders, and more recently through a generation cost recovery rider (GCRR), which reflects a higher revenue requirement when a discrete asset is placed into service. Furthermore, ETI is expected to file a general rate case in Q2 2022 to update its operating cost recovery and begin to recoup non-rider investment.For EAL and EMI, capital and operating cost recovery occurs annually through their respective FRP filings. These regulatory proceedings are particularly credit supportive since they include forward-looking provisions that enhance the predictability and stability of cash flow, especially when compared to peer utilities operating under more traditional, or less comprehensive, cost recovery frameworks.OutlooksETI’s stable outlook incorporates our expectation that the company will generate cash flow to debt ratios above 15% and that supportive regulatory outcomes will continue, including the company’s upcoming general rate case proceeding.EAL’s positive outlook reflects the strong legislative support for utility cost recovery and the transparent, and now more predictable, formula rate construct in Arkansas. The newly clarified FRP should allow the company to maintain a ratio of CFO pre-WC to debt consistently around 20%.EML’s positive outlook is based on the timely cost recovery and transparent rate making offered by its FRP, which should translate into the company maintaining a ratio of CFO pre-WC to debt of 20% going forward.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors That Could Lead to an UpgradeETI could be upgraded with ongoing supportive regulatory and legislative treatment, along with a ratio of CFO pre-WC to debt consistently above 18%. The incorporation of more forward-looking cost recovery mechanisms could also put upward pressure on ETI’s rating.EAL could be upgraded if financial metrics improved to a level where the company’s ratio of CFO pre-WC to debt is consistently at 20%, while maintaining its current level of cost recovery support from the FRP.EML’s rating could be upgraded if its CFO pre-WC to debt metric is sustainable at 20%, along with maintaining timely cost recovery through the FRP.Factors That Could Lead to a DowngradeETI could be downgraded if regulatory support for cost recovery wanes, if significant weather events continue to cause material physical damage to its assets and timely cost recovery is not certain or if the company’s ratio of CFO pre-WC to debt drops below 15% for a sustained period of time.For EAL, a ratio of CFO pre-WC to debt declining below 16% on a sustained basis could cause downwards rating pressure. Also, a deterioration in regulatory support, unforeseen complications with the FRP process (especially after recent legislative actions), or other added regulatory uncertainties could cause a downgrade of EAL’s ratings.EML’s rating could be downgraded in the event of an adverse regulatory decision, weakening ability to recover costs or decreasing predictability of cash flows. A downgrade could also be considered if significant storm costs were not recovered in a timely basis, or if the company’s ratio of CFO pre-WC to debt declined below 16% for an extended period of time.The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of
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Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS https://interchange.puc.texas.gov/Documents/51997_77_1171649.PDF 02-Dec-2021 https://interchange.puc.texas.gov/Documents/50031_41_1074248.PDF 08-Jul-2020Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Ryan Wobbrock VP – Senior Credit Officer Infrastructure Finance Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Michael G. 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