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Rating Action:

MOODY'S CONFIRMS THE RATINGS OF ENTERGY GULF STATES (Baa3 SR. SEC.) ; OUTLOOK STABLE

07 Feb 2006
MOODY'S CONFIRMS THE RATINGS OF ENTERGY GULF STATES (Baa3 SR. SEC.) ; OUTLOOK STABLE

Approximately $2.3 Billion of Debt Securities Affected

New York, February 07, 2006 -- Moody's Investors Service confirmed the debt ratings of Entergy Gulf States, Inc. Ratings confirmed include Entergy Gulf States' Baa3 senior secured, Ba1 senior unsecured, and Ba3 preferred stock. This concludes the review that was initiated in September 2005 following extensive damage to the utility's infrastructure caused by Hurricane Rita. The rating outlook is stable.

The ratings confirmation reflects the proactive measures taken by Entergy Corporation's management in putting in place and promptly executing a financial plan to fund storm costs and bolster the liquidity of Entergy Gulf States, its largest utility subsidiary, immediately following the storm. This plan included the provision of $300 million of equity funding to Entergy Gulf States from the parent; the issuance of $350 million of first mortgage bonds at Entergy Gulf States; the issuance of $500 million of equity linked securities at the parent to finance storm costs throughout the Entergy system, including those at Entergy Gulf States; and an increase in the parent company's bank revolving credit facility to $3.5 billion from $2.0 billion. Although the issuance of first mortgage bonds by Entergy Gulf States has increased the level of funded debt at the utility, this is balanced by the infusion of equity from the parent company and the expectation that regulators will allow substantial recovery of spending on storm related repairs.

Entergy Gulf States relies solely on $340 million of availability under the Entergy money pool for its short term financing needs and does not maintain its own bank facility, although Entergy is in the process of obtaining regulatory approval to add a separate bank facility at the utility. Moody's believes that committed bank facilities without material adverse change provisions can provide more reliable immediate funding under distress than a money pool arrangement. As an example, it is noted that Entergy New Orleans filed for bankruptcy protection before using up its designated availability under the Entergy system money pool.

The ratings confirmation also reflects Entergy Gulf States' financial metrics, which are strong for the Baa3 senior secured rating category. These include an adjusted funds from operations to adjusted interest ratio of approximately 3.5 times and an adjusted funds from operations to adjusted debt ratio in the 15% to 20% range over the last several years. Using guidelines in Moody's rating methodology for electric utility companies of average medium risk, the financial ratios of Entergy Gulf States might justify a rating that is one to two notches higher. However, the risk is considered to be slightly higher than average, taking into consideration the rate freeze in Texas, the implementation of retail open access in Texas, uncertainty related to the eventual separation of the utility into Texas and Louisiana jurisdictions, a service territory with per capita income lower than the U.S. average, and event risk that includes possible hurricanes. The rate freeze in Texas is in place until June 30, 2008, which will limit the improvement of the utility's financials and constrain the utility's credit quality over this time period. However, the utility did recently receive approval in Texas to recover purchased power capacity costs of $18 million annually beginning December 2005 and an increase to cover transition to competition costs of $18 million annually beginning March 1, 2006, which should help to address normal operating cost pressures under the rate freeze.

The ratings consider the traditionally difficult regulatory environment for utilities in which Entergy Gulf States operates and the slow regulatory response to the utility's storm cost recovery efforts. While some state regulators in Texas have voiced support for cost recovery and acknowledged past decisions allowing recovery of prudently incurred hurricane costs, actions thus far have been limited to an inquiry into the level of storm costs incurred. The ratings confirmation reflects Moody's expectation of a supportive regulatory response from Texas regulators when the utility makes a formal request for cost recovery in June. In Louisiana, Entergy Gulf States has filed for interim recovery of storm costs through an annual interim surcharge, although the recovery period is over a ten year time frame, which will result in weaker financial metrics than would be the case for a more rapid recovery arrangement. This contrasts markedly with the more timely storm cost recovery periods in other hurricane affected states, most notably Florida, where some storm costs are being recovered over a time frame of several years. Entergy's request for $350 million in direct hurricane recovery assistance has been denied, although it is still possible that aid could be forthcoming through tax breaks or community development block grants.

The stable outlook for Entergy Gulf States reflects Moody's expectation that the utility will be allowed, through securitization or other regulatory mechanisms, to recover a substantial portion of the costs related to the recent hurricanes; that any jurisdictional separation of the company will be executed in a manner that is not detrimental to bondholders; that financial metrics will be maintained over the near term as the utility begins to recover deferred storm costs and collect purchased power and transition to competition costs in Texas; and that a base rate increase will be implemented to cover increased costs following the expiration of its rate freeze in Texas in 2008.

Entergy Gulf States, Inc. is a public utility headquartered in Beaumont, Texas and a subsidiary of Entergy Corporation, an integrated energy company that is temporarily headquartered in Clinton, Mississippi.

New York
Daniel Gates
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael G. Haggarty
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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