ENTERGY ARKANSAS, LLC - Annual Report: 2002 (Form 10-K)

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes Ö No ____

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [Ö ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

The aggregate market value of Entergy Corporation Common Stock, $0.01 Par Value, held by non-affiliates as of the end of the second quarter of 2002, was $9.4 billion based on the reported last sale price of $42.44 per share for such stock on the New York Stock Exchange on June 28, 2002. Entergy Corporation is directly or indirectly the sole holder of the common stock of Entergy Arkansas, Inc., Entergy Gulf States, Inc., Entergy Louisiana, Inc., Entergy Mississippi, Inc., Entergy New Orleans, Inc., and System Energy Resources, Inc.

Portions of the Proxy Statement of Entergy Corporation to be filed in connection with its Annual Meeting of Stockholders, to be held May 9, 2003, are incorporated by reference into Parts I and III hereof.

Forward-looking statements involve a number of risks and uncertainties, and there are factors that could cause actual results to differ materially from those expressed or implied in the statements. Some of those factors (in addition to others described elsewhere in this report and in subsequent securities filings) include:

• resolution of pending and future rate cases and negotiations, including the Entergy New Orleans rate case and various performance-based rate discussions, and other regulatory decisions, including those related to Entergy's utility supply plan
• Entergy's ability to reduce its operation and maintenance costs, particularly at its Non-Utility Nuclear generating facilities, including the uncertainty of negotiations with unions to agree to such reductions

• the performance of Entergy's generating plants, and particularly the capacity factor at its nuclear generating facilities
• prices for power generated by Entergy's unregulated generating facilities - particularly the ability to extend or replace the existing power purchase agreements for the Non-Utility Nuclear plants - and the prices and availability of power Entergy must purchase for its utility customers
• Entergy's ability to develop and execute on a point of view regarding prices of electricity, natural gas, and other energy-related commodities
• Entergy-Koch's profitability in trading electricity, natural gas, and other energy-related commodities
• changes in the number of participants in the energy trading market, and in their creditworthiness and risk profile
• changes in the financial markets, particularly those affecting the availability of capital and Entergy's ability to refinance existing debt and to fund investments and acquisitions
• actions of rating agencies, including changes in the ratings of debt and preferred stock
• changes in inflation and interest rates
• Entergy's ability to purchase and sell assets at attractive prices and on other attractive terms
• volatility and changes in markets for electricity, natural gas, and other energy-related commodities
• changes in utility regulation, including the beginning or end of retail and wholesale competition, the ability to recover net utility assets and other potential stranded costs, and the establishment of SeTrans or another regional transmission organization
• changes in regulation of nuclear generating facilities and nuclear materials and fuel, including possible shutdown of Indian Point or other nuclear generating facilities
• changes in environmental, tax, and other laws, including requirements for reduced emissions of sulfur, nitrogen, carbon, and other substances
• the economic climate, and particularly growth in Entergy's service territory
• variations in weather, hurricanes, and other disasters
• advances in technology
• the potential impacts of threatened or actual terrorism and war
• the success of Entergy's strategies to reduce taxes
• the effects of litigation
• changes in accounting standards
• changes in corporate governance and securities law requirements and
• Entergy's ability to attract and retain talented management and directors.

Certain abbreviations or acronyms used in the text and notes are defined below:

                    Entergy Corporation is an integrated energy company engaged primarily in electric power production, retail distribution operations, energy marketing and trading, and gas transportation. Entergy owns and operates power plants with approximately 30,000 MW of electric generating capacity, and it is the second-largest nuclear generator in the United States. Entergy delivers electricity to 2.6 million utility customers in Arkansas, Louisiana, Mississippi, and Texas. Through Entergy-Koch, Entergy is a leading provider of wholesale energy marketing and trading services, as well as an operator of natural gas pipeline and storage facilities. Entergy had annual revenues of over $8 billion in 2002 and more than 15,000 employees as of December 31, 2002.

                    Entergy operates primarily through three business segments: U.S. Utility, Non-Utility Nuclear, and Energy Commodity Services.

• U.S. Utility generates, transmits, distributes, and sells electric power, with a small amount of natural gas distribution.
• Non-Utility Nuclear owns and operates five nuclear power plants and is primarily focused on selling electric power produced by those plants to wholesale customers.
• Energy Commodity Services is focused almost exclusively on providing energy commodity trading and gas transportation and storage services through Entergy-Koch, L.P. Energy Commodity Services also includes Entergy's non-nuclear wholesale asset business.

Following are the percentages of Entergy's consolidated revenues and net income generated by these segments and the percentage of total assets held by them:

The net income figures in 2002 include a $238 million net of tax charge in the Energy Commodity Services segment. If this charge were excluded, the percentages would be 70% for U.S. Utility, 23% for Non-Utility Nuclear, 11% for Energy Commodity Services, and (4%) for Parent & Other.

                Entergy's business has traditionally operated primarily through its regulated utility subsidiaries in its four-state service territory. Entergy has reshaped its non-utility business through the sale of its international electric distribution businesses in 1998, the growth of its non-utility nuclear business in the northeastern United States beginning in 1999, and the termination of its greenfield power development business in 2002. With the start of the Entergy-Koch venture in early 2001, Entergy expanded its business opportunities into new areas. The trading activities of Entergy-Koch extend to various parts of the United States, as well as the United Kingdom, Western Europe, and Canada. Entergy-Koch's Gulf South Pipeline system covers the Gulf Coast region of the United States. Entergy's financial interest in the Entergy-Koch venture allows it to appoint four of the eight members of the general partner's board of directors. Operating decisions for Entergy-Koch are made by Entergy-Koch management.

                The following shows the principal subsidiaries within Entergy's business segments. Companies that file reports and other information with the SEC under the Securities Exchange Act of 1934 are identified in bold-faced type.

                The following is a brief summary of Entergy's business segments. More detailed information on each of Entergy's businesses can be found in the U.S. Utility, Non-Utility Nuclear, and Energy Commodity Services sections, including certain business segment financial information.

                The U.S. Utility is Entergy's predominant business segment, with five wholly-owned retail electric utility subsidiaries: Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans. These companies generate, transmit, distribute, and sell electric power to retail and wholesale customers primarily in Arkansas, Louisiana, Mississippi, and Texas.

                Entergy Gulf States and Entergy New Orleans also provide natural gas utility services to customers in and around Baton Rouge, Louisiana and New Orleans, Louisiana, respectively. Also included in the U.S. Utility is System Energy, a wholly-owned subsidiary that owns or leases 90 percent of Grand Gulf 1. System Energy sells all the power and capacity from Grand Gulf 1 at wholesale to four of the domestic utility companies. As a registered public utility holding company under the Public Utility Holding Company Act of 1935, Entergy and its subsidiaries are subject to the broad regulatory provisions of PUHCA. Rates and other activities of the domestic utility companies are each regulated by state utility commissions, or in the case of Entergy New Orleans, the City Council. System Energy is regulated by the FERC as all of its transactions are at the wholesale level. Entergy's U.S. Utility continues to operate as a regulated monopoly as efforts toward deregulation in the jurisdictions it serves have either been delayed, abandoned, or not yet initiated.

                The primary objective of the U.S. Utility is to provide reliable and cost-effective electricity and gas service while creating a work environment that provides the highest level of safety for its employees. Since 1998 the U.S. Utility has significantly improved key customer service, reliability, and safety metrics. The overall generation portfolio of the U.S. Utility, which is primarily made up of natural gas and nuclear generation, is consistent with Entergy's strong support for environmental stewardship.

                The Non-Utility Nuclear business and Energy Commodity Services are referred to as Entergy's competitive businesses. These businesses, unlike the U.S. Utility, are not subject to cost-based rate regulation by state or local utility commissions. Primary oversight for these operations comes from the NRC and the FERC.

                Entergy's Non-Utility Nuclear business is focused on acquiring, owning, operating, and selling power from nuclear power plants and providing operations and management services to nuclear power plants owned by other utilities in the United States. Non-Utility Nuclear sells all of its power to wholesale customers. Operations and management services, including decommissioning services, are provided through Entergy's wholly-owned subsidiary, Entergy Nuclear, Inc.

                Entergy's Non-Utility Nuclear business currently owns assets located in the northeastern portion of the United States as shown on the map below:

                The Energy Commodity Services segment includes the operations of Entergy-Koch (50% owned by Entergy) and Entergy's non-nuclear wholesale asset business. Entergy-Koch is engaged in two major businesses: energy commodity marketing and trading that includes power, gas, weather derivatives, emissions, and cross-commodities through Entergy-Koch Trading and gas transportation and storage through Gulf South Pipeline. Entergy's non-nuclear wholesale asset business owns and operates power plants capable of generating about 1,400 MW of electricity for sale in the wholesale market.

                Entergy's strategy is to create value by focusing on asset management and strong operational execution, with a particular emphasis on service reliability and nuclear excellence.  Entergy continually evaluates its business position, with a view toward enhancing the company's scale, scope, and skill advantages. It applies a well-developed point of view of the marketplace and strong risk management to manage its asset portfolio and customer relationships. Entergy benchmarks its operational performance against industry and competitor standards on measures such as safety, reliability, customer service, and cost efficiency.

                The following graph compares the performance of Entergy common stock to the S&P 500 Index and Philadelphia Utility Index (each of which includes Entergy) for the last five years:

1. Assumes $100 invested at the closing price on December 31, 1997, in Entergy common stock, the S&P 500, and the Philadelphia Utility Index, and reinvestment of all dividends.
2. Cumulative total returns calculated from the S&P 500 Index and Philadelphia Utility Index maintained by Standard & Poor's Corporation.

                Selected Entergy financial data obtained from Entergy's consolidated financial statements for the past three years is reflected on the charts below.

                A more detailed discussion of Entergy's operations is set forth below in "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS."

Significant Business Issues

Rate Regulation and Fuel-Cost Recovery

                The rates that the domestic utility companies and System Energy charge for their services are a very important item influencing Entergy's financial position, results of operations, and liquidity. See Rate Regulation and Fuel-Cost Recovery in "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS" and "Rate Matters" in Part I, Item 1 for discussion of this issue.

                Utility restructuring in Entergy's retail service territories has either been delayed, abandoned, or not pursued; however, major changes are occurring in the wholesale and retail electric utility business, including in the transmission business. See Utility Restructuring in "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS" for discussion of these issues.

                The domestic utility companies, System Energy, and the Non-Utility Nuclear subsidiaries own and operate, through affiliates, ten nuclear power plants. See Nuclear Matters in "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS" for discussion of the risks inherent in owning and operating nuclear power plants.

                The sale of capacity and energy from the power generation plants owned by the Non-Utility Nuclear business and the non-nuclear wholesale asset business is subject to fluctuations in the market price for power. See Market and Credit Risks in "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS" for a discussion of the market risk associated with these businesses.

                Entergy owns a 50% interest in Entergy-Koch. Entergy-Koch, through its Entergy-Koch Trading subsidiary, buys and sells natural gas, power, and other energy-related services and commodities, including weather derivatives. Prices of these commodities may fluctuate over relatively short periods of time and expose Entergy-Koch to commodity price risk. See Market and Credit Risks in "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS" for a discussion of the market risk associated with the energy trading business.

                Entergy relies on access to both short-term money markets and longer-term capital markets as a source of liquidity for capital requirements and refinancing not satisfied by the cash flow from its operations. See Liquidity and Capital Resources in "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS" for a discussion of these matters.

                Entergy and its subsidiaries are involved in the ordinary course of business in a substantial amount of employment, asbestos, hazardous material and other environmental and rate-related, proceedings and litigation, a significant portion of which originates in Louisiana, Mississippi, and Texas. Entergy uses legal and appropriate means to contest litigation threatened or filed against it, but the litigation environment in these states poses a significant business risk. See "Litigation" below in Part I, Item 1 for additional discussion of significant litigation involving Entergy.

                In addition to the regulation of rates that the domestic utility companies and System Energy charge for sales of electric power, there are three additional primary areas of regulation: federal regulation of the utility business, regulation of nuclear power, and environmental regulation. The regulation of nuclear power and environmental regulation are discussed in detail in the description of the U.S. Utility Business and Non-Utility Nuclear Business sections of Part I, Item 1.

                The Public Utility Holding Company Act of 1935, as amended, regulates companies like Entergy Corporation that serve as holding companies to domestic operating utilities. Some of the more significant impacts of PUHCA are that it:

• limits the operations of a registered holding company system to a single, integrated public utility system, plus related systems and businesses;
• regulates transactions among affiliates within a holding company system;
• governs the issuance, acquisition, and disposition of securities and assets by registered holding companies and their subsidiaries;
• limits the entry by registered holding companies and their subsidiaries into businesses other than electric and/or gas utility businesses; and
• requires SEC approval for certain utility mergers and acquisitions.

                Entergy continues to support the broad industry effort to pass legislation in the United States Congress to repeal PUHCA and transfer certain aspects of the oversight of public utility holding companies from the SEC to FERC. Entergy believes that PUHCA inhibits its ability to compete in the evolving electric energy marketplace and largely duplicates the oversight activities otherwise performed by FERC, other federal regulators, and state and local regulators. In June 1995, the SEC adopted a report proposing options for the repeal or significant modification of PUHCA, which it continues to support.

                The Federal Power Act regulates:

• the transmission and wholesale sale of electric energy in interstate commerce;
• the licensing of certain hydroelectric projects; and
• certain other activities, including accounting policies and practices of electric and gas utilities.

                The Federal Power Act gives FERC jurisdiction over the rates charged by System Energy for Grand Gulf 1 capacity and energy provided to Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans and over some of the rates charged by Entergy Arkansas and Entergy Gulf States. FERC also regulates the rates charged for intrasystem sales pursuant to the System Agreement.

                Entergy Arkansas holds a FERC license for two hydroelectric projects totaling 70 MW of capacity that was to expire on February 28, 2003. In December 2002, FERC issued an order approving Entergy Arkansas' application to renew the license for these two facilities. The license gives Entergy Arkansas permission to operate the projects for another 50 years.

                Employees are an integral part of Entergy's commitment to serving its customers. As of December 31, 2002, Entergy employed 15,601 people.

                Approximately 5,100 employees are represented by the International Brotherhood of Electrical Workers Union, the Utility Workers Union of America, and the International Brotherhood of Teamsters Union.

                Management of Entergy Corporation and its subsidiaries has prepared and is responsible for the financial statements and related financial information included herein. The financial statements are based on accounting principles generally accepted in the United States of America. Financial information included elsewhere in this report is consistent with the financial statements.

                To meet their responsibilities with respect to financial information, management maintains and enforces a system of internal accounting controls designed to provide reasonable assurance, on a cost-effective basis, as to the integrity, objectivity, and reliability of the financial records, and as to the protection of assets. This system includes communication through written policies and procedures, an employee Code of Entegrity, and an organizational structure that provides for appropriate division of responsibility and the training of personnel. This system is also tested by a comprehensive internal audit program.

                The Audit Committee of the Board of Directors, composed solely of Directors who are not employees of Entergy, meets with the independent auditors, management, and internal accountants periodically to discuss internal accounting controls and auditing and financial reporting matters. The Audit Committee appoints the independent auditors annually and reviews with the independent auditors the scope and results of the audit effort. The Committee also meets periodically with the independent auditors and the chief internal auditor without management, providing free access to the Committee.

                Independent public accountants provide an objective assessment of the degree to which management meets its responsibility for fairness of financial reporting. They regularly evaluate the system of internal accounting controls and perform such tests and other procedures as they deem necessary to reach and express an opinion on the fairness of the financial statements.

                Management believes that these policies and procedures provide reasonable assurance that its operations are carried out with a high standard of business conduct.

                Entergy Corporation is an investor-owned public utility holding company that operates primarily through three business segments.

• U.S. Utility generates, transmits, distributes, and sells electric power, with a small amount of natural gas distribution.
• Non-Utility Nuclear owns and operates five nuclear power plants and is primarily focused on selling electric power produced by those plants to wholesale customers.
• Energy Commodity Services is focused almost exclusively on providing energy commodity trading and gas transportation and storage services through Entergy-Koch, L.P. Energy Commodity Services also includes Entergy's non-nuclear wholesale assets business.

Following are the percentages of Entergy's consolidated revenues and net income generated by these segments and the percentage of total assets held by them:

                Earnings applicable to common stock for the years ended December 31, 2002, 2001, and 2000 by operating segment are as follows:

                Results for 2002 were negatively affected by net charges ($238.3 million after-tax) reflecting the effect of Entergy's decision to discontinue additional greenfield power plant development and asset impairments resulting from the deteriorating economics of wholesale power markets principally in the United States and the United Kingdom. The net charges are discussed more fully below in the Energy Commodity Services discussion.

                Entergy's income before taxes is discussed according to the business segments listed above. See Note 12 to the consolidated financial statements for further discussion of Entergy's business segments and their financial results in 2002, 2001, and 2000.

                Refer to "SELECTED FINANCIAL DATA - FIVE-YEAR COMPARISON OF ENTERGY CORPORATION AND SUBSIDIARIES, ENTERGY ARKANSAS, INC., ENTERGY GULF STATES, INC. AND SUBSIDIARIES, ENTERGY LOUISIANA, INC., ENTERGY MISSISSIPPI, INC., ENTERGY NEW ORLEANS, INC., AND SYSTEM ENERGY RESOURCES, INC." which accompany each company's financial statements in this report for further information with respect to operating statistics.

                The increase in earnings for the U.S. Utility in 2002 from $550 million to $583 million was primarily due to a decrease in interest charges combined with an increase in other income, partially offset by decreases in operating income and interest income.

                The decrease in earnings for the U.S. Utility in 2001 from $587 million to $550 million was primarily due to a decrease in operating income and increased interest charges, partially offset by an increase in interest income.

2002 Compared to 2001

                Operating income decreased by $43.6 million in 2002 primarily due to:

• an increase in other operation and maintenance expenses of $273.2 million. $159.9 million of this increase is offset in other regulatory credits and relates to a March 2002 settlement agreement and 2001 earnings review that became final in the second quarter of 2002, allowing Entergy Arkansas to recover a large majority of 2000 and 2001 ice storm repair expenses through previously-collected transition cost account (TCA) amounts. The remaining increase in other operation and maintenance expenses is explained below; and
• an increase in depreciation and amortization expenses of $105.7 million primarily due to the effects in 2001 of the final FERC order addressing System Energy's 1995 rate filing.

Partially offsetting these decreases in operating income were the following:

• increased revenues of $155.7 million due to increased electricity usage in the service territories;
• an increase in revenue of $94.3 million due to an increase in the price applied to unbilled sales; and
• an increase in other regulatory credits of $121.3 million primarily due to a March 2002 settlement agreement allowing Entergy Arkansas to recover a large majority of 2000 and 2001 ice storm repair expenses through the previously-collected TCA amounts. This increase is offset in other operation and maintenance expenses.

                In addition to the effect of the March 2002 settlement agreement, the increase in other operation and maintenance expenses was primarily due to:

• an increase of $51.2 million in benefit costs;
• increased expenses of $24.5 million at Entergy Arkansas due to the reversal in 2001 of ice storm costs previously charged to expense in December 2000;
• an increase of $14.6 million in fossil plant expenses due to maintenance outages and turbine inspection costs at various plants;
• an increase of $10.9 million to reflect the current estimate of the liability for the future disposal of low-level radioactive waste materials; and
• lower nuclear insurance refunds of $6.7 million.

                Fuel recovery mechanisms at the domestic utility companies generally provide for the deferral of fuel and purchased power costs above the amounts included in existing rates. Operating revenues include a decrease in fuel cost recovery revenue of $897.4 million and $60.5 million related to electric sales and gas sales, respectively, primarily due to lower fuel recovery factors resulting from decreases in the market prices of natural gas and purchased power in 2002. As such, this revenue decrease is offset by decreased fuel and purchased power expenses. Also contributing to the decrease in fuel cost recovery revenue was a lower fuel recovery surcharge in 2002 in the Texas jurisdiction of Entergy Gulf States.

2001 Compared to 2000

                Operating income decreased $125.6 million in 2001 primarily due to:

• decreased revenues of $161.9 million due to decreased electricity usage in the service territories;
• a decrease in revenue of $161.7 million due to a decrease in the price applied to unbilled sales; and
• the accrual of $26.8 million in the transition cost account at Entergy Arkansas.

Partially offsetting these decreases in operating income were the following:

• a decrease in other operation and maintenance expenses of $95.6 million, which is explained below;
• a decrease in depreciation and amortization expense at System Energy of $74.5 million primarily resulting from the final resolution of its 1995 rate filing; and
• a decrease in decommissioning expense at System Energy of $32.4 million resulting from the final resolution of the FERC order addressing the 1995 rate increase filing.

                The decrease in other operation and maintenance expenses in 2001 was primarily due to:

• a decrease in property damage expenses of $49.7 million primarily due to a reversal of $24.5 million in June 2001, upon recommendation from the APSC, of ice storm costs previously charged to expense in December 2000. The effect of the reversal of the ice storm costs on net income was largely offset by the adjustment to the transition cost account as a result of the 2000 earnings review in 2001;
• decreases in expenses of $9.3 million at Entergy Arkansas due to decreased transition to competition support costs and $11.0 million at Entergy Louisiana due to decreased legal fees; and
• decreases of $10.7 million and $14.6 million at Entergy Louisiana and Entergy Mississippi, respectively, because of maintenance and planned maintenance outages at certain fossil plants in 2000.

                Operating revenues include an increase in fuel cost recovery revenue of $462.7 million related to electric sales primarily due to increased fuel recovery factors at Entergy Arkansas, Entergy Gulf States in the Texas jurisdiction, and Entergy Mississippi, combined with higher fuel and purchased power costs recovered through fuel recovery mechanisms at Entergy Gulf States in the Louisiana jurisdiction and Entergy New Orleans due to the increased market prices of natural gas and purchased power early in 2001. As such, this revenue increase is offset by increased fuel and purchased power expenses.

2002 Compared to 2001

                Results for the year ended December 31, 2002 for U.S. Utility were also affected by the following:

• a decrease in interest income of $56.5 million, which is explained below;
• an increase in "miscellaneous - net" in other income of $26.7 million due to the cessation of amortization of goodwill in January 2002 upon implementation of SFAS 142 and settlement of liability insurance coverage at Entergy Gulf States; and
• a decrease in interest charges of $111.0 million, which is explained below.

                The decrease in interest income in 2002 was primarily due to:

• interest recognized in 2001 on Grand Gulf 1's decommissioning trust funds resulting from the final order addressing System Energy's rate proceeding;
• interest recognized in 2001 at Entergy Mississippi and Entergy New Orleans on the deferred System Energy costs that were not being recovered through rates; and
• lower interest earned on declining deferred fuel balances.

                The decrease in interest charges in 2002 is primarily due to:

• a decrease of $31.9 million in interest on long-term debt primarily due to the retirement of long-term debt in late 2001 and early 2002; and
• a decrease of $76.0 million in other interest expense primarily due to interest recorded on System Energy's reserve for rate refund in 2001. The refund was made in December 2001.

2001 Compared to 2000

                Results for the year ended December 31, 2001 for U.S. Utility were also affected by an increase in interest charges of $61.5 million primarily due to:

• the final FERC order addressing the 1995 System Energy rate filing;
• debt issued at Entergy Arkansas in July 2001, at Entergy Gulf States in June 2000 and August 2001, at Entergy Mississippi in January 2001, and at Entergy New Orleans in July 2000 and February 2001; and
• borrowings under credit facilities during 2001, primarily at Entergy Arkansas.

                The increase in earnings in 2002 for Non-Utility Nuclear from $128 million to $201 million was primarily due to the operation of Indian Point 2 and Vermont Yankee, which were purchased in September 2001 and July 2002, respectively.

                The increase in earnings in 2001 for Non-Utility Nuclear from $49 million to $128 million was primarily due to the operation of FitzPatrick and Indian Point 3 for a full year, as each was purchased in November 2000, and the operation of Indian Point 2, which was purchased in September 2001.

                Following are key performance measures for Non-Utility Nuclear:

                The following fluctuations in the results of operations for Non-Utility Nuclear in 2002 were primarily caused by the acquisitions of Indian Point 2 and Vermont Yankee (except as otherwise noted):

• operating revenues increased $411.0 million to $1.2 billion;
• other operation and maintenance expenses increased $201.8 million to $596.3 million;
• depreciation and amortization expenses increased $25.1 million to $42.8 million;
• fuel expenses increased $29.4 million to $105.2 million;
• nuclear refueling outage expenses increased $23.9 million to $46.8 million, which was due primarily to a full year of amortization of Pilgrim and Indian Point 3 expenses;
• interest income increased $17.2 million to $71.3 million; and
• interest expense increased $12.1 million to $93.3 million.

                The following fluctuations in the results of operations for Non-Utility Nuclear in 2001 were primarily caused by the acquisition of FitzPatrick, Indian Point 3, and Indian Point 2:

• operating revenues increased $491.1 million to $789.2 million;
• other operation and maintenance expenses increased $217.6 million to $394.5 million;
• interest expense, primarily related to debt incurred to purchase the plants, increased $47.9 million to $81.1 million;
• fuel expenses increased $51.0 million to $75.8 million; and
• taxes other than income taxes increased $30.9 million to $40.1 million.

                The decrease in earnings for Energy Commodity Services in 2002 from $106 million to a $146 million loss was primarily due to the impairment charges that are discussed below.

                The increase in earnings for Energy Commodity Services in 2001 from $55 million to $106 million was primarily due to the strong performance of the trading and gas pipeline businesses of Entergy-Koch.

                The decrease in earnings for Energy Commodity Services in 2002 was primarily due to the charges to reflect the effect of Entergy's decision to discontinue additional greenfield power plant development and to reflect asset impairments resulting from the deteriorating economics of wholesale power markets principally in the United States and the United Kingdom. Entergy recorded net charges of $428.5 million ($238.3 million net of tax) to operating expenses. The net charges consist of the following:

• The power development business obtained contracts in October 1999 to acquire 36 turbines from General Electric. Entergy's rights and obligations under the contracts for 22 of the turbines were sold to an independent special-purpose entity in May 2001. $178.0 million of the charges, including an offsetting net of tax benefit of $18.5 million related to the subsequent sale of four turbines to a third party, is a provision for the net costs resulting from cancellation or sale of the turbines subject to purchase commitments with the special-purpose entity;
• $204.4 million of the charges results from the write-off of Entergy Power Development Corporation's equity investment in the Damhead Creek project and the impairment of the values of its Warren Power power plant and its Crete and RS Cogen projects. This portion of the charges reflects Entergy's estimate of the effects of reduced spark spreads in the United States and the United Kingdom. Damhead Creek was sold in December 2002, resulting in an after-tax gain of $31.4 million;
• $39.1 million of the charges relates to the restructuring of the non-nuclear wholesale assets business, which is comprised of $22.5 million of impairments of administrative fixed assets, $10.7 million of estimated sublease losses, and $5.9 million of employee-related costs;
• $32.7 million of the charges results from the write-off of capitalized project development costs for projects that will not be completed; and
• a gain of $25.7 million ($15.9 million net of tax) realized on the sale in August 2002 of an interest in projects under development in Spain.

                Also, in the first quarter of 2002, Energy Commodity Services sold its interests in projects in Argentina, Chile, and Peru for net proceeds of $135.5 million. After impairment provisions recorded for these Latin American interests in 2001, the net loss realized on the sale in 2002 is insignificant.

                Revenues and fuel and purchased power expenses decreased for Energy Commodity Services by $1,075.8 million and $876.9 million, respectively, in 2002 primarily due to:

• a decrease of $542.9 million in revenues and $539.6 million in fuel and purchased power expenses resulting from the sale of Highland Energy in the fourth quarter of 2001;
• a decrease of $161.7 million in revenues resulting from the sale of the Saltend plant in August 2001; and
• a decrease of $139.1 million in revenues and $133.5 million in purchased power expenses due to the contribution of substantially all of Entergy's power marketing and trading business to Entergy-Koch in February 2001. Earnings from Entergy-Koch are reported as equity in earnings of unconsolidated equity affiliates in the financial statements. The net income effect of the lower revenues was more than offset by the income from Entergy's investment in Entergy-Koch. The income from Entergy's investment in Entergy-Koch was $31.9 million higher in 2002 primarily as a result of earnings at Entergy-Koch Trading (EKT) and higher earnings at Gulf South Pipeline due to more favorable transportation contract pricing. Although the gain/loss days ratio reported below declined in 2002, EKT made relatively more money on the gain days than the loss days, and thus had an increase in earnings for the year.

1. Previously reported volumes, which included only U.S. trading, have been adjusted to reflect both U.S. and Europe volumes traded.

Entergy accounts for its 50% share in Entergy-Koch under the equity method of accounting. Certain terms of the partnership arrangement allocate income from various sources, and the taxes on that income, on a significantly disproportionate basis through 2003. Losses and distributions from operations are allocated to the partners equally. Substantially all of Entergy-Koch's profits were allocated to Entergy in 2002. Effective January 1, 2004, a revaluation of Entergy-Koch's assets for legal capital account purposes will occur, and future profit allocations will change after the revaluation. The profit allocations other than for weather trading and international trading are expected to become equal, unless special allocations are necessary to equalize the partners' legal capital accounts. Profit allocations for weather trading and international trading remain disproportionate to the ownership interests. Earnings allocated under the terms of the partnership agreement constitute equity, not subject to reallocation, for the partners.

                The increase in earnings for Energy Commodity Services in 2001 was primarily due to:

• the gain on the sale of the Saltend plant discussed below;
• the favorable results from Entergy-Koch discussed below;
• the $33.5 million ($23.5 million net of tax) cumulative effect of an accounting change marking to market the Damhead Creek gas contract;
• liquidated damages of $13.9 million ($9.7 million net of tax) received in 2001 from the Damhead Creek construction contractor as compensation for lost operating margin from the plant due to construction delays; and
• a $12.2 million ($7.9 million net of tax) gain on the sale of a permitted site in Desoto County, Florida, in May 2001.

                Partially offsetting the increase in earnings for Energy Commodity Services in 2001 was the following:

• $60.1 million ($49.9 million net of tax) of losses or asset impairments recorded on Latin American investments and other development projects;
• a $9.8 million ($6.4 million net of tax) loss recorded primarily because of the pending cancellation of four gas turbines scheduled for delivery in 2004;
• liquidated damages of $55.1 million ($38.6 million net of tax) received in 2000 from the Saltend contractor as compensation for lost operating margin from the plant due to construction delays;
• a $19.7 million ($12.8 million net of tax) gain on the sale of the Freestone project located in Fairfield, Texas, in June 2000;
• increased depreciation expense of $23.6 million in 2001, primarily due to the commencement of the commercial operation of the Saltend and Damhead Creek plants; and
• increased interest expense of $78.7 million in 2001, primarily because of the commencement of commercial operation of the Saltend and Damhead Creek plants.

                Revenues decreased for Energy Commodity Services by $983.3 million in 2001, primarily due to the contribution of substantially all of Entergy's power marketing and trading business to Entergy-Koch in 2001. As a result, in 2001, revenues from this activity were lower by $1,957.0 million compared to 2000 revenue for Entergy's power marketing and trading segment, and purchased power expenses were lower by $1,830.0 million. The net income effect in 2001 of the lower revenue was more than offset by the equity in earnings from Entergy's interest in Entergy-Koch. Entergy's earnings from this activity increased in 2001 as a result of increased electricity and gas trading volumes as well as a broader range of commodity sources and options provided to customers by the joint venture than provided previously by Entergy.

                The decrease in revenues in 2001 was partially offset by an increase in operating revenues primarily due to an increase of $409.8 million from Highland Energy and an increase of $450.1 million from the Saltend and Damhead Creek plants. Highland Energy was acquired in June 2000, and the Saltend and Damhead Creek plants began commercial operation in late November 2000 and early 2001, respectively. Highland Energy was sold in the fourth quarter of 2001. The increase in revenues from Highland Energy, Damhead Creek, and Saltend is largely offset by increased fuel and purchased power expenses of $644.1 million and increased other operation and maintenance expenses of $94.6 million.

                Entergy sold the Saltend plant in August 2001 and revenues include the $88.1 million ($57.2 million net of tax) gain on the sale.

                The loss from Parent & Other decreased in 2002 from $58 million to $39 million primarily due to:

• a decrease in income tax expense of $12.1 million resulting from the allocation of intercompany tax benefits; and
• a decrease in interest charges of $6.0 million.

                The loss from Parent & Other increased in 2001 from $11 million to $58 million primarily due to:

• a decrease in interest income of $41.2 million;
• $21.8 million ($14.1 million net of tax) of merger-related expenses incurred by Entergy Corporation in the first quarter of 2001; and
• an increase in interest charges of $19.5 million.

The increased loss in 2001 was partially offset by the write-down in 2000 of investments in Latin American projects to their estimated fair values.

                The effective income tax rates for 2002, 2001, and 2000 were 32.1%, 38.3%, and 40.3%, respectively. See Note 3 to the consolidated financial statements for a reconciliation of the federal statutory rate of 35.0% to the effective income tax rates.

                This section discusses Entergy's capital structure, capital spending plans and other uses of capital, sources of capital, and the cash flow activity presented in the cash flow statement.

                Entergy's capitalization is balanced between equity and debt, as shown in the following table. The reduction in the percentage for 2002 is primarily the result of the sale of Damhead Creek in December 2002. Debt outstanding on the Damhead Creek facility was $458 million as of December 31, 2001.

Net debt consists of gross debt less cash and cash equivalents. Gross debt consists of notes payable, capital lease obligations, and long-term debt, including the currently maturing portion. Net capital consists of net debt, common shareholders' equity, and preferred stock and securities.

                Long-term debt, including the currently maturing portion, makes up over 90% of Entergy's total debt outstanding. Following are Entergy's long-term debt principal maturities as of December 31, 2002 by operating segment. These figures include principal payments on the Entergy Louisiana and System Energy sale-leaseback transactions, which are included in long-term debt on the balance sheet.

                In the fourth quarter of 2002, the U.S. Utility issued $640 million of debt with maturities ranging from 2007 to 2032. Approximately $71 million of the proceeds of the debt issued in the fourth quarter were used to retire, in 2002, debt that was scheduled to mature in 2003, and the remainder will be used to meet certain 2003 maturities as they occur. Entergy Mississippi issued an additional $100 million of debt in January 2003 that matures in 2013. The proceeds will be used to repay, prior to maturity, debt of Entergy Mississippi that is scheduled to mature in 2003 and 2004. Note 7 to the consolidated financial statements provides more detail concerning long-term debt.

                The Energy Commodity Services debt was paid at maturity in January 2003 using money drawn on Entergy Corporation's 364-day credit facility.

                Capital lease obligations, including nuclear fuel leases, are a minimal part of Entergy's overall capital structure, and are discussed further in Note 10 to the consolidated financial statements. Following are Entergy's payment obligations under those leases:

                Notes payable, which include borrowings outstanding on credit facilities with original maturities of less than one year, were less than $1 million as of December 31, 2002. Entergy Corporation, Entergy Arkansas, Entergy Louisiana, and Entergy Mississippi each have 364-day credit facilities available as follows:

Although the Entergy Corporation credit line expires in May 2003, Entergy has the discretionary option to extend the period to repay the amount then outstanding for an additional 364-day term. Because of this option, which Entergy intends to exercise if it does not renew the credit line or obtain an alternative source of financing, the debt outstanding under the credit line is reflected in long-term debt on the balance sheet. The credit line is reflected as notes payable at December 31, 2001.

                In addition to the obligations listed above that are reflected on the balance sheet, Entergy has a minimal amount of operating leases and guarantees in support of unconsolidated obligations that are not reflected as liabilities on the balance sheet. These items are not on the balance sheet in accordance with generally accepted accounting principles.

                Following are Entergy's payment obligations on noncancelable operating leases with a term over one year as of December 31, 2002:

The operating leases are discussed more thoroughly in Note 10 to the consolidated financial statements.

                Entergy's guarantees of unconsolidated obligations outstanding as of December 31, 2002 total a maximum amount of $267.5 million. In August 2001, EntergyShaw entered into a turnkey construction agreement with an Entergy subsidiary, Entergy Power Ventures, L.P. (EPV), and with Northeast Texas Electric Cooperative, Inc. (NTEC), providing for the construction by EntergyShaw of a 550 MW electric generating station to be located in Harrison County, Texas. Entergy has guaranteed the obligations of EntergyShaw to construct the plant, which will be 70% owned by EPV. Entergy's maximum liability on the guarantee is $232.5 million. In addition, one of the contracts transferred to Entergy-Koch by Entergy's power marketing and trading business is backed by an Entergy Corporation guarantee authorized in the amount of $35 million.

Capital Funds Agreement

                Pursuant to an agreement with certain creditors, Entergy Corporation has agreed to supply System Energy with sufficient capital to:

• maintain System Energy's equity capital at a minimum of 35% of its total capitalization (excluding short-term debt);
• permit the continued commercial operation of Grand Gulf 1;
• pay in full all System Energy indebtedness for borrowed money when due; and
• enable System Energy to make payments on specific System Energy debt, under supplements to the agreement assigning System Energy's rights in the agreement as security for the specific debt.

                Following are the amounts of Entergy's planned construction and other capital investments by operating segment for 2003 through 2005 (in millions):

                The capital plan for the U.S. Utility primarily consists of spending for maintenance capital, supporting continued reliability improvements, and customer growth. Also included is the replacement of the ANO 1 steam generator and reactor vessel closure head. Entergy estimates the cost of the fabrication and replacement to be approximately $235 million, of which approximately $135 million will be incurred through 2004. Entergy expects the replacement to occur during a planned refueling outage in 2005. Entergy Arkansas filed in January 2003 a request for a declaratory order by the APSC that the investment in the replacement is in the public interest analogous to the order received in 1998 prior to the replacement of the steam generator for ANO 2. Receipt of an order relating to the replacement at ANO 1 would provide additional support for the inclusion of these costs in a future general rate case; however, management cannot predict the outcome of either the request for a declaratory order or a general rate proceeding.

                The capital plan for Non-Utility Nuclear primarily consists of spending for maintenance capital. Entergy also includes some spending for power uprate projects in the estimate.

                The capital plan for Energy Commodity Services primarily consists of Entergy's obligation to make a $73 million cash contribution to Entergy-Koch in January 2004. The completion of the Harrison County project is also included in the plan. The plant has been under construction since 2001. Entergy will own approximately 385 MW once construction is completed and operation has begun, which Entergy expects to occur in June 2003.

                The planned construction and capital investments do not include potential investments in new businesses or assets. The estimated capital expenditures are subject to periodic review and modification and may vary based on the ongoing effects of business restructuring, regulatory constraints, business opportunities, market volatility, economic trends, and the ability to access capital.

                Declarations of dividends on Entergy's common stock are made at the discretion of the Board. Among other things, the Board evaluates the level of Entergy's common stock dividends based upon Entergy's earnings, financial strength, and future investment opportunities. At its October 2002 meeting, the Board increased Entergy's quarterly dividend per share by 6%, to $0.35. In 2002, Entergy paid $299 million in cash dividends on its common stock.

                In accordance with Entergy's stock option plans, Entergy periodically grants stock options to its employees, which may be exercised to obtain shares of Entergy's common stock. In order to reduce the potential increase in outstanding common shares created by the exercise of stock options, Entergy plans to purchase up to 10 million shares of its common stock through mid-2004 on a discretionary basis through open market purchases or privately negotiated transactions. Entergy repurchased 2,885,000 shares of common stock for a total purchase price of $118.5 million in 2002.

                System Energy had three-year letters of credit in place that were scheduled to expire in March 2003 securing certain of its obligations related to the sales/leaseback of a portion of Grand Gulf 1. System Energy replaced the letters of credit with new three-year letters of credit totaling approximately $192 million that are backed by cash collateral. System Energy used approximately $192 million in March 2003 to provide this cash collateral.

                Entergy's ability to invest in domestic and foreign generation businesses is subject to the SEC's regulations under PUHCA. As authorized by the SEC, Entergy is allowed to invest an amount equal to 100% of its average consolidated retained earnings in domestic and foreign generation businesses. As of December 31, 2002, Entergy's investments subject to this rule totaled $1.97 billion constituting 52.5% of Entergy's average consolidated retained earnings.

                Entergy's ability to guarantee obligations of Entergy's non-utility subsidiaries is also limited by SEC regulations under PUHCA. In August 2000, the SEC issued an order, effective through December 31, 2005, that allows Entergy to issue up to $2 billion of guarantees for the benefit of its non-utility companies.

                Under PUHCA, the SEC imposes a limit equal to 15% of consolidated capitalization on the amount that may be invested in "energy-related" businesses without specific SEC approval. Entergy has made investments in energy-related businesses, including power marketing and trading. Entergy's available capacity to make additional investments at December 31, 2002 was approximately $1.8 billion.

                Entergy's sources to meet its capital requirements and to fund potential investments include:

• internally generated funds, which have been the source of the majority of Entergy's capital;
• cash on hand ($1.3 billion as of December 31, 2002);
• securities issuances;
• bank financing under new or existing facilities; and
• sales of assets.

                The majority of Entergy's internally generated funds come from the domestic utility companies and System Energy. Circumstances such as weather patterns, price fluctuations, and unanticipated expenses, including unscheduled plant outages, could affect the level of internally generated funds in the future. In the following section Entergy's cash flow activity for the previous three years is discussed.

                Provisions within the Articles of Incorporation or pertinent indentures and various other agreements relating to the long-term debt and preferred stock of certain of Entergy Corporation's subsidiaries restrict the payment of cash dividends or other distributions on their common and preferred stock. As of December 31, 2002, Entergy Arkansas and Entergy Mississippi had restricted retained earnings unavailable for distribution to Entergy Corporation of $296.1 million and $36.2 million, respectively. Additionally, PUHCA prohibits Entergy Corporation's subsidiaries from making loans or advances to Entergy Corporation.

                Short-term borrowings by the domestic utility companies and System Energy, including borrowings under the intra-company money pool, are limited to amounts authorized by the SEC. Under the SEC order authorizing the short-term borrowing limits, the domestic utility companies and System Energy cannot incur new short-term indebtedness if the issuer's common equity would comprise less than 30% of its capital. In addition, this order restricts Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, or System Energy from issuing long-term debt unless that debt will be rated as investment grade. See Note 4 to the consolidated financial statements for further discussion of Entergy's short-term borrowing limits.

                As shown in Entergy's Statements of Cash Flows, cash flows for the years ended December 31, 2002, 2001, and 2000 were as follows:

2002 Compared to 2001

                Entergy's cash flow provided by operating activities decreased slightly in 2002 primarily due to:

• The U.S. Utility provided $2,341 million in operating cash flow, an increase of $693 million compared to 2001. The increase primarily resulted from the tax accounting election made by Entergy Louisiana that is discussed below.
• The parent company used $439 million in operating cash flow, compared to providing $407 million in 2001. The decrease primarily resulted from the payment that Entergy Corporation made to Entergy Louisiana pursuant to the tax accounting election made by Entergy Louisiana that is discussed below.
• The Non-Utility Nuclear business provided $282 million in operating cash flow, an increase of $18 million compared to 2001.
• Entergy's investment in Entergy-Koch used $47 million in operating cash flow in 2002, a decrease of $8 million compared to 2001. The use of cash primarily relates to tax payments on Entergy's share of the partnership income. Entergy did not receive a dividend from Entergy-Koch in 2002 or in 2001 because the joint venture is retaining capital for business opportunities.
• The non-nuclear wholesale asset business provided $43 million in operating cash flow in 2002, compared to using $73 million in 2001.

2001 Compared to 2000

                Entergy's consolidated net cash flow provided by operating activities increased in 2001 primarily due to:

• An increase of $432 million in cash provided by the parent company primarily due to the tax accounting election made by Entergy Louisiana that is discussed below and the receipt of a federal tax refund associated primarily with deductions for 2000 ice storm costs, partially offset by increased interest expense and the payment of FPL merger-related costs.
• An increase of $171 million in cash provided by the Non-Utility Nuclear business, primarily from the operation of the FitzPatrick and Indian Point 3 plants purchased in the fourth quarter of 2000 and the Indian Point 2 plant purchased in the third quarter of 2001.

                These increases were partially offset by a decrease of $129 million in cash provided by the U.S. Utility and net cash used of $128 million in 2001 compared to net cash provided of $64.3 million in 2000 by the Energy Commodity Services segment. The Energy Commodity Services segment includes the non-nuclear wholesale assets business and the Entergy-Koch joint venture. In 2001, the non-nuclear wholesale assets business used $73 million of net cash in operating activities; in 2000, the non-nuclear wholesale assets business provided $37 million of operating cash flow. This fluctuation is primarily due to a net loss, excluding the gain on the sale of the Saltend plant, generated in 2001 compared with net income generated in 2000. Entergy's investment in Entergy-Koch used $55 million of net cash in operating activities in 2001 compared with power marketing and trading providing $27 million of operating cash flow in 2000. This fluctuation is primarily because, although income from this activity was higher in 2001, Entergy did not receive dividends from Entergy-Koch, as the joint venture retained capital for business opportunities.

Entergy Louisiana Tax Election

                In 2001 Entergy Louisiana changed its method of accounting for tax purposes related to the contract to purchase power from the Vidalia project (the contract is discussed in Note 9 to the consolidated financial statements). The new tax accounting method has provided a cumulative cash flow benefit of approximately $867 million through 2002, which is expected to reverse in the years 2003 through 2031. The election did not reduce book income tax expense. The timing of the reversal of this benefit depends on several variables, including the price of power. Approximately half of the consolidated cash flow benefit of the election occurred in 2001 and the remainder occurred in 2002. In accordance with Entergy's intercompany tax allocation agreement, the cash flow benefit for Entergy Louisiana occurred in the fourth quarter of 2002.

                In a September 2002 settlement of an LPSC proceeding that concerned the Vidalia contract, the LPSC approved Entergy Louisiana's proposed treatment of the regulatory impact of the tax accounting election. In general, the settlement permits Entergy Louisiana to keep a portion of the tax benefit in exchange for bearing the risk associated with sustaining the tax treatment. The LPSC settlement divided the term of the Vidalia contract into two segments: 2002-12 and 2013-31. During the first eight years of the 2002-12 segment, Entergy Louisiana agreed to credit rates by flowing through its fuel adjustment calculation $11 million each year, beginning monthly in October 2002. Entergy Louisiana must credit rates in this way and by this amount even if Entergy Louisiana is unable to sustain the tax deduction. Entergy Louisiana also must credit rates by $11 million each year for an additional two years unless either the tax accounting method elected is retroactively repealed or the Internal Revenue Service denies the entire deduction related to the tax accounting method. Entergy Louisiana agreed to credit ratepayers additional amounts unless the tax accounting election is not sustained if it is challenged. During 2013-2031, Entergy Louisiana and its ratepayers would share the remaining benefits of this tax accounting election.

2002 Compared to 2001

                Net cash used in investing activities decreased by $836 million in 2002 primarily due to the following:

• Entergy used $420 million less cash in its 2002 nuclear power plant purchase than it used in its 2001 purchase. In July 2002, Entergy's Non-Utility Nuclear business purchased the 510 MW Vermont Yankee nuclear power plant for $180 million in cash. In September 2001, Entergy's Non-Utility Nuclear business purchased the 970 MW Indian Point 2 nuclear power plant for $600 million in cash. The liabilities to decommission both plants, as well as related decommissioning trust funds, were also transferred to Entergy. These decommissioning trust transfers are reflected in the non-cash activity section of the cash flow statements.
• Entergy made cash contributions of approximately $414 million in 2001 in connection with the formation of Entergy-Koch.
• Entergy did not make an investment in 2002 like the $272 million cash investment it made in 2001 to provide collateral for a line of credit that secures the installment obligations owed to NYPA for the acquisition of the FitzPatrick and Indian Point 3 nuclear power plants. As of December 31, 2002, $232 million remained invested as collateral for the line of credit.
• Entergy used $150 million to invest in temporary investments with a maturity of greater than 90 days in 2001 and those investments matured in 2002. This results in a net decrease of $300 million in cash used in 2002.

                Partially offsetting the decrease in net cash used in investing activities were the following:

• Entergy received less cash from sales of businesses in 2002 than it received in 2001. The sale of the Saltend plant in August 2001 provided approximately $810 million in cash, while the sale of various projects in 2002 provided approximately $215 million in cash.
• Entergy spent approximately $150 million more on construction in 2002 than in 2001, primarily for construction of the Harrison County project.

2001 Compared to 2000

                Net cash used in investing activities increased by $410 million in 2001 primarily due to:

• Entergy used $550 million more cash in its 2001 nuclear power plant purchase than it used in its 2000 nuclear power plant purchase. In September 2001, Entergy's Non-Utility Nuclear business purchased the 970 MW Indian Point 2 nuclear power plant for $600 million in cash. In 2000, Entergy paid $50 million cash and issued notes payable of approximately $750 million to NYPA to purchase the 980 MW Indian Point 3 and 825 MW FitzPatrick nuclear power plants.
• Entergy made cash contributions of approximately $414 million in connection with the formation of Entergy-Koch in 2001.
• Entergy made a $272 million cash investment in 2001 to provide collateral for a line of credit that secures the installment obligations it owes to NYPA for the acquisition of the FitzPatrick and Indian Point 3 nuclear power plants.
• Entergy used $150 million to invest in temporary investments with a maturity of greater than 90 days in 2001.

                Partially offsetting the increase in net cash used in investing activities were the following:

• Entergy received approximately $810 million in cash from the sale of the Saltend plant in August 2001.
• Entergy spent less on construction due to completion of the Saltend and Damhead Creek plants.
• The recovery of deferred fuel costs incurred at certain of the domestic utility companies increased in 2001. Entergy Arkansas, the Texas portion of Entergy Gulf States, and Entergy Mississippi for 2000 only, have treated these costs as regulatory investments because these companies are allowed by their regulatory jurisdictions to recover the accumulated fuel cost regulatory asset over longer than a twelve-month period. Entergy Mississippi's fuel recovery mechanism changed effective January 2001, and Entergy Mississippi's fuel cost under-recoveries incurred after that date are being recovered over less than a twelve-month period. The companies will recover carrying charges on the under-recovered balances.

2002 Compared to 2001

                Financing activities used $409 million less cash in 2002 than in 2001 primarily due to:

• Entergy increased the net borrowings under Entergy Corporation's credit facilities by $295 million in 2002.
• Entergy Corporation issued $267 million of long-term notes in 2002.
• The non-nuclear wholesale assets business used $196 million less cash in 2002 to retire debt than it did in 2001. This primarily resulted from two transactions. The non-nuclear wholesale assets business retired $268 million of long-term debt in April 2002 related to the acquisition of the rights to purchase turbines from a special-purpose financing entity. In 2001 the non-nuclear wholesale assets business retired the $555 million outstanding on the Saltend credit facility when the plant was sold.
• Issuances of long-term debt net of retirements by the U.S. Utility segment provided $113 million less cash in 2002 than in 2001. Net issuances were $76 million in 2002 compared to $189 million in 2001.
• Entergy repurchased $81.6 million more of its common stock in 2002 than in 2001.

In a non-cash transaction in 2002, long-term debt was reduced by $488 million in the sale of the Damhead Creek plant when the purchaser assumed the Damhead Creek debt along with the acquisition of the plant.

2001 Compared to 2000

                Financing activities used cash in 2001 compared to providing a small amount of cash in 2000 primarily due to:

• The $555 million retirement of the Saltend credit facility in August 2001 when the plant was sold.
• A higher amount of net issuances of debt by the U.S. Utility in 2000 than in 2001.
• No additional borrowings in 2001 under the Saltend and Damhead Creek credit facilities due to the completion of the construction of the plants in 2000. In 2000, borrowings under the Damhead Creek credit facility increased by approximately $164 million to finance construction of the plant
• A reduction in the amount of debt outstanding on the Entergy Corporation credit facility.

• Decreased repurchases of Entergy's common stock in 2001.
• The redemption of Entergy Gulf States' preference stock in 2000.

                The rates that the domestic utility companies and System Energy charge for their services are an important item influencing Entergy's financial position, results of operations, and liquidity. These companies are closely regulated and the rates charged to their customers are determined in regulatory proceedings, except for a portion of Entergy Gulf States' operations. Governmental agencies, including the APSC, the City Council, the LPSC, the MPSC, the PUCT, and FERC, are primarily responsible for approval of the rates charged to customers. The status of material retail rate proceedings are summarized below and described in more detail in Note 2 to the consolidated financial statements.

1. Entergy Louisiana's formula rate plan expired with the 2001 test year. Under the expired formula, if Entergy Louisiana earned outside of the bandwidth range, rates would be adjusted on a prospective basis. If earnings were above the bandwidth range, rates would be reduced by 60% of the overage, and if below, increased by 60% of the shortfall.
2. If Entergy Mississippi earns outside of the bandwidth range, rates will be adjusted on a prospective basis. If earnings are above the bandwidth range, rates are reduced by 50% of the overage, and if below, increased by 50% of the shortfall. The range presented is not adjusted for performance measures, under which the ROE midpoint can increase or decrease by as much as 1%.

                In addition to the regulatory scrutiny connected with base rate proceedings, the domestic utility companies' fuel costs recovered from customers are subject to regulatory scrutiny. The domestic utility companies' significant fuel cost proceedings are described in Note 2 to the consolidated financial statements.

                The domestic utility companies have historically engaged in the coordinated planning, construction, and operation of generating and transmission facilities under the terms of an agreement called the System Agreement that has been approved by FERC. Litigation involving the System Agreement has been initiated by the LPSC and City Council. These proceedings include challenges to the allocation of costs as defined by the System Agreement, raise questions of imprudence by the domestic utility companies in their execution of the System Agreement, and seek support for local regulatory authority over System Agreement issues. Entergy believes that any changes in the allocation of costs would not have a material effect on Entergy's financial condition because any changes should result in similar rate changes for retail customers. Entergy further believes that state and local regulators are pre-empted by federal law from reviewing and deciding System Agreement issues for themselves. An unrelated case currently pending between the LPSC and Entergy Louisiana raises the question whether a state regulator is pre-empted by federal law from reviewing and interpreting FERC rate schedules that are part of the System Agreement, and from subsequently enforcing that interpretation. The LPSC interpreted a System Agreement rate schedule in the unrelated case, and then sought to enforce its interpretation. The Louisiana Supreme Court affirmed. In January 2003, the U.S. Supreme Court granted Entergy Louisiana's request for a writ of certiorari for purposes of reviewing the decision of the LPSC and the Louisiana Supreme Court. Entergy cannot predict the timing or outcome of these proceedings.

                Market risk is the risk of changes in the value of commodity and financial instruments, or in future operating results or cash flows, in response to changing market conditions. Entergy is exposed to the following significant market risks:

• The commodity price risk associated with Entergy's Non-Utility Nuclear and Energy Commodity Services segments.
• The foreign currency exchange rate risk associated with certain of Entergy's contractual obligations.
• The interest rate and equity price risk associated with Entergy's investments in decommissioning trust funds.

Entergy is also exposed to credit risk. Credit risk is the risk of loss from nonperformance by suppliers, customers, or financial counterparties to a contract or agreement. Where it is a significant consideration, counterparty credit risk is addressed in the discussions that follow.

Power Generation

                The sale of electricity from the power generation plants owned by Entergy's Non-Utility Nuclear business and Energy Commodity Services, unless otherwise contracted, is subject to the fluctuation of market power prices. Entergy's Non-Utility Nuclear business has entered into power purchase agreements (PPAs) and other contracts to sell the power produced by its power plants at prices established in the PPAs. Entergy continues to pursue opportunities to extend the existing PPAs and to enter into new PPAs with other parties. Following is a summary of the amount of Entergy's Non-Utility Nuclear business' and Energy Commodity Services' output that is currently sold forward under physical or financial contracts at fixed prices: