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Rating Action:

Moody's upgrades certain Entergy subsidiaries, outlooks stable

31 Jan 2014

Approximately $11 Billion of Debt Securities Upgraded

New York, January 31, 2014 -- Moody's Investors Service upgraded the long-term ratings of Entergy Gulf States Louisiana, LLC (Issuer Rating to Baa1 from Baa2, Senior Secured to A2 from A3, Preferred Stock to Baa3 from Ba1); Entergy Louisiana, LLC (Issuer Rating and Senior Unsecured to Baa1 from Baa2, Senior Secured to A2 from A3, Preferred Stock to Baa3 from Ba1); Entergy Mississippi, Inc. (Issuer Rating to Baa2 from Baa3, Senior Secured to A3 from Baa1, Preferred Stock to Ba1 from Ba2); and Entergy Texas, Inc. (Issuer Rating to Baa3 from Ba1, Senior Secured to Baa1 from Baa2, and Senior Secured Shelf to (P)Baa1 from (P)Baa2).

Moody's also confirmed the rating of Entergy Arkansas, Inc. This rating action concludes the review of these companies' ratings Moody's initiated on November 8, 2013. The rating outlooks of Entergy Corporation and all of its subsidiaries are stable.

RATINGS RATIONALE

Moody's had placed the ratings on review for upgrade in response to Moody's more favorable view of the relative credit supportiveness of the US regulatory environment, as detailed in the September 2013 Request for Comment titled "Proposed Refinements to the Regulated Utilities Rating Methodology and our Evolving View of US Utility Regulation." Among the critical factors supporting this view include better cost recovery provisions, reduced regulatory lag, and generally fair and open relationships between utilities and regulators. The US utility sector's low number of defaults, high recovery rates, and generally strong financial metrics from a global perspective provide additional corroboration for these upgrades.

Entergy Gulf States Louisiana (EGSL) is regulated by the Louisiana Public Service Commission (LPSC), which has provided a relatively stable and credit supportive regulatory environment. Like other major utilities in the state, EGSL operates with earnings-sharing mechanisms and Formula Rate Plan (FRP). Moody's generally views FRPs as a credit positive, since they reduce regulatory lag and provide transparency on cost recoveries. EGSL has been operating under an FRP established in 2009 with an ROE mid-point of 10.65% and a +/- 75 basis point bandwidth. Earnings outside the bandwidth are allocated 60% to customers and 40% to the company. The company has recently over-earned under the FRP. LTM third-quarter 2013 metrics further justify the rationale, with Cash Flow Interest Coverage of 6.9x and CFO pre-WC to debt of 29%.

Entergy Louisiana (EL) is also regulated by the LPSC and benefits from a similar earnings-sharing mechanism and FRP structure. EL's FRP through 2012 incorporated a ROE mid-point of 10.25% and a +/- 80 basis point bandwidth, which included a recovery mechanism for LPSC-approved capacity additions. Similar to EGSL's FRP, earnings outside EL's bandwidth are allocated 60% to customers and 40% to the company. In December 2013, the LPSC and EL filed a settlement for its pending rate case, under which EL's base rates were to remain unchanged and the company was allowed to operate under a FRP through the 2016 test-year. The updated FRP incorporated a ROE of 9.95% and +/- 80 basis point bandwidth. In addition, the settlement included several riders outside of the FRP formula, including a capacity rider and the ability to recover costs associated with EL's MISO integration. EL is also permitted to implement a $10 million base rate increase in December 2014. Certain other costs, including MISO related costs, capacity and purchase costs, environmental-related costs, efficiency-related costs, storm costs, and certain depreciation and decommissioning costs would be recover outside of the FRP mechanism. LTM third-quarter 2013 metrics further justify the rationale, with Cash Flow Interest Coverage of 5.5x and CFO pre-WC to debt of 20%.

Mississippi has traditionally fostered a fairly supportive regulatory environment for investor owned utilities. Entergy Mississippi (EM) has benefited from an ability to recover fuel costs in rates on a timely basis by filing for small but relatively frequent adjustments in rates. The company operates under a FRP that was modified in March 2010 to align it more with FRPs of other utilities in Mississippi. The modification replaced the old revenue change limit (2% with a $14.5 million cap) with a 4% limit (no dollar cap), with any adjustment over 2% requiring a hearing. These changes were slightly positive from a credit standpoint. In August 2013, the MPSC approved $22.3 rate increase, which would reset EM's ROE to 10.59%, which compares to an 8.96% earned ROE for 2012, with the increase effective as of September 2013. LTM third-quarter 2013 metrics further justify the rationale, with Cash Flow Interest Coverage of 4.6x and CFO pre-WC to debt of 19%.

Moody's generally views the regulatory climate in Texas as credit positive for transmission and distribution utilities operating within ERCOT but somehow challenging for vertically integrated utilities operating outside of ERCOT. The PUC generally has not permitted the utilities to include construction work in progress (CWIP) in rate base, with the exception of certain environmental compliance costs. However, the companies are permitted to adjust rates through surcharge mechanisms to reflect certain types of new transmission and distribution investment, fuel and purchased power costs are recovered through a separate fuel factor, the level of which is established in base rate cases.

On September 2013, ET filed a rate case with the PUCT requesting a $38.6 million base rate increase, reflecting a 10.4% ROE based on a test year ending March 31, 2013. ET also sought to implement several riders, including a rough production cost equalization adjustment rider (Rider RPCEA), a rate case expense rider (Rider RCE), deferred tax accounting rider (Rider DTA), and a transmission cost recovery rider (Rider TCRF). On January 17, the PUCT's staff filed testimony regarding the pending case recommending that the PUCT approve a $3.4 million base rate increase based on 9.2% ROE, the settlement decision is expected by March 5, after rebuttal testimony, hearing, and briefs. The resolution of this case will be an important indicator of the trend in long-term credit supportiveness of Texas's regulatory environment. Despite being on a quarterly basis, LTM third-quarter 2013 metrics were stronger than initially projected, with Cash Flow Interest Coverage of 5.4x and CFO pre-WC to debt of 25%. Fiscal year end 2012 metrics were 4.5x Cash Flow Interest Coverage and 20% CFO pre-WC to debt.

Moody's confirmed the ratings of Entergy Arkansas based on the less than favorable rate case outcomes in May 2010 and December 2013. Arkansas operates under traditional rate of return regulation rather than the more credit supportive formula rate plans in place in Louisiana and Mississippi, where Entergy's other large subsidiaries operate. The rate of return regulation contributes to regulatory lag at Entergy Arkansas (EA). Under Arkansas regulation, the test year is either fully historical or 6 months historical and 6 months projected. However, there are fuel and certain other riders that help offset some aspects of the lag.

Historically, EA has experienced a relatively challenging regulatory environment. In March 2013, EA filed for a rate increase with the Arkansas Public Service Commission (APSC) that included MISO and capacity costs riders, receiving a decision in December 2013. The outcome was disappointing as EA received a base rate increase of $81 million (without specifying the amounts to be recovered through MISO and Capacity Costs riders) based on a 9.3% ROE, significantly below its requested base rate increase of $145 million based on 10.4% ROE. Resolution of EA's May 2010 rate case also yielded an increase below that expected of $63.7 million (10.3% ROE) against the expected $168 million (10.6% ROE). LTM third-quarter 2013 metrics are consistent with that of fiscal year end 2012, with Cash Flow Interest Coverage of 4.5x and CFO pre-WC to debt of 13%. According to Moody's adjusted projections, EA will be able to maintain appropriate metrics for the rating, including CFO pre-WC to debt, and CFO pre-WC -- Div to debt of around 16% and 14% respectively.

Rating Outlook

Entergy Gulf States Louisiana, Entergy Louisiana, and Entergy Mississippi outlooks are stable, reflecting that Moody's expects the companies will continue to exhibit financial metrics that are appropriate for their current ratings, that in Louisiana formula rate plan will continue to provide regulatory transparency and certainty, and that Mississippi's regulation will remain reasonably long-term credit supportive and allow the recovery of prudently incurred costs.

Entergy Texas' rating outlook is stable, reflecting Moody's view that the company will continue to generate adequate metrics for its rating. Although the regulatory lag for vertically integrated utilities will remain less credit supportive over the medium term in Texas, Moody's does not expect the regulatory environment to deteriorate. According to Moody's adjusted projections, ET will likely be able to maintain appropriate metrics for the rating, including CFO pre-WC to debt, and CFO pre-WC -- Div to debt of around 15% and 12% respectively.

Entergy Arkansas' rating outlook is stable, reflecting Moody's expectation that the utility's financial metrics will maintain levels that are appropriate for its rating despite the company's disappointing rate case outcomes. The outlook also assumes that regulatory lag will remain manageable and that the issues surrounding the company's exit from the Entergy System Agreement will be resolved in a manner not detrimental to credit quality. According to Moody's adjusted projections, EA will likely be able to maintain appropriate metrics for the rating, including CFO pre-WC to debt, and CFO pre-WC -- Div to debt of around 16% and 14% respectively.

What Could Change the Rating - Up

Entergy Gulf States Louisiana and Entergy Louisiana ratings could be upgraded if material long-term credit improvements were to happen in Louisiana regulation that set the state far above other jurisdictions in the US, if economic conditions in its service territory continued to improve, and if recently improved financial metrics were sustained in the absence of bonus depreciation, including consistent CFO pre-WC plus interest to interest above 5.5x and CFO pre-WC to debt nearing the mid-20% range.

The ratings for Entergy Mississippi could be further upgraded if there were an improvement in the regulatory and political environment in the state, or if there were a sustained increase in EM's cash flow coverage metrics, including CFO pre- WC to debt above 19%.

The rating of Entergy Texas is unlikely to be upgraded in the near term; however an upgrade could come under consideration if there is a material and sustained improvement in the regulatory environment in Texas for vertically integrated utilities --outside ERCOT- including the implementation of long-term credit-supportive rate design and cost recovery mechanisms, and continued strong financial metrics, including CFO pre-WC to Debt above 16% on a sustained basis.

The ratings of Entergy Arkansas could be upgraded if there were an improvement in the credit supportiveness of the regulatory environment in Arkansas, along with a sustainable increase in cash flow coverage metrics, including CFO pre-WC to debt above 22%.

What Could Change the Rating - Down

The ratings for Entergy Gulf States Louisiana, Entergy Louisiana, and Entergy Mississippi could be downgraded if there were a deterioration in the regulatory environment for utilities in Louisiana, and Mississippi, if there were significant additional storm costs that were not recovered on a timely basis through the regulatory process, or if financial metrics excluding bonus depreciation exhibited a sustained decline.

The ratings of Entergy Texas could be downgraded if the business and regulatory environment in which it operates were to deteriorate, if pending or future rate case outcomes are detrimental to its credit profile, or if there were a significant decline in financial metrics, including CFO pre-WC to debt below 13% on a sustained basis.

The ratings of Entergy Arkansas could be downgraded if there were continuous adverse regulatory developments, if there were a termination or any changes to the utility's rate riders that would prevent full and timely recovery of prudently incurred costs, or if there is not an improvement in cash flow coverage metrics from unusually low 2012 and 2013 levels, including CFO pre-WC to debt below 15% for an extended period.

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

The following ratings of Entergy Gulf States Louisiana are upgraded:

Issuer Rating to Baa1 from Baa2

Preference Stock to Baa3 from Ba1

Pref. Shelf to (P)Baa3 from (P)Ba1

First Mortgage Bonds to A2 from A3

The outlook of Entergy Gulf States Louisiana is stable from RUR-UP

The following ratings of Entergy Louisiana are upgraded:

Issuer Rating to Baa1 from Baa2

Senior Unsecured to Baa1 from Baa2

Pref. Stock to Baa3 from Ba1

Backed First Mortgage Bonds to A2 from A3

Underlying First Mortgage Bonds to A2 from A3

First Mortgage Bonds to A2 from A3

The outlook of Entergy Louisiana is stable from RUR-UP

The following rating of W3A Funding Corporation has been upgraded:

BACKED Senior Secured Shelf to (P)Baa1 from (P)Baa2

The outlook of W3A Funding Corporation is stable from RUR-UP

The following ratings of Entergy Mississippi are upgraded:

Issuer Rating to Baa2 from Baa3

Senior Secured Shelf to (P)A3 from (P)Baa1

Pref. Stock to Ba1 from Ba2

Underlying First Mortgage Bonds to A3 from Baa1

First Mortgage Bonds to A3 from Baa1

Backed First Mortgage Bonds to A3 from Baa1

The outlook of Entergy Mississippi is stable from RUR-UP

The following ratings of Entergy Texas are upgraded:

Issuer Rating to Baa3 from Ba1

Senior Secured Shelf to (P)Baa1 from (P)Baa2

First Mortgage Bonds to Baa1 from Baa2

The outlook of Entergy Texas is stable from RUR-UP

The following ratings of Entergy Arkansas, Inc. are confirmed:

Issuer Rating, Confirmed at Baa2

Pref. Stock Preferred Stock, Confirmed at Ba1

Pref. Stock Shelf, Confirmed at (P)Ba1

Senior Secured First Mortgage Bonds, Confirmed at A3

The outlook of Entergy Arkansas, Inc. is stable from RUR-UP

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Susana Vivares
Vice President - Senior Analyst
Corporate 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

William L. Hess
MD - Utilities
Corporate 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

Moody's upgrades certain Entergy subsidiaries, outlooks stable
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