Liability Management and Capital

Structure

October 29, 2013 Stacey Lousteau,

CTP, CPA, CMA

Manager, Corporate

Finance

Entergy Services, Inc.

slouste@entergy.com

Table of Contents

• Objectives

• Capital Structure Components

• Rating Agencies

• Debt Issuance Process

• Questions & Answers

Objectives

• Understand the characteristics of capital structure

components

• Understand what impact ratings can have on issuance of

securities

• Understand the process of issuing debt in the capital

markets

Table of Contents

• Objectives

• Capital Structure Components

• Rating Agencies

• Debt Issuance Process

• Questions & Answers

Corporate Finance • Every decision that a business makes has financial implications, and any

decision which affects the finances of a business is a corporate finance decision.

• Defined broadly, everything that a business does results in corporate finance decisions.

Corporate

Finance

Financial analysis

of pricing and

product strategies:

Marketing

Information for better

financial decision

making: Accounting

and IT

Assessing and

increasing the

financial value of

human capital: HR

Assessing the financial

payoff to creating and

augmenting barriers to

entry: Strategy

Financial consequences

of production and

operating decisions:

Operations

Capital Structure Components

• Debt

– Secured

– Unsecured

• Common Equity

• Hybrid Securities

– Preferred securities

– Convertible debt

Debt or Equity?

Debt Characteristics

Interest is tax deductible • Interest expense is a “fixed charge”

Cost of debt is “limited” • Can be a long-term commitment

No loss of “control” • Repayment / reissuance risk

Cost is usually lower than

equity

• Financial provisions and covenants

Debt or Equity?

Equity Characteristics

No “fixed” charges • More expensive than debt

No fixed maturity date • Further division of income

Can increase financial

flexibility

• Ownership of the enterprise

Debt or Equity?

Hybrid Characteristics

Potential for rating agency equity

credit

• More expensive than debt

“Cheap” form of equity • Financial covenants may trigger

– suspension of common

dividends

– deferral of interest payments

Can defer “interest” payments

Can increase financial flexibility

Secured vs. Unsecured

• Secured debt – First Mortgage Bonds – Securitizations (storm damage, stranded costs) – Usually less expensive than unsecured – Easier to issue in difficult markets – Can cause other restrictions with assets – Indenture limits the amount of secured debt outstanding

• Unsecured debt

– Does not encumber assets – Greater financing flexibility – May be limited by indentures or covenants – May be more expensive than secured debt

Public vs. Private Debt

• Public debt – Securities are registered with the SEC and may be traded on public

security exchanges

• Private placement debt – Not registered with SEC

– Must be sold to “qualified institutional investors”

– Lower cost than public issue

Capital Markets vs. Bank Markets

• Capital markets – Sale of bonds to institutional or retail investors

– Public or private

• Bank market – Revolving credit facilities

– Letters of credit

– Term loans

– Bridge loans

Taxable vs. Tax-exempt

• Taxable debt – Interest income is taxable to the investor

• Tax-exempt debt – Interest income is tax free to the investor – Typically lower cost of funds – Financing executed through a conduit – Qualifying financing includes

• Airports

• Docks and wharves

• Mass commuting facilities

• Sewage facilities

• Solid waste disposal facilities (excluding nuclear)

• Qualified residential rental projects

• Facilities for the local furnishing of electric energy or gas

• Local district heating or cooling facilities

• Environmental enhancements of hydroelectric generating facilities

On vs. Off Balance Sheet

• On balance sheet financing – Appears as long-term debt on the balance sheet

• Off balance sheet financing

– Can include the following

• Debt of joint ventures and unconsolidated subsidiaries

• Guarantees and other support agreements – On-credit for rating agency purposes!

Securities Issuance Determination

• Cost of capital

• Target capitalization

• Regulatory return on equity

• Debt to capitalization ratios

• Coverage ratios

• Market availability

Corporate Debt Issuances Corporate Issuance by Sector YTD

$358B

Corporate Issuance by Tenor YTD

$358B

Source: Dealogic, Citigroup Global Markets, Inc. Data as of September 27, 2013

Consumer15%

Power & Energy20%

TMT33%

Lodging0%

Healthcare12%

Metals and Mining5%

Industrials12%

Transportation3%

<313%

311%

4-525%

6-910%

1022%

11-297%

309%

30+2%

Perp1%

Table of Contents

• Objectives

• Capital Structure Components

• Rating Agencies

• Debt Issuance Process

• Questions & Answers

Credit Ratings

• There are three top credit rating agencies – Standard & Poor’s – Moody’s – Fitch

• Agencies help investors determine credit quality of an

investment, which can include views of what investors can expect to recover in the event of default

• Ratings can be assigned to short-term and long-term debt obligations as well bank loans and preferred stock

Agency Ratings Scale Moody’s Standard

& Poor’s

Aaa AAA

Aa1 AA+

Aa2 AA

Aa3 AA-

A1 A+

A2 A

A3 A-

Baa1 BBB+

Baa2 BBB

Baa3 BBB-

Ba1 BB+

Ba2 BB

Ba3 BB-

B1 B+

B2 B

B3 B-

Investment

Grade

Non-Investment

Grade

S&P Ratings Criteria

Source: Standard and Poor’s

S&P Ratings Criteria

Moody’s Rating Criteria

Source: Moody’s

Moody’s Rating Criteria

Source: Moody’s

Utility Ratings

Source: Moody’s Power and Utility Industry Outlook

Utility Ratings

Source: Standard & Poors

Historical Spread Statistics

Source: Citigroup Global Markets, Inc. Data as of September 27, 2013.

Spre

ad (

bp)

0

200

400

600

800

1,000

1,200

1,400

1,600

1995 1997 1999 2002 2004 2006 2009 2011 2013

US Corp "A" Spreads US Corp "BBB" Spreads HY Corp "BB" Spreads

Table of Contents

• Objectives

• Capital Structure Components

• Rating Agencies

• Debt Issuance Process

• Questions & Answers

Financing Need is Identified

• Long-term liquidity need is identified

• Scheduled maturity

• Economic refunding opportunity exists – Callable debt – Make-whole calls – Unamortized costs from previous financing – Cost of new issuance

Internal Management Buy-in

• Regulatory impact

• Ratings impact

• Covenant restrictions

• Board authority

Sufficient Regulatory Authority?

• SEC S-3 – 1933 act forms “register” the securities with the SEC – Shelf registration allows company to file well ahead of issuance – S-3 allows for existing SEC filings to be incorporated by reference – WKSI – allows unlimited shelf authority – Form S-3 used for registering most securities if

• have issued more than $1 billion of SEC registered non-convertible debt or preferred securities in the prior three years

• have outstanding at least $750 million of SEC registered non-convertible debt or preferred securities

• are a wholly-owned subsidiary of a WKSI

• are a majority-owned operating partnership of a REIT that qualifies as a WKSI

• Other federal, state or local regulatory authority

Determine Security Structure

• Secured or unsecured?

• Public or private market?

• Taxable or tax exempt?

• Institutional or retail market?

• Fixed or floating?

• What will the tenor be? –Short-term – less than 5 years

– Intermediate – 5 to 10 years

–Long-term – 15 to 30 years

Determine Targeted Tenor

• Debt cash flows should match up as closely as possible with the firm’s cash flows

• Consider unusual events like asset sale proceeds

• A levelized maturity profile tends to reduce refinancing risk

• Long-term assets should be funded with long-term debt

• Short-term debt is usually cheaper than long-term debt…don’t be too tempted!

Determine Targeted Tenor

0

500

1000

1500

2000

13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

Illustrative

Debt Maturities Refinancing Risk?

Gaps to fill?

Notify Internal Parties to be Involved

• Accountants

• Auditors

• Legal

• Due diligence participants

Choose Underwriters and Assign

Underwriters’ Counsel • Will sell the deal to investors

• Certain underwriters may have different areas of expertise – Taxable vs. tax-exempt – Institutional vs. Retail

• Book-runners vs. Co-managers

• Determine economic split

• Underwriter’s fees are standardized for investment grade issuers and vary by maturity

– Institutional five year = 0.6% – Institutional ten year = 0.65% – Institutional thirty year = 0.875% – Retail thirty year = 3.15%

Hold Due Diligence

• SEC filings should be current

• Usually a list of questions for management and a conference call with underwriting group and counsel prior to launch

• Discuss specific financial, operational and regulatory disclosure items

• Subject matter experts participate

• Accounting/auditor due diligence

“Typical” Due Diligence Questions

• Please briefly review the Company’s first quarter 2012 results of operations and second quarter 2012 results of operations thus far to the extent available.

• Except as otherwise disclosed or discussed, are there any known material trends or factors that are expected to significantly affect 2011 earnings or liquidity? Does the Company expect to report any changes in accounting principles or material one-time items, adjustments, reserves or write-offs during 2012 that have not already been disclosed?

• Please discuss the Company’s current and projected policy with respect to future levels of equity capitalization of, and dividend payouts by, the Company.

“Typical” Due Diligence Questions

• As of the most recent available date, please indicate (i) the limits on the Company’s short-term and long-term borrowings under its existing regulatory authority and governing instruments, (ii) the amount of available external short-term credit facilities and (iii) current short-term debt balances and expectations for maximum short-term debt balances for 2012.

• Please discuss any material changes in the Company’s cash balances and liquidity position since March 31, 2012. Does management have any concerns about the Company’s current liquidity position in light of projected working capital and other needs and various contingency planning scenarios?

• Please review the Company’s ratings. Please indicate whether the rating agencies are aware of the proposed offering and whether they have indicated the ratings for the bonds.

“Typical” Due Diligence Questions

• Please discuss the general competitive climate in which the Company operates, including whether the Company expects energy conservation, demand side management or distributed generation efforts to have a material effect on demand in the near term.

• Please discuss economic conditions in the Company’s service territory, the impact of the recession on the Company’s results of operations (by customer class), including bad debt expenses, and any material loss of load thus far or expected in 2012.

• Please discuss any recent developments or trends concerning operations at the Company’s electric generating stations and with respect to the Company’s electric distribution and transmission system.

“Typical” Due Diligence Questions

• Please discuss any material developments in pending environmental matters from what is disclosed in the Company’s public disclosure.

• Except as otherwise described, please discuss any material developments in pending litigation matters from what is disclosed in the Company’s public disclosure.

• Please discuss whether there will be any material developments or events with respect to the Company or its affiliates at or around the time of the proposed offering.

Draft Marketing Documents

• Prospectus Supplement

– Describes the details of the transaction, including key terms, risk factors and use of proceeds

– Preliminary version is called a “red herring” and is often referred to as the “red”

• Key document issued to prospective buyers

– Can include “recent developments” that are not previously reported in a company’s SEC disclosure

• Auditors must provide a “comfort letter” that provides underwriters assurance that the numbers in the prospectus supplement are correct

Market Update and Organizational

Calls

• Talk to underwriters about marketing strategy,

including price “whisper”

• Discuss how target pricing was determined

• Discuss potential deals to be announced over the

next few days that would compete with your

issuance

Go or No Go?

• Make sure there is not a reason to be blacked out – Disclosure – Stale financials

• Early in the morning, underwriters get a feel for market tone

• Pay attention to any economic news expected to be released that day

• Pay attention to what other deals are expected to be in the market and potential impact on your deal

• Decide whether or not to go to market

• Determine interest rate management

Deal Expectations

• Fair pricing of security

• Strong demand helps assure fair pricing

• Smooth execution

• No unexpected disclosure issues

• No change in key terms requiring reissuing documents

• In and out of the market as quickly as possible

It’s a Go!

8:45 Call: Go/No Go Decision

9:00: Underwriters “announce” deal with “red

herring” and start discussions with investors

10:30 Call: What is the interest? What is the

spread? Size of book? Set price guidance.

10:30 to 12:00: Officially launch deal with a

price. Finalize investor base; allocations

12:00 Call: Final pricing call (coupon set),

term sheet finalized, unwind any hedges

After Pricing

• Make sure wires are sent to SEC for registration fees

• File term sheet with SEC

• File final prospectus with SEC

• Finalize closing documents

Prospectus Example

Term Sheet Example

Pre-closing

• Rating agency ratings letters are obtained

• Auditor final comfort letters are delivered

• Trustee (if applicable) executes mortgage documents

• Counsel ensures everything is in place to close

Closing

• Bring down due diligence

• Wire is released

• Bond is issued to DTC

Table of Contents

• Objectives

• Capital Structure Components

• Rating Agencies

• Debt Issuance Process

• Questions & Answers