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Rating Action:

Moody's Upgrades Entergy Arkansas to Baa1 from Baa2; Outlook Stable

Global Credit Research - 18 Mar 2016

New York, March 18, 2016 -- Moody's Investors Service, ("Moody's") today upgraded the long-term ratings of Entergy Arkansas, Inc. (EAI) to Baa1 from Baa2. The ratings outlook is stable. For a complete list of rating changes, see the debt list below.

Upgrades:

..Issuer: Entergy Arkansas, Inc.

.... Issuer Rating, Upgraded to Baa1 from Baa2

....Pref. Stock Preferred Stock, Upgraded to Baa3 from Ba1

....Pref. Stock Shelf, Upgraded to (P)Baa3 from (P)Ba1

....Senior Secured First Mortgage Bonds, Upgraded to A2 from A3

....Senior Secured Shelf, Upgraded to (P)A2 from (P)A3

..Issuer: Independence (County of) AR

....Senior Secured Revenue Bonds, Upgraded to A2 from A3

..Issuer: Jefferson (County of) AR

....Senior Secured Revenue Bonds, Upgraded to A2 from A3

..Issuer: Pope (County of) AR

....Senior Unsecured Revenue Bonds, Upgraded to Baa1 from Baa2

Outlook Actions:

..Issuer: Entergy Arkansas, Inc.

....Outlook, Changed To Stable From Positive

RATINGS RATIONALE

"Entergy Arkansas' newly adopted formula rate plan (FRP) will enhance the predictability and stability of the Arkansas regulatory framework and the company's financial profile over the next five years" said Assistant Vice President Ryan Wobbrock. "With forward-looking rates and a 9.75% allowed return on equity, we think that EAI will be able to generate a steady ratio of cash flow to debt approaching 20%." added Wobbrock.

The FRP provides improved visibility into EAI's future gross margin and cash flow production because it offers a clear framework for timely operating and capital cost recovery. This will not only enhance predictability of rate case proceedings, but will also improve the stability of the company's core cash flow production. The most supportive features of the FRP include: the use of a forward test year for rate making, automatic revenue adjustments should EAI's earned ROE fall outside a 50 basis point bandwidth of the 9.75% target ROE, and the five year plan horizon. While we expect a period of fine-tuning for the initial implementation of the FRP next year, the forward-looking cost recovery, with formula rates, will be a significant benefit to EAI's credit profile over the next five years.

EIA's historical financial metrics have been somewhat volatile, with key financial ratios such as cash from operations before changes in working capital (CFO pre-WC) to debt fluctuating between nearly 20% in 2014 to just over 15% in 2015. While we expect Entergy's tax policies to continue to drive some volatility in deferred taxes, we find that ongoing rate base investments, numerous cost tracking mechanism and now the formulaic rate plan will provide a more stable cash flow ballast to support debt coverage ratios in the 16% -- 19% range on a sustainable basis. The core cash flow generation of EAI is enough to support a Baa1 financial profile, despite potential swings due to one-time financial engineering.

Rating Outlook

EAI's stable rating outlook is based on its more transparent and supportive regulatory environment in Arkansas and our expectation that the company will produce CFO pre-WC to debt in the high teens range over the life of its formula rate plan.

What Could Change the Rating -- Up

EAI could be upgraded if financial metrics improved to a level where CFO pre-WC to debt is sustainable (i.e., without one-time cash flow benefits or engineering of tax policies) at around 25%, while maintaining its current level of regulatory support.

What Could Change the Rating -- Down

A decline in the degree of regulatory support, unforeseen complications with the implementation of the FRP or other added regulatory uncertainties could cause a downgrade for EAI. Similarly, ongoing CFO pre-WC to debt around 15% would pressure EAI's rating down.

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
Asst Vice President - 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 Entergy Arkansas to Baa1 from Baa2; Outlook Stable
No Related Data.
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