Moody's Confirms Securities Ratings of Five Entergy Corporation Subsidiaries Subsequent to sale of London Electricity to Electricite de France for $US3.2 Billion (a $245 million gain)
Moody's confirmed the Baa2 senior secured ratings of Entergy Arkansas, Entergy Louisiana, and Entergy Mississippi and the Baa3 senior secured ratings of Entergy Gulf States and System Energy Resources in response to the sale of London Electricity to Electricite de France (EDF) for $3.2 billion, which parent company Entergy Corporation announced today. However, the outlooks for all of the Entergy subsidiary bond ratings remain negative and will stay negative until management clarifies its strategy for the credit profiles of each of the individual subsidiaries. Management announced a new strategic plan in August which Moody's views as more tightly focused than previous ones. Although the plan contemplates debt reduction at the operating companies, the amount and timing of these reductions remain unclear.
Management's intention to reduce debt at the US operating companies in order to strengthen balance sheets and improve financial indicators is a positive development from a bondholders' perspective. The company expects to accomplish this debt reduction through stranded cost recovery, the amount and timing of which will be determined in five separate competitive transition plans administered by five different public utility commissions. However, while these plans continue to move slowly, management is working more closely with regulators, particularly the Public Utility Commission of Texas, which oversees Entergy Gulf States, to improve service quality and reliability with more supportive rate-making. Success in these endeavors will ultimately support bond ratings, but in the meantime outlooks remain negative as indicators remain weak relative to therespective rating categories of the subsidiaries.
By contrast, management has been decisive about where to spend cash proceeds as it divests targeted assets at the parent level, which is leveraged but unrated. The new strategic plan revolves around refocusing resources on the parent's core competencies, identified as: power generation and development of global merchant power stations; nuclear power operations and management; and power marketing and trading. In order to execute its plan, management embarked on an effort to divest within eighteen months international distribution including London Electricity in the UK and CitiPower in Australia; Entergy Security, Entergy Integrated Solutions, and portions of Entergy's telecommunications interests. The divestitures have occurred more quickly than anticipated as sales agreements for all except Entergy Security and the telecommunications businesses have been announced.
Proceeds of the sale of London Electricity will be used to repay $2 billion of debt at London Electricity and to support Entergy Corporation's growth businesses discussed below. After debt repayment, cash proceeds of $860 million will contribute to an estimated gain of at least $245 million. The sale of London Electricity follows closely behind the sale of CitiPower to AEP Resources for $US1.1 billion (a $US 30 million gain) on November 23. Most of the proceeds of the CitiPower sale will pay down $700 million of debt in Australia, freeing $300 million for use at home. (CitiPower debt is unrated.) Entergy Integrated Solutions was sold at a loss since it had been carried as a non-performing asset.
In August, management instituted a 30% dividend cut and announced that it expected that the resulting extra funds plus cash proceeds from asset sales would approximate $4 billion. Cash flow from these two sources will be deployed as follows: $2.5 billion for the elimination of acquisition debt (including the $2 billion at London Electricity and the $700 million at CitiPower); $500 million to reduce parent debt; and $1 billion to either fund growth or to reduce other debt. Of this latter $1 billion mentioned, management estimates that $500 million will be combined with $1 billion of cash generated internally and $3.5 billion of project finance debt for a total of $5 billion to invest as follows: $4 billion in global independent power producer development; $500 million in global power marketing; and $500 million in nuclear consolidation. Moody's analysis of operating company ratings will include an assessment of the extent to which subsidiary company bonds are protected from risk inherent in the parent's new and focused strategy for growth.
The parent company continues to execute other elements of the strategy through its unrated, non-regulated subsidiaries. Development of the Salt End and Damhead Creek projects in the UK and the Maritza project in Bulgaria (construction costs of each total an estimated $800 million, $625 million and $375 million respectively,) illustrate the type of project the Entergy Power Group will implement to realize the global power development strategy. In addition to Europe, other regions of interest include Australia, Latin America and North America. The acquisition of the Pilgrim nuclear plant from Boston Edison for $80 million announced in November typifies the transactions Entergy Nuclear will undertake to effect the nuclear consolidation strategy. Entergy Power Marketing Corporation, already one of the top five among electricity brokers, experienced losses this summer from the market turmoil in the midwest.
We expect that cost savings of $200 million through reengineering work processes will be realized by year end 2000. These will further support bond ratings.
Entergy Corporation is headquartered in New Orleans, Louisiana.
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