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Rating Action:

Moody's Changes Entergy Mississippi's Rating Outlook to Positive from Stable; Affirms System Energy Resources

29 Jul 2016

New York, July 29, 2016 -- Moody's Investors Service, ("Moody's") today affirmed the ratings of Entergy Mississippi Inc. (EMI, A3 senior secured and first mortgage bonds; Baa2 issuer rating, Ba1 preferred stock) and System Energy Resources, Inc. (SERI; Baa1 first mortgage bonds). The rating outlook for EMI was changed to positive from stable. The rating outlook for SERI remains stable.

Outlook Actions:

..Issuer: Entergy Mississippi, Inc.

....Outlook, Changed To Positive From Stable

..Issuer: System Energy Resources, Inc.

....Outlook, Remains Stable

Affirmations:

..Issuer: Claiborne (County of) MS

....Senior Unsecured Revenue Bonds, Affirmed Baa3

..Issuer: Entergy Mississippi, Inc.

.... Issuer Rating, Affirmed Baa2

....Pref. Stock Preferred Stock, Affirmed Ba1

....Senior Secured First Mortgage Bonds, Affirmed A3

..Issuer: Independence (County of) AR

....Senior Secured Revenue Bonds, Affirmed A3

....Underlying Senior Secured Revenue Bonds, Affirmed A3

..Issuer: Mississippi Business Finance Corporation

....Senior Secured Revenue Bonds, Affirmed A3

....Underlying Senior Secured Revenue Bonds, Affirmed A3

....Senior Unsecured Revenue Bonds, Affirmed Baa3

..Issuer: System Energy Resources, Inc.

....Senior Secured First Mortgage Bonds, Affirmed Baa1

RATINGS RATIONALE

"Entergy Mississippi is benefiting from the successful implementation of forward-looking cost adjustments within its formula rate plan" said Vice President Ryan Wobbrock. "These adjustments should improve EMI's margins going forward and result in sustained cash flow to debt metrics around 20%."

Last month, the Mississippi Public Service Commission (MPSC) approved a rate stipulation settlement, between EMI and the Mississippi Public Utilities Staff, resulting in a $19.4 million base rate increase as well as the inclusion of several rider mechanisms to recover other costs on an annual basis. Importantly, the formula rate plan (FRP) order also incorporated, for the first time, adjustments to true-up the known and measurable costs incurred subsequent to EMI's filed, historical, test year. These adjustments improve the timeliness of cost recovery and boost cash flow beyond what EMI has already been achieving through the FRP.

Moody's views the FRP as a significant credit positive since it provides a dependable and clear framework for timely operating cost recovery. This translates into a high degree of visibility and predictability into EMI's future operating margin, cash flow and debt service. As a result, EMI has shown some of the most consistent and predictable financial margins among vertically integrated peers over the last five years. In addition to being very stable, EMI's margins should now increase due to forward-looking adjustments, which should also improve cash flow to debt ratios.

EMI's cash flow from operations (CFO) to debt was well above 20% over the last two years, supported by a 7.96% target return on rate base and an annual re-set of costs in rates. Entergy's corporate tax policies could result in EMI having some CFO volatility at times, due to fluctuations in deferred taxes, but Moody's believes that the ongoing intrinsic cash flow generation of EMI will continue to produce cash flow to debt in the high teens, at a minimum

The Baa1 first mortgage bond rating and stable outlook for SERI reflects the strong contractual support for the revenues underpinning its sole asset -- Grand Gulf 1, a 1,400 megawatt (90% of which is owned by SERI) nuclear plant in Claiborne County, MS. The Baa1 first mortgage bond rating and stable outlook considers the improving credit profile of SERI's utility affiliate off-takers, who paid roughly $54 per MWh (i.e., $632 million of revenue / 11.7 TWh production) for SERI's nuclear generation in 2015. SERI's rating is constrained by its single asset concentration risk and increasing cost structure vis-à-vis competing renewable and natural gas generation. We also see the potential for SERI's financial metrics to decline in coming years, due to around $345 million of uncertain tax positions that have benefitted historical cash flow. Excluding this full amount from CFO would change SERI's cash flow to debt metrics from nearly 59%, as of 2015, to around 31%.

Rating Outlook

EMI's positive rating outlook reflects the improved cost recovery provisions in its formula rate plan, a supportive regulatory environment in Mississippi and cash flow to debt metrics that should be in the 20% range over the next twelve to eighteen months.

What Could Change the Rating -- Up

EMI could be upgraded if financial metrics improved to a level where cash flow to debt is sustainable (i.e., without one-time cash flow benefits or engineering of tax policies) at around 20%, while maintaining its current level of regulatory support.

What Could Change the Rating -- Down

A downgrade for EMI could result from a less supportive regulatory environment in Mississippi or sustained cash flow to debt metrics in the low-teens.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in December 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please 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
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

James Hempstead
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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