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ENTERGY MISSISSIPPI, LLC - Quarter Report: 2007 September (Form 10-Q)

__________________________________________________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

X

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

   
 

For the Quarterly Period Ended September 30, 2007

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

   
 

For the transition period from ____________ to ____________


Commission
File Number

Registrant, State of Incorporation or Organization, Address of Principal Executive Offices, Telephone Number, and IRS Employer Identification No.

 


Commission
File Number

Registrant, State of Incorporation or Organization, Address of Principal Executive Offices, Telephone Number, and IRS Employer Identification No.

1-11299

ENTERGY CORPORATION
(a Delaware corporation)
639 Loyola Avenue
New Orleans, LA 70113
Telephone (504) 576-4000
72-1229752

 

1-31508

ENTERGY MISSISSIPPI, INC.
(a Mississippi corporation)
308 East Pearl Street
Jackson, Mississippi 39201
Telephone (601) 368-5000
64-0205830

         
         

1-10764

ENTERGY ARKANSAS, INC.
(an Arkansas corporation)
425 West Capitol Avenue
Little Rock, Arkansas 72201
Telephone (501) 377-4000
71-0005900

 

0-5807

ENTERGY NEW ORLEANS, INC.
(a Louisiana corporation)
1600 Perdido Street, Building 529
New Orleans, Louisiana 70112
Telephone (504) 670-3700
72-0273040

         
         

1-27031

ENTERGY GULF STATES, INC.
(a Texas corporation)
350 Pine Street
Beaumont, Texas 77701
Telephone (409) 838-6631
74-0662730

 

1-9067

SYSTEM ENERGY RESOURCES, INC.
(an Arkansas corporation)
Echelon One
1340 Echelon Parkway
Jackson, Mississippi 39213
Telephone (601) 368-5000
72-0752777

         
         

1-32718

ENTERGY LOUISIANA, LLC
(a Texas limited liability company)
446 North Boulevard
Baton Rouge, LA 70802
Telephone (225) 381-5868
75-3206126

     
         

__________________________________________________________________________________________

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

 

Large
accelerated
filer

 



Accelerated filer

 


Non-accelerated filer

Entergy Corporation

Ö

       

Entergy Arkansas, Inc.

       

Ö

Entergy Gulf States, Inc.

       

Ö

Entergy Louisiana, LLC

       

Ö

Entergy Mississippi, Inc.

       

Ö

Entergy New Orleans, Inc.

       

Ö

System Energy Resources, Inc.

       

Ö

Indicate by check mark whether the registrants are shell companies (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Common Stock Outstanding

 

Outstanding at October 31, 2007

Entergy Corporation

($0.01 par value)

194,376,164

Entergy Corporation, Entergy Arkansas, Inc., Entergy Gulf States, Inc., Entergy Louisiana, LLC, Entergy Mississippi, Inc., Entergy New Orleans, Inc., and System Energy Resources, Inc. separately file this combined Quarterly Report on Form 10-Q. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company reports herein only as to itself and makes no other representations whatsoever as to any other company. This combined Quarterly Report on Form 10-Q supplements and updates the Annual Report on Form 10-K for the calendar year ended December 31, 2006, and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007, filed by the individual registrants with the SEC, and should be read in conjunction therewith.

 

ENTERGY CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2007

 

Page Number

   

Definitions

1

Entergy Corporation and Subsidiaries

 
 

Management's Financial Discussion and Analysis

 
   

Hurricane Katrina and Hurricane Rita

5

Results of Operations

6

   

Liquidity and Capital Resources

14

   

Significant Factors and Known Trends

19

   

Critical Accounting Estimates

24

   

New Accounting Pronouncements

24

 

Consolidated Statements of Income

27

 

Consolidated Statements of Cash Flows

28

 

Consolidated Balance Sheets

30

 

Consolidated Statements of Retained Earnings, Comprehensive Income, and
  Paid-In Capital

32

 

Selected Operating Results

34

Notes to Financial Statements

35

Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk

59

Part I. Item 4. Controls and Procedures

59

Entergy Arkansas, Inc.

 
 

Management's Financial Discussion and Analysis

 
   

Results of Operations

60

   

Liquidity and Capital Resources

63

   

Significant Factors and Known Trends

64

   

Critical Accounting Estimates

65

   

New Accounting Pronouncements

66

 

Income Statements

67

 

Statements of Cash Flows

69

 

Balance Sheets

70

 

Selected Operating Results

72

Entergy Gulf States, Inc.

 
 

Management's Financial Discussion and Analysis

 
   

Hurricane Rita and Hurricane Katrina

73

   

Results of Operations

74

   

Liquidity and Capital Resources

78

   

Significant Factors and Known Trends

80

   

Critical Accounting Estimates

82

   

New Accounting Pronouncements

82

 

Consolidated Income Statements

83

 

Consolidated Statements of Cash Flows

85

 

Consolidated Balance Sheets

86

 

Consolidated Statements of Retained Earnings and Comprehensive Income

88

 

Selected Operating Results

89

Entergy Louisiana, LLC

 
 

Management's Financial Discussion and Analysis

 
   

Hurricane Rita and Hurricane Katrina

90

   

Results of Operations

90

   

Liquidity and Capital Resources

94

   

Significant Factors and Known Trends

96

   

Critical Accounting Estimates

97

   

New Accounting Pronouncements

97

 

Income Statements

98

 

Statements of Cash Flows

99

ENTERGY CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2007

 

Page Number

   
 

Balance Sheets

100

 

Statements of Members' Equity and Comprehensive Income

102

 

Selected Operating Results

103

Entergy Mississippi, Inc.

 
 

Management's Financial Discussion and Analysis

 
   

Results of Operations

104

   

Hurricane Katrina Storm Cost Recovery

106

 

 

Liquidity and Capital Resources

107

   

Significant Factors and Known Trends

108

Critical Accounting Estimates

109

   

New Accounting Pronouncements

109

 

Income Statements

110

 

Statements of Cash Flows

111

 

Balance Sheets

112

 

Selected Operating Results

114

Entergy New Orleans, Inc.

 
 

Management's Financial Discussion and Analysis

 
   

Hurricane Katrina

115

   

Bankruptcy Proceedings

115

   

Results of Operations

116

   

Liquidity and Capital Resources

119

   

Significant Factors and Known Trends

120

   

Critical Accounting Estimates

121

   

New Accounting Pronouncements

121

 

Income Statements

122

 

Statements of Cash Flows

123

 

Balance Sheets

124

 

Selected Operating Results

126

System Energy Resources, Inc.

 
 

Management's Financial Discussion and Analysis

 
   

Results of Operations

127

   

Liquidity and Capital Resources

127

   

Significant Factors and Known Trends

129

   

Critical Accounting Estimates

129

   

New Accounting Pronouncements

129

 

Income Statements

130

 

Statements of Cash Flows

130

 

Balance Sheets

132

Part II. Other Information

 
 

Item 1. Legal Proceedings

134

 

Item 1A. Risk Factors

134

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

134

 

Item 5. Other Information

135

 

Item 6. Exhibits

138

Signature

140

 

 

FORWARD-LOOKING INFORMATION

In this combined report and from time to time, Entergy Corporation and the Registrant Subsidiaries each makes statements as a registrant concerning its expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. Such statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "intends," "plans," "predicts," "estimates," and similar expressions are intended to identify forward-looking statements but are not the only means to identify these statements. Although each of these registrants believes that these forward-looking statements and the underlying assumptions are reasonable, it cannot provide assurance that they will prove correct. Any forward-looking statement is based on information current as of the date of this combined report and speaks only as of the date on which such statement is made. Except to the extent required by the federal securities laws, these registrants undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Forward-looking statements involve a number of risks and uncertainties. There are factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, including those factors discussed or incorporated by reference in (a) Item 1A. Risk Factors in the Form 10-K, (b) Management's Financial Discussion and Analysis in the Form 10-K and in this report, and (c) the following factors (in addition to others described elsewhere in this combined report and in subsequent securities filings):

  • resolution of pending and future rate cases and negotiations, including various performance-based rate discussions and implementation of Texas restructuring legislation, and other regulatory proceedings, including those related to Entergy's System Agreement, Entergy's utility supply plan, recovery of storm costs, and recovery of fuel and purchased power costs
  • Entergy's and its subsidiaries' ability to manage their operation and maintenance costs
  • 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, the operations of the independent coordinator of transmission that includes Entergy's utility service territory, and the application of market power criteria by the FERC
  • the economic climate, and particularly growth in Entergy's service territory
  • variations in weather and the occurrence of hurricanes and other storms and disasters, including uncertainties associated with efforts to remediate the effects of Hurricanes Katrina and Rita and recovery of costs associated with restoration including Entergy's ability to obtain financial assistance from governmental authorities in connection with these storms
  • the performance of Entergy's generating plants, and particularly the capacity factors at its nuclear generating facilities
  • changes in the financial markets, particularly those affecting the availability of capital and Entergy's ability to refinance existing debt, execute its share repurchase program, and fund investments and acquisitions
  • actions of rating agencies, including changes in the ratings of debt and preferred stock, changes in general corporate ratings, and changes in the rating agencies' ratings criteria
  • changes in inflation and interest rates
  • Entergy's ability to develop and execute on a point of view regarding future prices of electricity, natural gas, and other energy-related commodities
  • Entergy's ability to purchase and sell assets at attractive prices and on other attractive terms
  • prices for power generated by Entergy's unregulated generating facilities, the ability to hedge, sell power forward or otherwise reduce the market price risk associated with those facilities, including the Non-Utility Nuclear plants, and the prices and availability of fuel and power Entergy must purchase for its utility customers, and Entergy's ability to meet credit support requirements for fuel and power supply contracts
  • volatility and changes in markets for electricity, natural gas, uranium, and other energy-related commodities
  • changes in regulation of nuclear generating facilities and nuclear materials and fuel, including possible shutdown of nuclear generating facilities, particularly those in the Non-Utility Nuclear business
  • uncertainty regarding the establishment of interim or permanent sites for spent nuclear fuel storage and disposal

FORWARD-LOOKING INFORMATION (Concluded)

  • resolution of pending or future applications for license extensions or modifications of nuclear generating facilities
  • changes in law resulting from federal energy legislation, including the effects of PUHCA repeal and the adoption of the FERC reliability requirements
  • changes in environmental, tax, and other laws, including requirements for reduced emissions of sulfur, nitrogen, carbon, mercury, and other substances
  • advances in technology
  • the potential effects of threatened or actual terrorism and war
  • the effects of Entergy's strategies to reduce tax payments
  • the effects of litigation and government investigations
  • changes in accounting standards and corporate governance
  • Entergy's ability to attract and retain talented management and directors
  • And the following transactional factors (in addition to others described elsewhere in this and in subsequent securities filings): (i) risks inherent in the contemplated Non-Utility Nuclear spin-off, joint venture and related transactions (including the level of debt incurred by SpinCo and the terms and costs related thereto); (ii) legislative and regulatory actions; and (iii) conditions of the capital markets during the periods covered by the forward-looking statements.  Entergy Corporation cannot provide any assurances that the spin-off or any of the proposed transactions related thereto will be completed, nor can it give assurances as to the terms on which such transactions will be consummated. The transaction is subject to certain conditions precedent, including regulatory approvals and the final approval by the Board.

DEFINITIONS

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

Abbreviation or Acronym

Term

   

AEEC

Arkansas Electric Energy Consumers

AFUDC

Allowance for Funds Used During Construction

ALJ

Administrative Law Judge

ANO 1 and 2

Units 1 and 2 of Arkansas Nuclear One Steam Electric Generating Station (nuclear), owned by Entergy Arkansas

APSC

Arkansas Public Service Commission

Average contract price per MWh

Price at which generation output or capacity is expected to be sold to third parties, given existing contract or option exercise prices based on expected dispatch or capacity, excluding revenue associated with amortization of the below-market PPA for Palisades

Average contract revenue per MWh

Price at which the combination of generation output and capacity are expected to be sold to third parties, given existing contract or option exercise prices based on expected dispatch

Average realized price per MWh

Revenue per MWh billed

Board

Board of Directors of Entergy Corporation

Cajun

Cajun Electric Power Cooperative, Inc.

capacity factor

Actual plant output divided by maximum potential plant output for the period

City Council or Council

Council of the City of New Orleans, Louisiana

CPI-U

Consumer Price Index - Urban

DOE

United States Department of Energy

EITF

FASB's Emerging Issues Task Force

Entergy

Entergy Corporation and its direct and indirect subsidiaries

Entergy Corporation

Entergy Corporation, a Delaware corporation

Entergy-Koch

Entergy-Koch, LP, a joint venture equally owned by subsidiaries of Entergy and Koch Industries, Inc.

Entergy Louisiana

Entergy Louisiana, LLC

EPA

United States Environmental Protection Agency

ERCOT

Electric Reliability Council of Texas

FASB

Financial Accounting Standards Board

FEMA

Federal Emergency Management Agency

FERC

Federal Energy Regulatory Commission

firm liquidated damages

Transaction that requires receipt or delivery of energy at a specified delivery point (usually at a market hub not associated with a specific asset); if a party fails to deliver or receive energy, the defaulting party must compensate the other party as specified in the contract

Form 10-K

Annual Report on Form 10-K for the calendar year ended December 31, 2006 filed by Entergy Corporation and its Registrant Subsidiaries with the SEC

FSP

FASB Staff Position

Grand Gulf

Unit No. 1 of Grand Gulf Steam Electric Generating Station (nuclear), 90% owned or leased by System Energy

GWh

Gigawatt-hour(s), which equals one million kilowatt-hours

GWh billed

Total number of GWh billed to all customers

1

 

DEFINITIONS (Continued)

Abbreviation or Acronym

Term

   

Independence

Independence Steam Electric Station (coal), owned 16% by Entergy Arkansas, 25% by Entergy Mississippi, and 7% by Entergy Power

IRS

Internal Revenue Service

ISO

Independent System Operator

kV

Kilovolt

kW

Kilowatt

kWh

Kilowatt-hour(s)

LDEQ

Louisiana Department of Environmental Quality

LPSC

Louisiana Public Service Commission

Mcf

One thousand cubic feet of gas

MMBtu

One million British Thermal Units

MPSC

Mississippi Public Service Commission

MW

Megawatt(s), which equals one thousand kilowatt(s)

MWh

Megawatt-hour(s)

Nelson Unit 6

Unit No. 6 (coal) of the Nelson Steam Electric Generating Station, owned 70% by Entergy Gulf States

Net debt ratio

Gross debt less cash and cash equivalents divided by total capitalization less cash and cash equivalents

Net MW in operation

Installed capacity owned and operated

Net revenue

Operating revenue net of fuel, fuel-related, and purchased power expenses; and other regulatory credits

Non-Utility Nuclear

Entergy's business segment that owns and operates six nuclear power plants and sells electric power produced by those plants primarily to wholesale customers

NRC

Nuclear Regulatory Commission

NYPA

New York Power Authority

OASIS

Open Access Same Time Information Systems

PPA

Purchased power agreement

production cost

Cost in $/MMBtu associated with delivering gas, excluding the cost of the gas

PRP

Potentially responsible party (a person or entity that may be responsible for remediation of environmental contamination)

PUCT

Public Utility Commission of Texas

PUHCA 1935

Public Utility Holding Company Act of 1935, as amended

PUHCA 2005

Public Utility Holding Company Act of 2005, which repealed PUHCA 1935, among other things

PURPA

Public Utility Regulatory Policies Act of 1978

Registrant Subsidiaries

Entergy Arkansas, Inc., Entergy Gulf States, Inc., Entergy Louisiana, LLC, Entergy Mississippi, Inc., Entergy New Orleans, Inc., and System Energy Resources, Inc.

Ritchie Unit 2

Unit 2 of the R.E. Ritchie Steam Electric Generating Station (gas/oil)

River Bend

River Bend Steam Electric Generating Station (nuclear), owned by Entergy Gulf States

SEC

Securities and Exchange Commission

SFAS

Statement of Financial Accounting Standards as promulgated by the FASB

SMEPA

South Mississippi Electric Power Agency, which owns a 10% interest in Grand Gulf

2

DEFINITIONS (Concluded)

Abbreviation or Acronym

Term

   

System Agreement

Agreement, effective January 1, 1983, as modified, among the Utility operating companies relating to the sharing of generating capacity and other power resources

System Energy

System Energy Resources, Inc.

System Fuels

System Fuels, Inc.

TWh

Terawatt-hour(s), which equals one billion kilowatt-hours

unit-contingent

Transaction under which power is supplied from a specific generation asset; if the asset is unavailable, the seller is not liable to the buyer for any damages

Unit Power Sales Agreement

Agreement, dated as of June 10, 1982, as amended and approved by FERC, among Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy, relating to the sale of capacity and energy from System Energy's share of Grand Gulf

UK

The United Kingdom of Great Britain and Northern Ireland

Utility

Entergy's business segment that generates, transmits, distributes, and sells electric power, with a small amount of natural gas distribution

Utility operating companies

Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans

Waterford 3

Unit No. 3 (nuclear) of the Waterford Steam Electric Generating Station, 100% owned or leased by Entergy Louisiana

weather-adjusted usage

Electric usage excluding the estimated effects of deviations from normal weather

White Bluff

White Bluff Steam Electric Generating Station, 57% owned by Entergy Arkansas

3

 

ENTERGY CORPORATION AND SUBSIDIARIES

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

 

Entergy operates primarily through two business segments: Utility and Non-Utility Nuclear.

  • Utility generates, transmits, distributes, and sells electric power in a four-state service territory that includes portions of Arkansas, Mississippi, Texas, and Louisiana, including the City of New Orleans; and operates a small natural gas distribution business.
  • Non-Utility Nuclear owns and operates six nuclear power plants located in the northern United States and sells the electric power produced by those plants primarily to wholesale customers. This business also provides services to other nuclear power plant owners.

In addition to its two primary, reportable, operating segments, Entergy also operates the non-nuclear wholesale assets business. The non-nuclear wholesale assets business sells to wholesale customers the electric power produced by power plants that it owns while it focuses on improving performance and exploring sales or restructuring opportunities for its power plants.

Plan to Pursue Separation of Non-Utility Nuclear

In November 2007, the Board approved a plan to pursue a separation of the Non-Utility Nuclear business from Entergy through a tax-free spin-off of Non-Utility Nuclear to Entergy shareholders. SpinCo, the term used to identify the new company that is yet to be named, will be a new, independent company with publicly-traded common equity. In addition, under the plan, SpinCo and Entergy are expected to enter into a nuclear services joint venture, with 50% ownership by SpinCo and 50% ownership by Entergy. The joint venture board of directors will be comprised of equal membership from both Entergy and SpinCo.

At the time that the transaction is consummated under the current plan, Entergy Corporation's shareholders will own 100 percent of the common equity in both SpinCo and Entergy. Entergy expects that SpinCo's business will be comprised of Non-Utility Nuclear's assets, including its six nuclear power plants, and Non-Utility Nuclear's power marketing operation. Entergy Corporation's remaining business will primarily be comprised of the Utility business. Entergy expects to treat the results of Non-Utility Nuclear as discontinued operations after the spin-off is consummated. The nuclear services joint venture is expected to operate the nuclear assets owned by SpinCo. The joint venture is also expected to offer nuclear services to third parties, including decommissioning, plant relicensing, and plant operation administrative support services, including the services currently provided for the Cooper Nuclear Station in Nebraska.

Entergy Nuclear Operations, Inc. will supplement its application filed in July 2007 with the NRC, which seeks indirect transfer of control of the operating licenses for the six Non-Utility Nuclear power plants, to incorporate the planned business separation. Entergy Nuclear Operations, the current NRC-licensed operator of the Non-Utility Nuclear plants, will remain the operator of those plants after the separation.  Entergy Operations, Inc., the current NRC-licensed operator of Entergy's five Utility nuclear plants, will remain a wholly-owned subsidiary of Entergy and will continue to be the operator of the Utility nuclear plants.

Subject to market terms and conditions, pursuant to the plan it is expected that approximately $4.5 billion of debt financing would be incurred by SpinCo in connection with the separation. Potential uses of the proceeds could include repayment of Entergy Corporation indebtedness, share repurchases, additional investments, or other corporate purposes.

Entergy is targeting third quarter 2008 as the effective date for the spin-off and joint venture transactions to be completed. Entergy expects the transactions to qualify for tax-free treatment for U.S. federal income tax purposes for both Entergy and its shareholders. The transactions are subject to various approvals.  Final terms of the transactions and spin-off completion will be subject to the subsequent approval of the Board. As

 

4

 

Entergy pursues completion of the separation and establishment of the joint venture, Entergy will continue to consider possible modifications to and variations upon the transaction structure, including a sponsored spin-off, a partial initial public offering preceding the spin-off, or the addition of a third-party joint venture partner.

Hurricane Katrina and Hurricane Rita

See the Form 10-K for a discussion of the effects of Hurricanes Katrina and Rita, which in August and September 2005 caused catastrophic damage to portions of the Utility's service territory in Louisiana, Mississippi, and Texas, including the effect of extensive flooding that resulted from levee breaks in and around the greater New Orleans area. See Note 2 to the financial statements herein for a discussion of updates in Entergy Gulf States', Entergy Louisiana's, and Entergy Mississippi's storm cost recovery proceedings.

Entergy has received a total of $134.5 million as of September 30, 2007 on its Hurricane Katrina and Hurricane Rita insurance claims, including $69.5 million that Entergy received in the second quarter 2007 in settlement of its Hurricane Katrina claim with one of its excess insurers. Of the $134.5 million received, $70.7 million was allocated to Entergy New Orleans, $33.2 million to Entergy Gulf States, and $24.8 million to Entergy Louisiana. In the third quarter 2007, Entergy filed a lawsuit in the U.S. District Court for the Eastern District of Louisiana against its other excess insurer on the Hurricane Katrina claim. At issue in the lawsuit is whether any policy exclusions limit the extent of coverage provided by that insurer. Refer to Note 8 to the financial statements in the Form 10-K for a further description of Entergy's Hurricane Katrina and Hurricane Rita insurance claims and the non-nuclear property insurance coverage in place at the time the claims occurred.

Community Development Block Grant (CDBG)

See the Form 10-K for a discussion of the Katrina Relief Bill, a hurricane aid package that includes $11.5 billion in Community Development Block Grants (for the states affected by Hurricanes Katrina, Rita, and Wilma) that allows state and local leaders to fund individual recovery priorities.

In March 2007, the City Council certified that Entergy New Orleans has incurred $205 million in storm-related costs through December 2006 that are eligible for CDBG funding under the state action plan, and certified Entergy New Orleans' estimated costs of $465 million for its gas system rebuild. In April 2007, Entergy New Orleans executed an agreement with the Louisiana Office of Community Development under which $200 million of CDBG funds are being made available to Entergy New Orleans. Entergy New Orleans submitted the agreement to the bankruptcy court, which approved it on April 25, 2007. Entergy New Orleans has received $180.8 million of the funds as of September 30, 2007, and the remainder will be paid to Entergy New Orleans as it incurs and submits additional eligible costs.

Entergy New Orleans Bankruptcy

See the Form 10-K for a discussion of the Entergy New Orleans bankruptcy proceeding. On May 7, 2007, the bankruptcy judge entered an order confirming Entergy New Orleans' plan of reorganization. With the receipt of CDBG funds, and the agreement on insurance recovery with one of its excess insurers, Entergy New Orleans waived the conditions precedent in its plan of reorganization, and the plan became effective on May 8, 2007. See Note 9 to the financial statements for a description of the significant terms in Entergy New Orleans' plan of reorganization.

With confirmation of the plan of reorganization, Entergy reconsolidated Entergy New Orleans in the second quarter 2007, retroactive to January 1, 2007. Because Entergy owns all of the common stock of Entergy New Orleans, reconsolidation does not affect the amount of net income that Entergy recorded from Entergy New Orleans' operations for the current or prior period, but does result in Entergy New Orleans' financial results being included in each individual income statement line item in 2007, rather than only its net income being presented as "Equity in earnings (loss) of unconsolidated equity affiliates," as will remain the case for 2005 and 2006.

5

Results of Operations

Third Quarter 2007 Compared to Third Quarter 2006

Following are income statement variances for Utility, Non-Utility Nuclear, Parent & Other, and Entergy comparing the third quarter 2007 to the third quarter 2006 showing how much the line item increased or (decreased) in comparison to the prior period:

 


Utility

 

Non-Utility
Nuclear

 

Parent & Other (1)


Entergy

(In Thousands)

 

 

 

 

 

 

 

3rd Quarter 2006 Consolidated Net Income

 

$290,033 

 

$106,898 

 

($8,048)

$388,883 

Net revenue (operating revenue less fuel
  expense, purchased power, and other
  regulatory charges/credits)

 



116,058 



141,117 



(4,243)



252,932 

Other operation and maintenance expenses

 

37,714 

34,915 

3,755 

76,384 

Taxes other than income taxes

 

(11,582)

7,353 

(175)

(4,404)

Depreciation and amortization

 

(2,143)

8,616 

549 

7,022 

Other income

 

19,273 

(26,783)

(15,217)

(22,727)

Interest charges

 

20,754 

(3,039)

25,853 

43,568 

Other (including discontinued operations)

 

530 

(8,105)

619 

(6,956)

Income taxes

 

48,053 

4,369 

(24,019)

28,403 

3rd Quarter 2007 Consolidated Net Income

 

$333,098 

 

$160,913 

 

($32,852)

$461,159 

(1)

Parent & Other includes eliminations, which are primarily intersegment activity.

Refer to "ENTERGY CORPORATION AND SUBSIDIARIES - SELECTED OPERATING RESULTS" for further information with respect to operating statistics.

6

As discussed above, Entergy New Orleans has been reconsolidated retroactive to January 1, 2007 and its results are included in each individual income statement line item for 2007. The variance explanations for the Utility for the third quarter 2007 compared to the third quarter 2006 in "Results of Operations" below reflect the 2006 results of operations of Entergy New Orleans as if it were reconsolidated in 2006, consistent with the 2007 presentation including the results in each individual income statement line item. Entergy's as-reported results for the three months ended September 30, 2006, which had Entergy New Orleans deconsolidated, and the amounts needed to reconsolidate Entergy New Orleans, which include inter-company items, are set forth in the table below.

 

Three Months Ended September 30, 2006

  

Entergy Corporation
and Subsidiaries
(as reported)

 


Entergy
New Orleans adjustment*

 

(In Thousands)

Operating Revenues

$3,254,719 

 

$94,330 

Operating Expenses:

     

  Fuel, fuel-related, and gas purchased for resale and purchased power

1,595,335 

 

37,571 

  Other operation and maintenance

590,992 

 

24,763 

  Taxes other than income taxes

133,527 

 

9,165 

  Depreciation and amortization

232,042 

 

8,733 

  Other regulatory credits - net

(21,563)

 

1,040 

  Other operating expenses

79,978 

 

43 

Total Operating Expenses

$2,610,311 

 

$81,315 

Other Income

$91,177 

 

($7,462)

Interest and Other Charges

$143,215 

 

$410 

Income From Continuing Operations Before Income Taxes

$592,370 

 

$5,143 

Income Taxes

$202,437 

 

$5,143 

Income From Continuing Operations

$389,933 

 

$ - 

Loss From Discontinued Operations

($1,050)

 

$ - 

Consolidated Net Income

$388,883 

 

$ - 

*

Reflects the adjustment needed to reconsolidate Entergy New Orleans for 2006. The adjustment includes intercompany eliminations.

Net Revenue

Utility

Following is an analysis of the change in net revenue comparing the third quarter 2007 to the third quarter 2006.

  

 

Amount

  

 

(In Millions)

2006 net revenue (includes $55.8
   million for Entergy New Orleans)

 

$1,355.1 

Fuel recovery

 

32.6 

Volume/weather

 

17.4 

Base revenues

 

15.7 

Net wholesale revenue

 

15.5 

Pass-through rider revenue

 

(12.4)

Purchased power capacity

 

(18.5)

Other

 

10.0 

2007 net revenue

 

$1,415.4 

7

The fuel recovery variance is due to increased recovery in the third quarter 2007 of fuel costs from retail and special rate customers in addition to purchased power costs deferred at Entergy Louisiana and Entergy New Orleans as a result of the re-pricing, retroactive to 2003, of purchased power agreements among Entergy system companies as directed by the FERC.

The volume/weather variance resulted primarily from increased usage primarily during the unbilled sales period. See Note 1 to the financial statements in the Form 10-K for a discussion of the accounting for unbilled revenues.

The base revenues variance resulted from rate increases primarily at Entergy Louisiana effective September 2006 for the 2005 formula rate plan filing to recover LPSC-approved incremental deferred and ongoing purchased power capacity costs. The formula rate plan filing is discussed in Note 2 to the financial statements in the Form 10-K.

The net wholesale revenue variance is primarily a result of lower wholesale revenues in the third quarter 2006 due to an October 2006 FERC order requiring Entergy Arkansas to make a refund to a coal plant co-owner resulting from a contract dispute.

The pass-through rider revenue variance is primarily due to a change effective in the third quarter 2006 in the accounting for city franchise tax revenues in Arkansas as directed by the APSC. The change resulted in an increase in rider revenue in 2006 with a corresponding increase in taxes other than income taxes, resulting in no effect on net income.

The purchased power capacity variance is due to higher capacity charges. A portion of the variance is due to the amortization of deferred capacity costs and is offset in base revenues due to base rate increases implemented to recover incremental deferred and ongoing purchased power capacity charges at Entergy Louisiana, as discussed above.

Non-Utility Nuclear

Net revenue increased for Non-Utility Nuclear from $364 million for the third quarter 2006 to $506 million for the third quarter 2007 primarily due to higher pricing in its contracts to sell power and additional production available resulting from the acquisition of the Palisades plant in April 2007. Amortization of the Palisades purchased power agreement liability, which is discussed in Note 5 to the financial statements, also contributed to the increase. The increase was partially offset by the effect on revenues of a scheduled refueling outage and an unplanned outage during the third quarter 2007. Following are key performance measures for Non-Utility Nuclear for the third quarters of 2007 and 2006:

 

 

2007

 

2006

 

 

 

 

 

Net MW in operation at September 30

 

4,998

 

4,200

Average realized price per MWh

 

$53.11

 

$44.90

GWh billed

 

10,105

 

9,119

Capacity factor

 

93%

 

99%

Other Income Statement Items

Utility

Taxes other than income taxes decreased for the Utility from $127 million for the third quarter 2006 to $107 million for the third quarter 2007 primarily due to an increase in city franchise taxes in Arkansas in 2006 as a result of a change effective in August 2006 in the accounting for city franchise tax revenues as directed by the APSC. The change resulted in an increase in taxes other than income taxes in 2006 with a corresponding increase in rider revenue, resulting in no effect on net income.

 

8

 

Other income increased for Utility from $19 million for the third quarter 2006 to $46 million for the third quarter 2007 primarily due to carrying charges on storm restoration costs.

Interest and other charges increased for Utility from $100 million for the third quarter 2006 to $121 million for the third quarter 2007 primarily due to the following:

  • interest on first mortgage bonds primarily at Entergy New Orleans. On September 23, 2006, when the one-year interest moratorium agreed to by the bondholders expired, Entergy New Orleans resumed interest accruals on its outstanding first mortgage bonds;
  • interest on securitization bonds issued during the second quarter 2007 at Entergy Gulf States;
  • interest on Entergy New Orleans' third-party accounts payable pursuant to its plan of reorganization, as discussed above under "Hurricane Katrina and Hurricane Rita - Entergy New Orleans Bankruptcy" and
  • interest recorded on advances from independent power producers.

Non-Utility Nuclear

Other operation and maintenance expenses increased for Non-Utility Nuclear from $163 million for the third quarter 2006 to $198 million for the third quarter 2007 primarily due to the acquisition of the Palisades plant in April 2007.

Other income decreased for Non-Utility Nuclear from $46 million for the third quarter 2006 to $19 million for the third quarter 2007 primarily due to miscellaneous income of $27 million ($16.6 million net-of-tax) recorded in the third quarter 2006 resulting from a reduction in the decommissioning liability for a plant as a result of revised decommissioning costs and changes in assumptions regarding the timing of when decommissioning of the plant will begin.

Parent & Other

Interest charges increased for Parent & Other from $32 million for the third quarter 2006 to $58 million for the third quarter 2007 primarily due to additional borrowings on Entergy Corporation's revolving credit facilities.

Income Taxes

The effective income tax rate for the third quarter 2007 was 33.1%. The reduction in the effective income tax rate versus the federal statutory rate of 35% is primarily due to:

  • an adjustment to state income taxes for Non-Utility Nuclear to reflect the effect of a change in the methodology of computing New York state income taxes as required by that state's taxing authority;
  • book and tax differences related to the allowance for equity funds used during construction; and
  • the amortization of investment tax credits.

These factors were partially offset by book and tax differences for utility plant items and state income taxes at the Utility operating companies.

The effective income tax rate for the third quarter 2006 was 33.8%. The reduction in the effective income tax rate for the third quarter 2006 versus the federal statutory rate of 35.0% is primarily due to the flow-through of a pension item and the favorable resolution of a tax audit issue, partially offset by state income taxes.

9

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Following are income statement variances for Utility, Non-Utility Nuclear, Parent & Other, and Entergy comparing the nine months ended September 30, 2007 to the nine months ended September 30, 2006 showing how much the line item increased or (decreased) in comparison to the prior period:

 


Utility

 

Non-Utility
Nuclear

 

Parent & Other (1)


Entergy

(In Thousands)

 

 

 

 

 

 

 

2006 Consolidated Net Income

 

$609,407 

 

$251,806 

 

$3,101 

$864,314 

Net revenue (operating revenue less fuel
  expense, purchased power, and other
  regulatory charges/credits)

 



252,850 



304,658 



(65,215)



492,293 

Other operation and maintenance expenses

 

146,713 

51,263 

(20,209)

177,767 

Taxes other than income taxes

 

25,618 

10,212 

4,328 

40,158 

Depreciation and amortization

 

37,365 

16,045 

1,343 

54,753 

Other income

 

23,195 

(16,756)

(4,305)

2,134 

Interest charges

 

35,666 

(11,787)

53,098 

76,977 

Other (including discontinued operations)

 

2,106 

(17,382)

(13,667)

(28,943)

Income taxes

 

56,455 

58,785 

(76,053)

39,187 

2007 Consolidated Net Income

 

$585,741 

 

$397,808 

 

($42,593)

$940,956 

(1)

Parent & Other includes eliminations, which are primarily intersegment activity.

Refer to "ENTERGY CORPORATION AND SUBSIDIARIES - SELECTED OPERATING RESULTS" for further information with respect to operating statistics.

10

The variance explanations for the Utility for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 in "Results of Operations" below reflect the 2006 results of operations of Entergy New Orleans as if it were reconsolidated in 2006, consistent with the 2007 presentation including the results in each individual income statement line item. Entergy's as-reported results for the nine months ended September 30, 2006, which had Entergy New Orleans deconsolidated, and the amounts needed to reconsolidate Entergy New Orleans, which include inter-company items, are set forth in the table below.

 

Nine Months Ended Sept. 30, 2006

  

Entergy Corporation
and Subsidiaries
(as reported)

 


Entergy
New Orleans adjustment*

 

(In Thousands)

Operating Revenues

$8,451,254

 

$227,484 

Operating Expenses:

     

   Fuel, fuel-related, and gas purchased for resale and purchased power

4,135,902 

 

78,827 

   Other operation and maintenance

1,693,657 

 

56,877 

   Taxes other than income taxes

327,995 

 

25,853 

   Depreciation and amortization

655,374 

 

24,621 

   Other regulatory credits - net

(124,509)

 

3,120 

   Other operating expenses

236,371 

 

126 

Total Operating Expenses

$6,924,790 

 

$189,424 

Other Income

$192,413 

 

($22,475)

Interest and Other Charges

$420,223 

 

$273 

Income From Continuing Operations Before Income Taxes

$1,298,654 

 

$15,312 

Income Taxes

$444,170 

 

$15,312 

Income From Continuing Operations

$854,484 

 

$ - 

Income From Discontinued Operations

$9,830 

 

$ - 

Consolidated Net Income

$864,314 

 

$ - 

*

Reflects the adjustment needed to reconsolidate Entergy New Orleans for 2006. The adjustment includes intercompany eliminations.

Net Revenue

Utility

Following is an analysis of the change in net revenue comparing the nine months ended September 30, 2007 to the nine months ended September 30, 2006.

  

 

Amount

  

 

(In Millions)

2006 net revenue (includes $145.6
  million for Entergy New Orleans)

 

$3,444.9 

Base revenues

 

80.8 

Volume/weather

 

74.8 

Fuel recovery

 

40.1 

Transmission revenue

 

28.3 

Purchased power capacity

 

(86.5)

Net wholesale revenue

 

(49.8)

Other

 

19.6 

2007 net revenue

 

$3,552.2 

11

The base revenues variance resulted from rate increases primarily at Entergy Louisiana effective September 2006 for the 2005 formula rate plan filing to recover LPSC-approved incremental deferred and ongoing purchased power capacity costs. The formula rate plan filing is discussed in Note 2 to the financial statements in the Form 10-K.

The volume/weather variance resulted primarily from increased electricity usage, including increased usage during the unbilled sales period. Billed usage increased by a total of 1,110 GWh, an increase of 1.5%. See Note 1 to the financial statements in the Form 10-K for a discussion of the accounting for unbilled revenues.

The fuel recovery variance is due to the inclusion of Grand Gulf costs in Entergy New Orleans' fuel recoveries effective July 1, 2006. In June 2006, the City Council approved the recovery of Grand Gulf costs through the fuel adjustment clause, without a corresponding change in base rates (a significant portion of Grand Gulf costs was previously recovered through base rates). The increase is also due to purchased power costs deferred at Entergy Louisiana and Entergy New Orleans as a result of the re-pricing, retroactive to 2003, of purchased power agreements among Entergy system companies as directed by the FERC.

The transmission revenue variance is due to higher rates and the addition of new transmission customers in late-2006.

The purchased power capacity variance is due to higher capacity charges and new purchased power contracts that began in mid-2006. A portion of the variance is due to the amortization of deferred capacity costs and is offset in base revenues due to base rate increases implemented to recover incremental deferred and ongoing purchased power capacity charges at Entergy Louisiana, as discussed above.

The net wholesale revenue variance is due primarily to 1) more energy available for resale at Entergy New Orleans in 2006 due to the decrease in retail usage caused by customer losses following Hurricane Katrina and 2) the inclusion in 2006 revenue of sales into the wholesale market of Entergy New Orleans' share of the output of Grand Gulf, pursuant to City Council approval of measures proposed by Entergy New Orleans to address the reduction in Entergy New Orleans' retail customer usage caused by Hurricane Katrina and to provide revenue support for the costs of Entergy New Orleans' share of Grand Gulf. The net wholesale revenue variance is partially offset by the effect of lower wholesale revenues in the third quarter 2006 due to an October 2006 FERC order requiring Entergy Arkansas to make a refund to a coal plant co-owner resulting from a contract dispute.

Non-Utility Nuclear

Net revenue increased for Non-Utility Nuclear from $1,041 million for the nine months ended September 30, 2006 to $1,346 million for the nine months ended September 30, 2007 primarily due to higher pricing in its contracts to sell power and additional production available resulting from the acquisition of the Palisades plant in April 2007. Amortization of the Palisades purchased power agreement liability, which is discussed in Note 5 to the financial statements, also contributed to the increase. The increase was partially offset by the effect on revenues of more refueling outages in 2007 as compared to the same period in 2006. Following are key performance measures for Non-Utility Nuclear for the nine months ended September 30, 2007 and 2006:

 

 

2007

 

2006

 

 

 

 

 

Net MW in operation at Sept 30

 

4,998

 

4,200

Average realized price per MWh

 

$53.12

 

$44.33

GWh billed

 

27,315

 

26,163

Capacity factor

 

88%

 

95%

12

Parent & Other

Net revenue decreased for Parent & Other from $99 million for the nine months ended September 30, 2006 to $34 million for the nine months ended September 30, 2007 primarily due to the $14.1 million gain ($8.6 million net-of-tax) realized on the sale of the non-nuclear wholesale asset business' remaining interest in a power development project in the second quarter 2006. Also contributing to the decrease were higher natural gas prices in 2007 compared to the same period in 2006 as well as lower production as a result of an additional plant outage in 2007 compared to the same period in 2006. A substantial portion of the effect on net income of this decline is offset by a related decrease in other operation and maintenance expenses.

Other Income Statement Items

Utility

Other operation and maintenance expenses increased from $1,238 million for the nine months ended September 30, 2006 to $1,328 million for the nine months ended September 30, 2007 primarily due to:

  • an increase of $31 million in distribution expenses, including higher contract labor costs, increases in vegetation maintenance costs, and the return to normal operations work in 2007 versus storm restoration activities in 2006 as a result of Hurricane Katrina and Hurricane Rita;
  • an increase of $21 million in transmission expenses, including transmission line and substation maintenance and independent coordinator of transmission expenses;
  • an increase of $21 million in nuclear expenses primarily due to non-refueling outages, increased nuclear labor and contract costs, and higher NRC fees;
  • an increase of $11 million as a result of higher insurance premiums due to amending coverage in mid-2006 in addition to the timing of premium payments compared to 2006;
  • an increase of $11 million due to a provision for storm-related bad debts;
  • an increase of $9 million in customer service costs primarily as a result of the write-off of uncollectible customer accounts; and
  • an increase of $6 million in fossil plant expenses due to the return to normal operations work in 2007 versus storm restoration activities in 2006 as a result of Hurricane Katrina and differing outage schedules and scopes from 2006 to 2007.

The increase is partially offset by a decrease of $33 million in payroll, payroll-related, and benefits costs.

Depreciation and amortization expenses increased from $618 million for the nine months ended September 30, 2006 to $630 million for the nine months ended September 30, 2007 primarily due to an increase in plant in service and a revision made in the first quarter 2006 to estimated depreciable lives involving certain intangible assets. The increase was partially offset by a revision in the third quarter 2007 related to depreciation previously recorded on storm-related assets. Recovery of the cost of those assets will now be through the securitization of storm costs approved by the LPSC in the third quarter 2007. The securitization approval is discussed in Note 2 to the financial statements.

Other income increased from $84 million for the nine months ended September 30, 2006 to $129 million for the nine months ended September 30, 2007 primarily due to carrying charges on storm restoration costs.

Interest and other charges increased from $289 million for the nine months ended September 30, 2006 to $324 million for the nine months ended September 30, 2007 primarily due to the following:

  • interest on first mortgage bonds primarily at Entergy New Orleans. On September 23, 2006, when the one-year interest moratorium agreed to by the bondholders expired, Entergy New Orleans resumed interest accruals on its outstanding first mortgage bonds;
  • interest on securitization bonds issued during the second quarter 2007 at Entergy Gulf States;

 

13

 

  • interest on Entergy New Orleans' third-party accounts payable pursuant to its plan of reorganization, as discussed above under "Hurricane Katrina and Hurricane Rita - Entergy New Orleans Bankruptcy" and
  • interest recorded on advances from independent power producers.

Non-Utility Nuclear

Other operation and maintenance expenses increased from $469 million for the nine months ended September 30, 2006 to $520 million for the nine months ended September 30, 2007 primarily due to the acquisition of the Palisades plant in April 2007.

Parent & Other

Interest charges increased from $95 million for the nine months ended September 30, 2006 to $148 million for the nine months ended September 30, 2007 primarily due to additional borrowings under Entergy Corporation's revolving credit facilities.

Income Taxes

The effective income tax rate for the nine months ended September 30, 2007 was 33.5%. The reduction in the effective income tax rate versus the federal statutory rate of 35% for the nine months ended September 30, 2007 is primarily due to:

These factors were partially offset by book and tax differences for utility plant items and state income taxes at the Utility operating companies.

The effective income tax rate for the nine months ended September 30, 2006 was 33.6%. The reduction in the effective income tax rate for the nine months ended September 30, 2006 versus the federal statutory rate of 35.0% is primarily due to:

  • the flow-through of a pension item;
  • the recognition of an income tax benefit related to ANO 1 steam generator removal cost; and
  • the favorable resolution of a tax audit issue.

These factors were partially offset by state income taxes.

Liquidity and Capital Resources

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources" in the Form 10-K for a discussion of Entergy's capital structure, capital expenditure plans and other uses of capital, and sources of capital. Following are updates to that discussion.

14

Capital Structure

Entergy's capitalization is balanced between equity and debt, as shown in the following table. The increase in the debt to capital percentage from 2006 to 2007 is primarily the result of additional borrowings under Entergy Corporation's revolving credit facilities, along with a decrease in shareholders' equity primarily due to repurchases of common stock.

 

 

September 30,
2007

 

December 31,
2006

 

 

 

 

 

Net debt to net capital

 

53.9%

 

49.4%

Effect of subtracting cash from debt

 

3.4%

 

2.9%

Debt to capital

 

57.3%

 

52.3%

Net debt consists of debt less cash and cash equivalents. Debt consists of notes payable, capital lease obligations, preferred stock with sinking fund, and long-term debt, including the currently maturing portion. Capital consists of debt, common shareholders' equity, and preferred stock without sinking fund. Net capital consists of capital less cash and cash equivalents. Entergy uses the net debt to net capital ratio in analyzing its financial condition and believes it provides useful information to its investors and creditors in evaluating Entergy's financial condition.

As discussed in the Form 10-K, Entergy Corporation had in place two separate revolving credit facilities, a five-year credit facility and a three-year credit facility. The five-year credit facility was due to expire in May 2010 and the three-year facility was due to expire in December 2008.

In August 2007, Entergy Corporation entered into a new, $3.5 billion, five-year credit facility, and terminated the two previously existing facilities. Entergy Corporation has the ability to issue letters of credit against the total borrowing capacity of the facility. The weighted average interest rate as of September 30, 2007 was 5.88% on the drawn portion of the facility. The facility fee is currently 0.09% of the commitment amount. The facility fee and interest rate can fluctuate depending on the senior unsecured debt ratings of Entergy Corporation.

As of September 30, 2007, amounts outstanding under the $3.5 billion credit facility are:


Capacity

 


Borrowings

 

Letters
of Credit

 

Capacity
Available

(In Millions)

             

$3,500 

 

$2,116 

 

$71 

 

$1,313

See Note 4 to the financial statements for additional discussion of Entergy's credit facilities.

Capital Expenditure Plans and Other Uses of Capital

See the table in the Form 10-K under "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources - Capital Expenditure Plans and Other Uses of Capital," which sets forth the amounts of planned construction and other capital investments by operating segment for 2007 through 2009.

Entergy is developing its capital plan for 2008 through 2010 and currently anticipates making $5.9 billion in capital investments during that period, including approximately $2.7 billion for maintenance of Entergy's existing assets ($2.5 billion for Utility and $0.2 billion for Non-Utility Nuclear). The remaining $3.2 billion ($2.5 billion for Utility and $0.7 billion for Non-Utility Nuclear) is associated with specific investments such as the pending Ouachita and Calcasieu acquisitions, the Little Gypsy repowering, replacement of the Waterford 3 steam generators, environmental compliance spending, transmission upgrades, business function relocation, dry cask storage and nuclear license renewal projects, NYPA value sharing costs and other investments, such as potential opportunities through the Utility's supply plan initiatives that support its ability

 

15

 

to meet load growth. The planned capital investment estimate does not include the costs associated with the potential interconnection between Entergy Gulf States and ERCOT that is discussed in Note 2 to the financial statements. These potential costs are currently estimated to be approximately $1 billion.

 

In April 2007, Entergy's Non-Utility Nuclear business purchased the 798 MW Palisades nuclear energy plant located near South Haven, Michigan from Consumers Energy Company for a net cash payment of $336 million. Entergy received the plant, nuclear fuel, inventories, and other assets. The liability to decommission the plant, as well as related decommissioning trust funds, was also transferred to Entergy's Non-Utility Nuclear business. Entergy's Non-Utility Nuclear business executed a unit-contingent, 15-year purchased power agreement (PPA) with Consumers Energy for 100% of the plant's output, excluding any future uprates. Prices under the PPA range from $43.50/MWh in 2007 to $61.50/MWh in 2022, and the average price under the PPA is $51/MWh. In the first quarter 2007, the NRC renewed Palisades' operating license until 2031. Also as part of the transaction, Entergy's Non-Utility Nuclear business assumed responsibility for spent fuel at the decommissioned Big Rock Point nuclear plant, which is located near Charlevoix, Michigan.  Palisades' financial results since April 2007 are included in Entergy's Non-Utility Nuclear business segment. See Note 5 to the financial statements herein for a discussion of the purchase price allocation and the amortization to revenue of the below-market PPA.

In April 2007, Entergy Louisiana announced that it plans to pursue the self-build solid fuel repowering of a 538 MW unit at its Little Gypsy plant.  Petroleum coke and coal will be the unit's primary fuel sources.  In July 2007, Entergy Louisiana filed with the LPSC for approval of the repowering project, and stated that it expects to spend $1.55 billion on the project. In addition to seeking a finding that the project is in the public interest, the filing with the LPSC asks that Entergy Louisiana be allowed to recover a portion of the project's financing costs during the construction period. Hearings were held in October 2007 and an LPSC decision could come in the fourth quarter 2007. Entergy Louisiana expects the project to be completed in 2011-2012. The planned capital investment estimate in the Form 10-K included capital required for a project of this type, although Entergy Louisiana now expects to spend approximately $100 million more through 2009 than the amounts included in the Form 10-K for the project.

In July 2007, Entergy Arkansas signed an agreement to purchase for $210 million the Ouachita Power Facility, a 789 MW natural gas-fired, combined-cycle, load-following generating facility located in north Louisiana and owned by Quachita Power, LLC.  Entergy Arkansas also plans to invest approximately $43 million in plant upgrades and transaction costs.  Upgrades to the Utility operating companies' transmission system also are expected to be required to obtain long-term transmission service for this resource.  The identity and cost of the transmission upgrades have not yet been determined definitively; additional transmission studies are currently underway.  The initial results of those additional studies are expected by the end of November 2007.  The Ouachita plant will be 100 percent owned by Entergy Arkansas, and the acquisition is expected to close in 2008.  Entergy Arkansas expects to sell to Entergy Gulf States-Louisiana, under a separate agreement, approximately one-third of the output of the Ouachita plant on a long-term basis.  The purchase of the plant is contingent upon obtaining necessary approvals, including full cost recovery, from various federal and state regulatory and permitting agencies.  Entergy Arkansas filed with the APSC in September 2007 for its approval of the acquisition, including full cost recovery, and the APSC approved a bifurcated procedural schedule whereby a hearing will be conducted first on an interim tolling agreement connected with the acquisition in December 2007, with a later hearing on the acquisition being conducted by April 2008.  APSC staff and Arkansas attorney general witnesses have filed testimony that generally oppose cost recovery by a separate rider, but argue that the cost recovery should be by the annual earnings review process currently being developed. An APSC staff witness also opposes allocating one-third of the output for sale to Entergy Gulf States-Louisiana. In November 2007, Entergy Gulf States filed a request with the LPSC for authorization for Entergy Gulf States-Louisiana to purchase one-third of the capacity and energy of the Ouachita plant during the term of the interim tolling agreement and for authorization for Entergy Gulf States-Louisiana to purchase one-third of the plant's capacity and energy on a life-of-unit basis after the plant's acquisition. The planned capital investments estimate in the Form 10-K included $190 million in 2008 for the estimated cost of an acquisition of this type.

Entergy Louisiana plans to replace the Waterford 3 steam generators, along with the reactor vessel closure head and control element drive mechanisms, in 2011.  Replacement of these components is common to pressurized water reactors throughout the nuclear industry.  The nuclear

 

16

 

 

industry continues to address susceptibility to stress corrosion cracking of certain materials associated with these components within the reactor coolant system.  The issue is applicable to Waterford 3 and is managed in accordance with standard industry practices and guidelines.  Routine inspections of the steam generators during Waterford 3's Fall 2006 refueling outage identified additional degradation of certain tube spacer supports in the steam generators that required repair beyond that anticipated prior to the outage.  Corrective measures were successfully implemented to permit continued operation of the steam generators. While potential future replacement of these components had been contemplated, the discovery of the additional steam generator degradation necessitates replacement of the steam generators as soon as reasonably achievable.  2011 is the earliest that new steam generators can be manufactured and delivered for installation. The reactor vessel head and control element drive mechanisms will be replaced at the same time, utilizing the same reactor building construction opening that is necessary for the steam generator replacement.  Entergy Louisiana estimates that it will spend approximately $485 million on this project.

Entergy now expects to spend $73 million more through 2008 than the amount included in the Form 10-K planned capital investment estimate for initial development costs for potential new nuclear development at the Grand Gulf and River Bend sites, including licensing and design activities.

Dividends

On July 30, 2007, the Board declared a quarterly dividend per Entergy Corporation common share of $0.75, which is an increase from the prior quarterly dividend per share of $0.54. On October 26, 2007, the Board also declared a quarterly dividend per Entergy Corporation common share of $0.75. 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.

Debtor-in-Possession Credit Agreement

See the Form 10-K for a discussion of the Entergy New Orleans debtor-in-possession (DIP) credit facility between Entergy New Orleans as borrower and Entergy Corporation as lender. Pursuant to the terms of its plan of reorganization, which became effective in May 2007, Entergy New Orleans fully repaid its DIP credit facility borrowings.

Cash Flow Activity

As shown in Entergy's Statements of Cash Flows, cash flows for the nine months ended September 30, 2007 and 2006 were as follows:

 

 

2007

 

2006

 

 

(In Millions)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$1,016 

 

$583 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

1,626 

 

2,257 

 

Investing activities

 

(1,451)

 

(1,395)

 

Financing activities

 

258 

 

(699)

Effect of exchange rates on cash and cash equivalents

(1)

Net increase in cash and cash equivalents

 

433 

 

162 

 

 

 

 

 

Effect of reconsolidating Entergy New Orleans in 2007

17 

Cash and cash equivalents at end of period

 

$1,466 

 

$745 

17

Operating Activities

Entergy's cash flow provided by operating activities decreased by $631 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. Following are cash flows from operating activities by segment:

  • Utility provided $1,212 million in cash from operating activities in 2007 compared to providing $1,683 million in 2006, primarily due to decreased collection of fuel costs, the catch-up in receivable collections in 2006 due to delays caused by the hurricanes in 2005, and the receipt of an income tax refund in 2006 compared to income tax payments being made in 2007, partially offset by the receipt of $181 million of Community Development Block Grant funds by Entergy New Orleans in 2007, significant storm restoration spending in 2006, and a decrease in the amount of pension funding payments in 2007. A $344 million income tax refund was received by Entergy Corporation in 2006 (including $71 million attributable to Entergy New Orleans) as a result of net operating loss carry back provisions contained in the Gulf Opportunity Zone Act of 2005. In accordance with Entergy's intercompany tax allocation agreement, $273 million of the refund was distributed to the Utility business in April 2006, with most of the remainder distributed to Non-Utility Nuclear.
  • Non-Utility Nuclear provided $535 million in cash from operating activities in 2007 compared to providing $648 million in 2006. The decrease is due to the receipt of income tax refunds in 2006 compared to income tax payments being made in 2007, along with spending associated with four refueling outages in 2007 compared to one in 2006. The decrease was offset partially by the cash flows attributable to higher net revenue.
  • Parent & Other used $120 million in cash in operating activities in 2007 compared to $75 million in 2006, primarily due to an increase in interest payments by Entergy Corporation.

Investing Activities

Net cash used in investing activities increased by $56 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. The following activity is notable in comparing the nine months ended September 30, 2007 to the nine months ended September 30, 2006:

  • Construction expenditures were $169 million lower in 2007 than in 2006, primarily due to storm restoration expenditures by the Utility in 2006.
  • Non-Utility Nuclear purchased the Palisades power plant in April 2007.
  • Entergy Mississippi purchased the Attala power plant in January 2006.
  • Insurance proceeds received increased by $64 million in 2007 because of payments received on Hurricane Katrina and Hurricane Rita claims.
  • In 2006, Entergy received proceeds from the sale of the retail electric portion of the Competitive Retail Services business operating in the ERCOT region of Texas and the sale of the non-nuclear wholesale asset business' remaining interest in a power development project.

Financing Activities

Financing activities provided $258 million of cash for the nine months ended September 30, 2007 compared to using $699 million of cash for the nine months ended September 30, 2006. The following activity is notable in comparing the nine months ended September 30, 2007 to the nine months ended September 30, 2006:

  • Entergy Corporation increased the net borrowings under its credit facilities by $1,296 million in 2007, compared to decreasing the net borrowings under its credit facilities by $290 million in 2006. See Note 4 to the financial statements for a description of the Entergy Corporation credit facilities.
  • A subsidiary of Entergy Gulf States issued $329.5 million of securitization bonds in June 2007. See Note 4 to the financial statements for additional information regarding the securitization bonds.
  • Entergy Mississippi redeemed $100 million of first mortgage bonds in 2007 and issued $100 million of first mortgage bonds in 2006.

 

18

 

  • Entergy Corporation repurchased $1,024 million of its common stock in 2007, and did not repurchase any shares of its common stock in 2006.
  • Entergy Louisiana Holdings, Inc. redeemed all $100.5 million of its outstanding preferred stock in June 2006.
  • Entergy Arkansas borrowed $60 million against its credit facility in 2007 and Entergy Louisiana repaid $40 million in borrowings against its credit facility in 2006.

Significant Factors and Known Trends

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends" in the Form 10-K for discussions of rate regulation, federal regulation, and market and credit risk sensitive instruments. Following are updates to the information provided in the Form 10-K.

State and Local Rate Regulation

See the Form 10-K for a chart summarizing material rate proceedings. See Note 2 to the financial statements herein for updates to the proceedings discussed in that chart.

Federal Regulation

See the Form 10-K for a discussion of federal regulatory proceedings. Following are updates to that discussion.

System Agreement Proceedings

Rough Production Cost Equalization proceeding

In May 2007 Entergy filed with the FERC the rates to implement the FERC's orders in the System Agreement proceeding that are discussed in the Form 10-K. The filing shows the following payments/receipts among the Utility operating companies for 2007, based on calendar year 2006 production costs, commencing for service in June 2007, are necessary to achieve rough production cost equalization as defined by the FERC's orders:

 

Payments or
(Receipts)

 

(In Millions)

Entergy Arkansas

$252

Entergy Gulf States

($120)

Entergy Louisiana

($91)

Entergy Mississippi

($41)

Entergy New Orleans

$0

Several parties intervened in the rate proceeding at the FERC, including the APSC, the MPSC, the Council, and the LPSC, which have also filed protests. Certain Entergy Arkansas wholesale customers also intervened, raising issues regarding whether the bandwidth payments are properly reflected in the wholesale rate that Entergy Arkansas charges. The APSC, the MPSC, and the Council ask the FERC to confirm that the FERC did not intend to preempt a retail regulator from undertaking an independent prudence review of the production costs in setting retail rates, or ask the FERC to set the rough production cost equalization payments/receipts for hearing to allow the retail regulators the opportunity to evaluate the prudence of the underlying production costs. In July 2007, the FERC accepted the proposed rates for filing, allowed them to go into effect as of June 1, 2007, subject to refund, and set the filing, including the calculation and underlying production costs, for hearing and settlement procedures. Settlement procedures have been terminated, and the proceeding is set for hearing in May 2008.

Entergy Arkansas will pay $36 million per month for seven months, and began making the payments to Entergy Gulf States, Entergy Louisiana, and Entergy Mississippi in June 2007. As discussed in Note 2 to the financial statements, the APSC has approved through December 31, 2008 a production cost allocation rider for recovery from customers of the retail portion of the costs allocated to Entergy Arkansas.

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Additionally, the Utility operating companies had filed with the FERC proposing certain modifications to the rough production cost equalization calculation. The FERC rejected certain of the proposed modifications, accepted certain of the proposed modifications without further proceedings, and set two of the proposed modifications for hearing and settlement procedures. A settlement in principle was reached in one of the proceedings, which settlement has been filed with the FERC. Settlement procedures were terminated in the second proceeding that involves changes to the functionalization of costs to the production function and a hearing in that proceeding is currently scheduled for March 2008.

On April 27, 2007, the FERC denied the requests for rehearing filed regarding the Utility operating companies' compliance filing to implement the System Agreement decision, with one exception regarding the issue of retrospective refunds. That issue will be addressed subsequent to the remanded proceeding involving the interruptible load decision discussed in the paragraph further below in this section. The LPSC appealed the decision to the D.C. Circuit Court of Appeals, and the Utility operating companies and the APSC intervened in that appeal.

Based on the FERC's April 27, 2007 order on rehearing, Entergy Arkansas recorded accounts payable and Entergy Gulf States, Entergy Louisiana, and Entergy Mississippi recorded accounts receivable to reflect the rough production cost equalization payments and receipts required to implement the FERC's remedy based on calendar year 2006 production costs that FERC accepted for filing and allowed to go into effect in June 2007. Entergy Arkansas recorded a corresponding regulatory asset for its right to collect the payments from its customers, and Entergy Gulf States, Entergy Louisiana, and Entergy Mississippi recorded corresponding regulatory liabilities for their obligations to pass the receipts on to their customers. The regulatory asset and liabilities are shown as "System Agreement cost equalization" on the respective balance sheets. The liabilities and assets for the estimated payments and receipts that may be required to implement the FERC's remedy based on calendar year 2007 production costs will be recorded at the end of 2007 when all production costs for 2007 have been incurred.  The level of any payments and receipts is significantly affected by a number of factors, including, among others, weather, the price of alternative fuels, the operating characteristics of the Entergy System generating fleet, and multiple factors affecting the calculation of the non-fuel related revenue requirement components of the total production costs, such as plant investment.

As discussed in the Form 10-K, various parties, including the LPSC and the APSC, appealed to the D.C. Circuit the FERC's June 1 and December 19, 2005 orders establishing the rough production cost equalization bandwidth. The D.C. Circuit held oral argument on the appeals on November 2, 2007.

On April 3, 2007, the LPSC filed a complaint with the FERC in which it sought to have the FERC order the following modifications to Entergy's rough production costs equalization calculation: (1) elimination of interruptible loads from the methodology used to allocate demand-related capacity costs; and (2) change of the method used to re-price energy from the Vidalia hydroelectric project for purposes of calculating production cost disparities. Entergy filed an intervention and protest in this proceeding. In May 2007 the FERC denied the LPSC's complaint. The LPSC has requested rehearing.

Other System Agreement-related Proceedings and Activity

As discussed in the Form 10-K, in June 2006 the APSC filed a complaint at the FERC that states, "the purpose of the complaint is to institute an investigation into the prudence of Entergy's practices affecting the wholesale rates that flow through its System Agreement." In June 2007 the FERC denied the APSC's complaint on the basis that it was premature. The FERC found that the annual rough production cost equalization filing is the appropriate proceeding for the retail regulators to raise prudence issues. Regarding transmission, the FERC found that the FERC has recently implemented reforms related to transmission. If those reforms are inadequate to address the APSC's concerns, then it can renew its complaint. The APSC, the MPSC, and the Council have asked for rehearing or clarification of this order to confirm that the FERC did not intend to preempt a retail regulator from undertaking an independent prudence review of the production costs in setting retail rates.

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As discussed in the Form 10-K, on December 18, 2006, the LPSC filed a complaint requesting the FERC "immediately institute a proceeding to determine whether, and on what terms, [Entergy Arkansas] may withdraw" from the System Agreement. In June 2007 the FERC denied the LPSC's complaint on the basis that it was premature. The FERC's order indicates that the FERC will evaluate at the time of Entergy Arkansas' departure whether "the System Agreement will remain just and reasonable for the remaining members . . . and likewise that any new Entergy Arkansas jurisdictional wholesale arrangements will be just and reasonable." The FERC Order goes on to state that "in light of the history and nature of the existing members' planning and operation of their facilities under the System Agreement, it is possible it may ultimately be appropriate to require transition measures or other conditions to ensure just and reasonable wholesale rates and services" upon the termination of Entergy Arkansas' participation in the current System Agreement.

On April 3, 2007, the U.S. Court of Appeals for the D.C. Circuit issued its opinion in the LPSC's appeal of the FERC's March 2004 and April 2005 orders related to the treatment under the System Agreement of the Utility operating companies' interruptible loads.  In its opinion, the D.C. Circuit concluded that the FERC (1) acted arbitrarily and capriciously by allowing the Utility operating companies to phase-in the effects of the elimination of the interruptible load over a 12-month period of time; (2) failed to adequately explain why refunds could not be ordered under Section 206(c) of the Federal Power Act; and (3) exercised appropriately its discretion to defer addressing the cost of sulfur dioxide allowances until a later time.  The D.C. Circuit remanded the matter to the FERC for a more considered determination on the issue of refunds. The FERC issued its order on remand in September 2007, in which it directs Entergy to make a compliance filing removing all interruptible load from the computation of peak load responsibility commencing April 1, 2004 and to issue any necessary refunds to reflect this change. In addition, the order directs the Utility operating companies to make refunds for the period May 1995 through July 1996. Entergy, the APSC, the MPSC, and the City Council have requested rehearing of the FERC's order on remand. The FERC granted the Utility operating companies' request to delay the payment of refunds for the period May 1995 through July 1996 until 30 days following a FERC order on rehearing.

In October 2007 the MPSC issued a letter confirming its belief that Entergy Mississippi should exit the System Agreement in light of recent developments involving the System Agreement. The MPSC letter also requests that Entergy Mississippi advise the MPSC regarding the status of the Utility operating companies' effort to develop successor arrangements to the System Agreement and advise the MPSC regarding Entergy Mississippi's position with respect to withdrawal from the System Agreement. In November 2007, pursuant to the provisions of the System Agreement, Entergy Mississippi provided its written notice to terminate its participation in the System Agreement effective ninety-six (96) months from the date of the notice or such earlier date as authorized by the FERC.

In conjunction with the application of Entergy Gulf States and Calcasieu Power, LLC seeking FERC approval of Entergy Gulf States' acquisition of the Calcasieu Generating Facility, the Utility operating companies filed a Petition for Declaratory Order requesting that the FERC find either (1) that in those circumstances where a resource to be acquired or constructed has been determined by Entergy's Operating Committee to be a resource devoted to serving Entergy System load and has been approved by the applicable retail regulator, the cost of such resource shall be reflected in the rough production cost equalization calculation; or (2) that Entergy Gulf States' acquisition of the Calcasieu facility is prudent and the costs are properly reflected in the rough production cost equalization calculation.  The APSC, LPSC, MPSC, City Council, and several other parties intervened in the proceeding, with the APSC, LPSC, and City Council filing protests.  In July 2007 the FERC denied the application for a declaratory order. The FERC concluded that (1) the circumstances surrounding resource acquisition on the Entergy System were not of sufficient "local interest" to warrant the FERC deferring to the findings of the applicable regulator; and (2) with respect to the alternative request for relief, consistent with its prior precedent, the FERC would not "entertain the issue of the prudence of a purchase until such time as the purchaser passes on the cost of the purchase to its customers." Entergy Gulf States and Calcasieu Power's application before the FERC seeking approval of the acquisition is still pending.

21

Independent Coordinator of Transmission (ICT)

In May 2007 the FERC denied the requests for rehearing of its October 2006 order. In June 2007, the Utility operating companies made their compliance filing pursuant to the FERC's order denying rehearing.

As discussed in the Form 10-K, in the FERC's April 2006 order approving Entergy's ICT proposal, the FERC stated that the weekly procurement process (WPP) must be operational within approximately 14 months of the FERC order, or June 24, 2007, or the FERC may reevaluate all approvals to proceed with the ICT.  The Utility operating companies have been working with the ICT and a software vendor to develop the software and systems necessary to implement the WPP. The Utility operating companies also filed with the FERC in April 2007 a request to make certain corrections and limited modifications to the current WPP tariff provisions. The Utility operating companies have filed status reports with the FERC notifying the FERC that, due to unexpected issues with the development of the WPP software and testing, the WPP is still not operational. The Utility operating companies have notified the FERC that Entergy will continue to pursue the implementation of the WPP as soon as possible and will notify the FERC upon the successful completion of the software testing.

In October 2006 the Utility operating companies filed revisions to their Open Access Transmission Tariff ("OATT") with the FERC to establish a mechanism to recover from their wholesale transmission customers the (1) costs incurred to develop or join an RTO and to develop the ICT; and (2) the on-going costs that will be incurred under the ICT agreement. Several parties intervened opposing the proposed tariff revisions. In December 2006 the FERC accepted for filing Entergy's proposed tariff revisions, and set them for hearing and settlement procedures. In its Order, the FERC concluded that each of the Utility operating companies "should be allowed the opportunity to recover its start up costs associated with its formation of the ICT and its participation in prior failed attempts to form an RTO," but also that the proposed tariffs raised issues of fact that are more properly addressed through hearing and settlement procedures. In June 2007 the Utility operating companies reached a settlement-in-principle with the parties to the proceeding and the settlement has been filed with the FERC.

Available Flowgate Capacity (AFC) Proceeding

In April 2007 the FERC issued an order terminating the AFC hearing involving Entergy because Entergy's ICT has been installed. In accordance with the provisions of the FERC order approving the ICT, during the first three quarters of 2007 the Utility operating companies notified the FERC, the ICT, and the stakeholders that certain instances had been identified in which software errors related to the AFC process had resulted in the reporting of inaccurate data.  Following the reporting of these errors, certain market participants continue to urge the FERC to move forward with an AFC hearing in light of the identified errors.

Market-based Rate Authority

As discussed in the Form 10-K, in May 2005, the FERC instituted a proceeding under Section 206 of the FPA to investigate whether Entergy satisfies the FERC's transmission market power and affiliate abuse/reciprocal dealing standards for the granting of market-based rate authority, and established a refund effective date pursuant to the provisions of Section 206 for purposes of the additional issues set for hearing.  The FERC decided to hold that investigation in abeyance, however, pending the outcomes of the ICT proceedings and Entergy's affiliate purchased power agreements proceeding. In June 2005, Entergy sought rehearing of the May order instituting the proceeding. The FERC terminated the Section 206 proceeding in May 2007 and dismissed Entergy's request for rehearing as moot. The FERC found that there was no further need for the proceeding.

22

Market and Credit Risk Sensitive Instruments

Commodity Price Risk

Power Generation

As discussed more fully in the Form 10-K, the sale of electricity from the power generation plants owned by Entergy's Non-Utility Nuclear business, unless otherwise contracted, is subject to the variability of market power prices. Following is an updated summary of the amount of Non-Utility Nuclear's output that is sold forward under physical or financial contracts (2007 represents the remaining quarter of the year):

   

2007

 

2008

 

2009

 

2010

 

2011

 

2012

Non-Utility Nuclear (including Palisades acquisition):

                       

Percent of planned generation sold forward:

                       

  Unit-contingent

 

48%

 

50%

 

42%

 

30%

 

29%

 

16%

  Unit-contingent with availability guarantees (1)

 

40%

 

36%

 

35%

 

28%

 

14%

 

7%

  Firm liquidated damages

 

7%

 

5%

 

0%

 

0%

 

0%

 

0%

     Total

 

95%

 

91%

 

77%

 

58%

 

43%

 

23%

Planned generation (TWh)

 

11

 

41

 

41

 

40

 

41

 

41

Average contract price per MWh

 

$47

 

$54

 

$60

 

$59

 

$55

 

$51

(1)

A sale of power on a unit-contingent basis coupled with a guarantee of availability provides for the payment to the power purchaser of contract damages, if incurred, in the event the seller fails to deliver power as a result of the failure of the specified generation unit to generate power at or above a specified availability threshold. All of Entergy's outstanding guarantees of availability provide for dollar limits on Entergy's maximum liability under such guarantees.

The Vermont Yankee acquisition included a 10-year PPA under which the former owners will buy the power produced by the plant through the expiration in 2012 of the current operating license for the plant. The PPA includes an adjustment clause under which the prices specified in the PPA will be adjusted downward monthly if power market prices drop below PPA prices, which has not happened thus far and is not expected in the foreseeable future.

See the Form 10-K for a discussion of Non-Utility Nuclear's value sharing agreements with NYPA for energy sales from the FitzPatrick and Indian Point 3 power plants. In October 2007 Non-Utility Nuclear and NYPA amended and restated the value sharing agreements to clarify and amend certain provisions of the original terms. Under the amended value sharing agreements Non-Utility Nuclear will make annual payments to NYPA based on the generation output of the Indian Point 3 and FitzPatrick plants from January 2007 through December 2014. Non-Utility Nuclear will pay NYPA $6.59 per MWh for power sold from Indian Point 3, up to an annual cap of $48 million, and $3.91 per MWh for power sold from FitzPatrick, up to an annual cap of $24 million. The annual payment for each year is due by January 15 of the following year, with the payment for year 2007 output due on January 15, 2008. If Entergy or an Entergy affiliate ceases to own the plants, then, after January 2009, the annual payment obligation terminates for generation after the date that Entergy ownership ceases.

Non-Utility Nuclear had previously calculated that $0 was owed to NYPA under the value sharing agreements for generation output in 2005 and 2006. In November 2006 NYPA filed a demand for arbitration claiming that $90.5 million was due to NYPA for 2005 under these agreements, and NYPA filed in April 2007 an amended demand for arbitration claiming that an additional $54 million was due to NYPA for 2006 under the value sharing agreements. As part of their agreement to amend the value sharing agreements, Non-Utility Nuclear and NYPA waived all present and future claims under the previous value sharing terms, including the claims for 2005 and 2006 pending before the arbitrator.

Non-Utility Nuclear will record its liability for payments to NYPA as power is generated and sold by Indian Point 3 and FitzPatrick. Non-Utility Nuclear recorded a $57 million liability for generation through September 30, 2007. An amount equal to the liability will be recorded to the plant

 

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asset account as contingent purchase price consideration for the plants. This amount will be depreciated over the expected remaining useful life of the plants.

Some of the agreements to sell the power produced by Entergy's Non-Utility Nuclear power plants contain provisions that require an Entergy subsidiary to provide collateral to secure its obligations under the agreements. The Entergy subsidiary is required to provide collateral based upon the difference between the current market and contracted power prices in the regions where Non-Utility Nuclear sells power. The primary form of collateral to satisfy these requirements is an Entergy Corporation guaranty.  Cash and letters of credit are also acceptable forms of collateral.  At September 30, 2007, based on power prices at that time, Entergy had in place as collateral $747 million of Entergy Corporation guarantees for wholesale transactions, including $65 million of guarantees that support letters of credit. The assurance requirement associated with Non-Utility Nuclear is estimated to increase by an amount of up to $325 million if gas prices increase $1 per MMBtu in both the short- and long-term markets. In the event of a decrease in Entergy Corporation's credit rating to below investment grade, Entergy will be required to replace Entergy Corporation guarantees with cash or letters of credit under some of the agreements.

In addition to selling the power produced by its plants, the Non-Utility Nuclear business sells installed capacity to load-serving distribution companies in order for those companies to meet requirements placed on them by the ISO in their area. Following is a summary of the amount of the Non-Utility Nuclear business' installed capacity that is currently sold forward, and the blended amount of the Non-Utility Nuclear business' planned generation output and installed capacity that is currently sold forward (2007 represents the remaining quarter of the year):

   

2007

 

2008

 

2009

 

2010

 

2011

 

2012

Non-Utility Nuclear (including Palisades acquisition):

                       

Percent of capacity sold forward:

                       

  Bundled capacity and energy contracts

 

27%

 

27%

 

26%

 

26%

 

26%

 

19%

  Capacity contracts

 

61%

 

59%

 

34%

 

16%

 

9%

 

2%

     Total

 

88%

 

86%

 

60%

 

42%

 

35%

 

21%

Planned net MW in operation

 

4,998

 

4,998

 

4,998

 

4,998

 

4,998

 

4.998

Average capacity contract price per kW per month

 

$1.7

 

$1.8

 

$1.7

 

$2.5

 

$3.1

 

$3.5

Blended Capacity and Energy (based on revenues)

                       

% of planned generation and capacity sold forward

 

93%

 

88%

 

73%

 

52%

 

36%

 

18%

Average contract revenue per MWh

 

$49

 

$56

 

$61

 

$60

 

$56

 

$52

As of September 30, 2007, approximately 99% of Non-Utility Nuclear's counterparty exposure from energy and capacity contracts is with counterparties with investment grade credit ratings.

Critical Accounting Estimates

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy's accounting for nuclear decommissioning costs, unbilled revenue, impairment of long-lived assets, qualified pension and other postretirement benefits, and other contingencies.

New Accounting Pronouncements

In September 2006 the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" (SFAS 157), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 generally does not require any new fair value measurements. However, in some cases, the application of SFAS 157 in the future may change Entergy's practice for measuring and disclosing fair values under other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for Entergy in the first quarter 2008 and will be applied prospectively. Entergy is currently evaluating SFAS 157 and its potential future effects on its financial position, results of operations, and cash flows.

24

The FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159) during the first quarter 2007. SFAS 159 provides an option for companies to select certain financial assets and liabilities to be accounted for at fair value with changes in the fair value of those assets or liabilities being reported through earnings. The intent of the standard is to mitigate volatility in reported earnings caused by the application of the more complicated fair value hedging accounting rules. Under SFAS 159, companies can select existing assets or liabilities for this fair value option concurrent with the effective date of January 1, 2008 for companies with fiscal years ending December 31 or can select future assets or liabilities as they are acquired or entered into. Entergy is in the process of evaluating the potential effect of making this accounting election, but does not expect the provisions of this standard to have a material effect on its financial position, results of operations, or cash flows.

In June 2006, the EITF reached a consensus on EITF Issue 06-3 "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)" (EITF 06-3). The scope of this issue includes any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, and may include, but is not limited to, sales, use, value added, and some excise taxes. Under EITF 06-3, the presentation of taxes within the scope of this issue on either a gross basis (included in revenues and costs) or a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. For any such taxes reported on a gross basis, the amounts of those taxes in interim and annual financial statements, for each period for which an income statement is presented, should be disclosed if those amounts are significant. Entergy's policy is to present such taxes on a net basis, unless required to report differently by a regulatory authority. EITF 06-3 did not affect Entergy's financial statements.

 

 

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ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
                 
    Three Months Ended   Nine Months Ended
    2007   2006   2007   2006
   

 (In Thousands, Except Share Data)

                 
OPERATING REVENUES                
Electric   $2,646,546    $2,761,124    $6,952,648    $7,031,771 
Natural gas   30,154    12,495    158,014    63,522 
Competitive businesses   612,387    481,100    1,641,836    1,355,961 
TOTAL   3,289,087    3,254,719    8,752,498    8,451,254 
                 
OPERATING EXPENSES                
Operating and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   809,283    987,558    2,192,296    2,489,347 
  Purchased power   520,622    607,777    1,565,861    1,646,555 
  Nuclear refueling outage expenses   44,387    43,045    131,977    127,584 
  Other operation and maintenance   667,376    590,992    1,871,424    1,693,657 
Decommissioning   43,597    36,933    123,507    108,787 
Taxes other than income taxes   129,123    133,527    368,153    327,995 
Depreciation and amortization   239,064    232,042    710,127    655,374 
Other regulatory charges (credits) - net   25,303    (21,563)   62,187    (124,509)
TOTAL   2,478,755    2,610,311    7,025,532    6,924,790 
                 
OPERATING INCOME   810,332    644,408    1,726,966    1,526,464 
                 
OTHER INCOME                 
Allowance for equity funds used during construction   9,367    7,721    34,084    32,088 
Interest and dividend income   63,754    37,720    174,811    116,689 
Equity in earnings of unconsolidated equity affiliates   1,432    14,772    3,533    26,843 
Miscellaneous - net   (6,103)   30,964    (17,881)   16,793 
TOTAL   68,450    91,177    194,547    192,413 
                 
INTEREST AND OTHER CHARGES                
Interest on long-term debt   133,165    125,907    380,321    369,058 
Other interest - net   52,503    15,035    118,270    47,532 
Allowance for borrowed funds used during construction   (5,260)   (4,538)   (20,175)   (18,989)
Preferred dividend requirements and other   6,375    6,811    18,784    22,622 
TOTAL   186,783    143,215    497,200    420,223 
                  
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES   691,999    592,370    1,424,313    1,298,654 
                 
Income taxes   230,840    202,437    483,357    444,170 
                 
INCOME FROM CONTINUING OPERATIONS   461,159    389,933    940,956    854,484 
                 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (net of income                
tax expense (benefit) of ($563) and $5,423, respectively)     (1,050)     9,830 
                 
CONSOLIDATED NET INCOME   $461,159    $388,883    $940,956    $864,314 
                 
                 
Basic earnings per average common share:                
  Continuing operations   $2.37    $1.87    $4.77    $4.11 
  Discontinued operations         0.05 
  Basic earnings per average common share   $2.37    $1.87    $4.77    $4.16 
Diluted earnings per average common share:                
  Continuing operations   $2.30    $1.83    $4.63    $4.03 
  Discontinued operations         0.05 
  Diluted earnings per average common share   $2.30    $1.83    $4.63    $4.08 
Dividends declared per common share   $0.75    $0.54    $1.83    $1.62 
                 
Basic average number of common shares outstanding   194,864,359    208,382,863    197,443,652    208,034,946 
Diluted average number of common shares outstanding   200,532,942    212,404,770    203,362,110    211,782,858 
                 
See Notes to Financial Statements.                

27

 

ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
    2007   2006
    (In Thousands)
   
OPERATING ACTIVITIES        
Consolidated net income   $940,956    $864,314 
Adjustments to reconcile consolidated net income to net cash flow        
provided by operating activities:        
  Reserve for regulatory adjustments   (18,337)   43,960 
  Other regulatory charges (credits) - net   62,187    (124,509)
  Depreciation, amortization, and decommissioning   833,634    765,627 
  Deferred income taxes, investment tax credits, and non-current taxes accrued   510,435    611,766 
  Equity in earnings of unconsolidated equity affiliates - net of dividends   (3,533)   (24,669)
  Changes in working capital:        
    Receivables   (317,454)   210,311 
    Fuel inventory   390    3,652 
    Accounts payable   (155,736)   (390,804)
    Taxes accrued   (176,790)   66,046 
    Interest accrued   8,180    3,190 
    Deferred fuel   (89,558)   436,663 
    Other working capital accounts   (53,977)   111,491 
  Provision for estimated losses and reserves   24,753    27,595 
  Changes in other regulatory assets   124,102    (193,323)
  Other   (62,500)   (153,953)
Net cash flow provided by operating activities   1,626,752    2,257,357 
         
INVESTING ACTIVITIES        
Construction/capital expenditures   (1,083,090)   (1,251,732)
Allowance for equity funds used during construction   34,084    32,088 
Nuclear fuel purchases   (272,137)   (260,759)
Proceeds from sale/leaseback of nuclear fuel   128,292    135,079 
Proceeds from sale of assets and businesses   13,063    77,159 
Payment for purchase of plant   (336,211)   (88,199)
Insurance proceeds received for property damages   82,648    18,227 
Decrease in other investments   71,770    56,501 
Proceeds from nuclear decommissioning trust fund sales   1,299,685    580,745 
Investment in nuclear decommissioning trust funds   (1,388,806)   (655,788)
Other regulatory investments     (38,506)
Net cash flow used in investing activities   (1,450,702)   (1,395,185)
         
See Notes to Financial Statements.        
         
         

28 

         
         
         
ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
    2007   2006
    (In Thousands)
     
FINANCING ACTIVITIES        
Proceeds from the issuance of:        
  Long-term debt   2,437,163    1,377,701 
  Preferred stock     73,354 
  Common stock and treasury stock   59,175    32,072 
Retirement of long-term debt   (889,813)   (1,598,425)
Repurchase of common stock   (1,024,185)  
Redemption of preferred stock   (3,450)   (183,881)
Changes in credit line borrowings - net   60,000    (40,000)
Dividends paid:        
  Common stock   (361,574)   (337,104)
  Preferred stock   (19,532)   (22,861)
Net cash flow provided by (used in) financing activities   257,784    (699,144)
         
Effect of exchange rates on cash and cash equivalents   (394)   (820)
         
Net increase in cash and cash equivalents   433,440    162,208 
         
Cash and cash equivalents at beginning of period   1,016,152    582,820 
         
Effect of the reconsolidation of Entergy New Orleans on cash and cash equivalents   17,093   
         
Cash and cash equivalents at end of period   $1,466,685    $745,028 
         
         
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid/(received) during the period for:        
  Interest - net of amount capitalized   $449,038    $390,059 
  Income taxes   $349,058    ($197,560)
         
See Notes to Financial Statements.        
 
 
29

 

ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2007 and December 31, 2006
(Unaudited)
    2007   2006
    (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents:        
  Cash   $127,307   $117,379
  Temporary cash investments - at cost,        
   which approximates market   1,339,378   898,773
     Total cash and cash equivalents   1,466,685   1,016,152
Note receivable - Entergy New Orleans DIP loan   -   51,934
Notes receivable   421   699
Accounts receivable:        
  Customer   638,059   410,512
  Allowance for doubtful accounts   (27,537)   (19,348)
  Other   475,037   487,264
  Accrued unbilled revenues   345,321   249,165
     Total accounts receivable   1,430,880   1,127,593
Deferred fuel costs   35,522   -
Accumulated deferred income taxes   -   11,680
Fuel inventory - at average cost   197,749   193,098
Materials and supplies - at average cost   683,000   604,998
Deferred nuclear refueling outage costs   209,473   147,521
System agreement cost equalization   107,886   -
Prepayments and other   106,449   171,759
TOTAL   4,238,065   3,325,434
         
OTHER PROPERTY AND INVESTMENTS        
Investment in affiliates - at equity   79,262   229,089
Decommissioning trust funds   3,303,701   2,858,523
Non-utility property - at cost (less accumulated depreciation)   212,110   212,726
Other   69,711   47,115
TOTAL   3,664,784   3,347,453
         
PROPERTY, PLANT AND EQUIPMENT        
Electric   32,568,142   30,713,284
Property under capital lease   737,459   730,182
Natural gas   297,355   92,787
Construction work in progress   973,798   786,147
Nuclear fuel under capital lease   317,653   336,017
Nuclear fuel   573,489   494,759
TOTAL PROPERTY, PLANT AND EQUIPMENT   35,467,896   33,153,176
Less - accumulated depreciation and amortization   14,891,183   13,715,099
PROPERTY, PLANT AND EQUIPMENT - NET   20,576,713   19,438,077
         
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  SFAS 109 regulatory asset - net   677,166   740,110
  Other regulatory assets   3,103,377   2,768,352
  Deferred fuel costs   168,122   168,122
Long-term receivables   16,257   19,349
Goodwill   377,172   377,172
Other   936,861   898,662
TOTAL   5,278,955   4,971,767
         
TOTAL ASSETS   $33,758,517   $31,082,731
         
See Notes to Financial Statements.        
 
30
 
ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2007 and December 31, 2006
(Unaudited)
    2007   2006
    (In Thousands)
         
CURRENT LIABILITIES        
Currently maturing long-term debt   $626,942   $181,576 
Notes payable   83,037   25,039 
Accounts payable   978,614   1,122,596 
Customer deposits   283,526   248,031 
Taxes accrued   10,534   187,324 
Accumulated deferred income taxes   20,494   -  
Interest accrued   187,015   160,831 
Deferred fuel costs   -   73,031 
Obligations under capital leases   153,559   153,246 
Pension and other postretirement liabilities   32,693   41,912 
System agreement cost equalization   107,886   -  
Other   239,208   271,544 
TOTAL   2,723,508   2,465,130 
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   6,328,049   5,820,700 
Accumulated deferred investment tax credits   348,099   358,550 
Obligations under capital leases   176,648   188,033 
Other regulatory liabilities   531,311   449,237 
Decommissioning and asset retirement cost liabilities   2,355,912   2,023,846 
Transition to competition   79,098   79,098 
Accumulated provisions   129,906   88,902 
Pension and other postretirement liabilities   1,409,540   1,410,433 
Long-term debt   10,147,126   8,798,087 
Preferred stock with sinking fund   7,050   10,500 
Other   1,187,878   847,415 
TOTAL   22,700,617   20,074,801 
         
Commitments and Contingencies        
         
Preferred stock without sinking fund   364,479   344,913 
         
SHAREHOLDERS' EQUITY        
Common stock, $.01 par value, authorized 500,000,000        
 shares; issued 248,174,087 shares in 2007 and in 2006   2,482   2,482 
Paid-in capital   4,846,834   4,827,265 
Retained earnings   6,687,955   6,113,042 
Accumulated other comprehensive income (loss)   8,194   (100,512)
Less - treasury stock, at cost (53,911,876 shares in 2007 and        
 45,506,311 shares in 2006)   3,575,552   2,644,390 
TOTAL   7,969,913   8,197,887 
         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $33,758,517   $31,082,731 
         
See Notes to Financial Statements.        
         
31

 

ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME, AND PAID-IN CAPITAL
For the Three Months Ended September 30, 2007 and 2006
(Unaudited)
                     
        2007   2006
        (In Thousands)
                     
RETAINED EARNINGS                    
                     
Retained Earnings - Beginning of period       $6,372,687        $5,681,618     
                     
  Add: Consolidated net income       461,159    $461,159    388,883    $388,883 
                     
  Deduct:                    
    Dividends declared on common stock       145,891        112,570     
    Capital stock and other expenses             1,621     
     Total       145,891        114,191     
                     
Retained Earnings - End of period       $6,687,955        $5,956,310     
                     
                     
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                    
Balance at beginning of period:                    
  Accumulated derivative instrument fair value changes       ($59,562)       ($194,629)    
                     
  Pension and other postretirement liabilities       (105,770)          
                     
  Net unrealized investment gains       116,897        59,376     
                     
  Foreign currency translation       6,666        3,773     
                     
  Minimum pension liability       -        (22,345)    
     Total       (41,769)       (153,825)    
                     
                     
Net derivative instrument fair value changes                    
 arising during the period (net of tax expense of $24,296 and $17,470)       42,201    42,201    27,295    27,295 
                     
Pension and other postretirement liabilities (net of tax expense of $682)       69    69     
                     
Net unrealized investment gains (net of tax expense of $24,586 and $18,788)       7,541    7,541    23,840    23,840 
                     
Foreign currency translation (net of tax expense of $82 and $143)       152    152    265    265 
                     
Minimum pension liability (net of tax expense of $386)           617    617 
                     
                     
Balance at end of period:                    
  Accumulated derivative instrument fair value changes       (17,361)       (167,334)    
                     
  Pension and other postretirement liabilities       (105,701)          
                     
  Net unrealized investment gains       124,438        83,216     
                     
  Foreign currency translation       6,818        4,038     
                     
  Minimum pension liability             (21,728)    
     Total       $8,194        ($101,808)    
Comprehensive Income           $511,122        $440,900 
                     
                     
PAID-IN CAPITAL                    
                     
Paid-in Capital - Beginning of period       $4,841,059        $4,817,628     
                     
  Add:                    
    Common stock issuances related to stock plans       5,775        1,264     
                     
                     
Paid-in Capital - End of period       $4,846,834        $4,818,892     
                     
                     
                     
See Notes to Financial Statements.                    
32                    

 

ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME, AND PAID-IN CAPITAL
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
                     
        2007   2006
        (In Thousands)
                     
RETAINED EARNINGS                    
                     
Retained Earnings - Beginning of period       $6,113,042        $5,433,931     
                     
  Add:                    
    Consolidated net income       940,956    $940,956    864,314    $864,314 
    Adjustment related to FIN 48 implementation       (4,600)          
     Total       936,356        864,314     
                     
  Deduct:                    
    Dividends declared on common stock       361,443        337,004     
    Capital stock and other expenses             4,931     
     Total       361,443        341,935     
                     
Retained Earnings - End of period       $6,687,955        $5,956,310     
                     
                     
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                    
Balance at beginning of period:                    
  Accumulated derivative instrument fair value changes       ($105,578)       ($392,614)    
                     
  Pension and other postretirement liabilities       (105,909)          
                     
  Net unrealized investment gains       104,551        67,923     
                     
  Foreign currency translation       6,424        3,217     
                     
  Minimum pension liability       -        (22,345)    
     Total       (100,512)       (343,819)    
                     
                     
Net derivative instrument fair value changes                    
 arising during the period (net of tax expense of $54,472 and $149,013)       88,217    88,217    225,280    225,280 
                     
Pension and other postretirement liabilities (net of tax expense of $2,048)       208    208     
                     
Net unrealized investment gains (net of tax expense of $31,693 and $10,986)       19,887    19,887    15,293    15,293 
                     
Foreign currency translation (net of tax expense of $212 and $442)       394    394    821    821 
                     
Minimum pension liability (net of tax expense of $386)           617    617 
                     
                     
Balance at end of period:                    
  Accumulated derivative instrument fair value changes       (17,361)       (167,334)    
                     
  Pension and other postretirement liabilities       (105,701)          
                     
  Net unrealized investment gains       124,438        83,216     
                     
  Foreign currency translation       6,818        4,038     
                     
  Minimum pension liability             (21,728)    
     Total       $8,194        ($101,808)    
Comprehensive Income           $1,049,662        $1,106,325 
                     
                     
PAID-IN CAPITAL                    
                     
Paid-in Capital - Beginning of period       $4,827,265        $4,817,637     
                     
  Add (Deduct):                    
    Common stock issuances related to stock plans       19,569        1,255     
                     
                     
Paid-in Capital - End of period       $4,846,834        $4,818,892     
                     
                     
                     
See Notes to Financial Statements.                    
                     
33                    

 

ENTERGY CORPORATION AND SUBSIDIARIES
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2007   2006   (Decrease)   %
    (Dollars In Millions)    
Utility Electric Operating Revenues:                
  Residential   $1,076   $1,115   ($39)   (3)
  Commercial   684   687   (3)  
  Industrial   646   704   (58)   (8)
  Governmental   60   42   18    43 
     Total retail   2,466   2,548   (82)   (3)
Sales for resale   106   147   (41)   (28)
Other   75   66     14 
     Total   $2,647   $2,761   ($114)   (4)
                 
Utility Billed Electric Energy                
 Sales (GWh):                
  Residential   11,128   10,772   356   
  Commercial   8,111   7,484   627   
  Industrial   10,120   10,154   (34)  
  Governmental   637   436   201    46 
     Total retail   29,996   28,846   1,150   
  Sales for resale   1,413   2,894   (1,481)   (51)
     Total   31,409   31,740   (331)   (1)
                 
                 
    Nine Months Ended   Increase/    
Description   2007   2006   (Decrease)   %
    (Dollars In Millions)    
Utility Electric Operating Revenues:                
  Residential   $2,512   $2,509   $3   
  Commercial   1,816   1,773    43   
  Industrial   1,920   1,990   (70)   (4)
  Governmental   163   118   45    38 
     Total retail   6,411   6,390   21   
  Sales for resale   295   488   (193)   (40)
  Other   247   154   93    60 
     Total   $6,953   $7,032   ($79)   (1)
                 
Utility Billed Electric Energy                
 Sales (GWh):                
  Residential   25,905   24,768   1,137   
  Commercial   20,708   19,078   1,630   
  Industrial   29,256   28,768   488   
  Governmental   1,749   1,196   553    46 
     Total retail   77,618   73,810   3,808   
  Sales for resale   4,479   8,471   (3,992)   (47)
     Total   82,097   82,281   (184)  
                 
                 
34

 

 

ENTERGY CORPORATION AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. COMMITMENTS AND CONTINGENCIES

Entergy New Orleans Bankruptcy

See Note 9 to the financial statements herein for information on the Entergy New Orleans bankruptcy proceeding.

Nuclear Insurance

See Note 8 to the financial statements in the Form 10-K for information on nuclear liability and property insurance associated with Entergy's nuclear power plants. Following is an update to that information.

Property Insurance

In April 2007, the excess layer coverage for the Utility nuclear plants was increased to $750 million per occurrence per plant and the blanket layer coverage (shared among the plants) for the Utility nuclear plants was decreased to $350 million per occurrence.

Conventional Property Insurance

See Note 8 to the financial statements in the Form 10-K for information on Entergy's conventional property insurance program. Following are updates to that information.

Hurricane Katrina and Hurricane Rita Claims

Entergy has received a total of $134.5 million as of September 30, 2007 on its Hurricane Katrina and Hurricane Rita insurance claims, including $69.5 million that Entergy received in the second quarter 2007 in settlement of its Hurricane Katrina claim with one of its excess insurers. Of the $134.5 million received, $70.7 million was allocated to Entergy New Orleans, $33.2 million to Entergy Gulf States, and $24.8 million to Entergy Louisiana. In the third quarter 2007, Entergy filed a lawsuit in the U.S. District Court for the Eastern District of Louisiana against its other excess insurer on the Hurricane Katrina claim. At issue in the lawsuit is whether any policy exclusions limit the extent of coverage provided by that insurer.

To the extent that Entergy New Orleans receives insurance proceeds for future construction expenditures associated with rebuilding its gas system, the October 2006 City Council resolution approving the settlement of Entergy New Orleans' rate and storm-cost recovery filings requires Entergy New Orleans to record those proceeds in a designated sub-account of other deferred credits. This other deferred credit is shown as "Gas system rebuild insurance proceeds" on Entergy New Orleans' balance sheet.

Conventional Property Insurance Coverage Update

Entergy's conventional property insurance program provides coverage up to $400 million on an Entergy system-wide basis for all operational perils including direct physical loss or damage due to machinery breakdown, electrical failure, fire, lightning, hail, and explosion on an "each and every loss" basis. In addition to this coverage, the program provides coverage up to $350 million on an Entergy system-wide basis for all natural perils including named windstorm, earthquake and flood on an annual aggregate basis. The coverage is subject to a $20 million self-insured retention per occurrence for operational perils or a 2% of the insured loss retention per occurrence for natural perils (up to a $35 million maximum self-insured retention). Covered property generally includes power plants, substations, facilities, inventories, and gas distribution-related properties. Excluded property generally includes above-ground transmission and distribution lines, poles, and towers. The primary

 

35

 

 

property program consists of a $150 million layer in excess of the self-insured retention and is placed through various insurers. The excess program consists of a $250 million layer in excess of the $150 million primary program for operational perils and a $150million layer in excess of the $150 million primary program for natural perils and is placed on a quota share basis through two insurers. The natural perils additional layer program consists of a $50 million layer in excess the $150 million excess program and is also placed on a quota share basis through two insurers. Coverage is in place for Entergy Corporation, the Registrant Subsidiaries, and certain other Entergy subsidiaries, including the owners of the Non-Utility Nuclear power plants.

In addition to the conventional property insurance program, Entergy has purchased additional coverage ($20 million per occurrence) for some of its non-regulated, non-generation assets. This policy serves to buy-down the $20 million deductible and is placed on a scheduled location basis. The applicable deductibles are $100,000 to $250,000.

NYPA Value Sharing Agreements

See Note 8 to the financial statements in the Form 10-K for a discussion of Non-Utility Nuclear's value sharing agreements with NYPA for energy sales from the FitzPatrick and Indian Point 3 power plants. In October 2007 Non-Utility Nuclear and NYPA amended and restated the value sharing agreements to clarify and amend certain provisions of the original terms. Under the amended value sharing agreements Non-Utility Nuclear will make annual payments to NYPA based on the generation output of the Indian Point 3 and FitzPatrick plants from January 2007 through December 2014. Non-Utility Nuclear will pay NYPA $6.59 per MWh for power sold from Indian Point 3, up to an annual cap of $48 million, and $3.91 per MWh for power sold from FitzPatrick, up to an annual cap of $24 million. The annual payment for each year is due by January 15 of the following year, with the payment for year 2007 output due on January 15, 2008. If Entergy or an Entergy affiliate ceases to own the plants, then, after January 2009, the annual payment obligation terminates for generation after the date that Entergy ownership ceases.

Non-Utility Nuclear had previously calculated that $0 was owed to NYPA under the value sharing agreements for generation output in 2005 and 2006. In November 2006 NYPA filed a demand for arbitration claiming that $90.5 million was due to NYPA for 2005 under these agreements, and NYPA filed in April 2007 an amended demand for arbitration claiming that an additional $54 million was due to NYPA for 2006 under the value sharing agreements. As part of their agreement to amend the value sharing agreements, Non-Utility Nuclear and NYPA waived all present and future claims under the previous value sharing terms, including the claims for 2005 and 2006 pending before the arbitrator.

Non-Utility Nuclear will record its liability for payments to NYPA as power is generated and sold by Indian Point 3 and FitzPatrick. Non-Utility Nuclear recorded a $57 million liability for generation through September 30, 2007. An amount equal to the liability will be recorded to the plant asset account as contingent purchase price consideration for the plants. This amount will be depreciated over the expected remaining useful life of the plants.

CashPoint Bankruptcy (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans)

See Note 8 to the financial statements in the Form 10-K for information regarding the bankruptcy of CashPoint, which managed a network of payment agents for the Utility operating companies.

Employment and Labor-related Proceedings

The Registrant Subsidiaries and other Entergy subsidiaries are responding to various lawsuits and other labor-related proceedings filed by current and former employees. These actions include, but are not limited to, allegations of wrongful employment actions; wage disputes and other claims under the Fair Labor Standards Act or its state counterparts; claims of race, gender and disability discrimination; disputes arising under collective bargaining agreements; unfair labor practice proceedings and other administrative proceedings before the National Labor Relations Board; claims of retaliation; and claims for or regarding benefits under various Entergy Corporation sponsored plans. Entergy and the Registrant Subsidiaries are responding to these suits and proceedings and deny liability to the claimants.

36

Asbestos and Hazardous Material Litigation (Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans)

See Note 8 to the financial statements in the Form 10-K for information regarding asbestos and hazardous material litigation at Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans.

 

NOTE 2. RATE AND REGULATORY MATTERS

Regulatory Assets

Other Regulatory Assets

See Note 2 to the financial statements in the Form 10-K for information regarding regulatory assets in the Utility business reflected on the balance sheets of Entergy and the Registrant Subsidiaries.

Deferred Fuel Costs

See Note 2 to the financial statements in the Form 10-K for information regarding fuel proceedings involving the Utility operating companies. The following are updates to the Form 10-K.

Entergy Arkansas

In March 2007, in order to allow further consideration by the APSC, the APSC granted Entergy Arkansas' petition for rehearing and for stay of the APSC's January 2007 order in the proceeding investigating Entergy Arkansas' interim energy cost rate. The APSC has taken no action in this proceeding since its March 2007 order.

Also in March 2007, Entergy Arkansas filed with the APSC its annual energy cost rate for the period April 2007 through March 2008. The filed energy cost rate decreased from $0.02827/kWh to $0.01179/kWh effective the first billing cycle in April 2007.

In its June 2007 order regarding Entergy Arkansas' rate case, discussed below, the APSC approved the continuation of Entergy Arkansas' energy cost recovery rider through December 31, 2008.

Entergy Gulf States (Texas)

The Entergy Gulf States rate filing made with the PUCT in September 2007, which is discussed below, includes a request to reconcile $858 million in fuel and purchased power costs on a Texas retail basis incurred over the period January 2006 through March 2007.

In March 2007, Entergy Gulf States filed a request with the PUCT to refund $78.5 million, including interest, of fuel cost recovery over-collections through January 2007. In June 2007 the PUCT approved a unanimous stipulation and settlement agreement that updated the over-collection balance through April 2007 and established a refund amount, including interest, of $109.4 million. The refund was made over a two-month period beginning with the first billing cycle in July 2007. Amounts refunded through the interim fuel refund are subject to final reconciliation in a future fuel reconciliation proceeding.

In May 2006, Entergy Gulf States filed with the PUCT a fuel and purchased power reconciliation case covering the period September 2003 through December 2005 for costs recoverable through the Texas fixed fuel factor rate and the incremental purchased capacity recovery rider. Entergy Gulf States reconciled $1.6 billion of fuel and purchased power costs on a Texas retail basis. A hearing was conducted before ALJs in April 2007. In July 2007, the ALJs issued a proposal for decision recommending that Entergy Gulf States be authorized to reconcile all of its requested Texas fixed fuel factor expenses and recommending a minor adjustment to the incremental purchased capacity recovery calculation. The ALJs also recommend granting an exception to PUCT rules to allow for recovery of an additional $11.4 million in Texas-jurisdictional

 

37

 

purchased power capacity costs. In September 2007, the PUCT issued a final order, which affirmed the ultimate result of the ALJ's proposal for decision. Upon motions for rehearing, the PUCT added additional language in its order on rehearing.  In order to preserve any appeals, the parties will have to file a subsequent motion for rehearing to the PUCT's order on rehearing.

Storm Cost Recovery Filings

See Note 2 to the financial statements in the Form 10-K for information regarding storm cost recovery filings involving the Utility operating companies. The following are updates to the Form 10-K.

Entergy Gulf States - Texas

In April 2007, the PUCT issued its financing order authorizing the issuance of securitization bonds to recover $353 million of hurricane reconstruction costs and up to $6 million of transaction costs, offset by $32 million of related deferred income tax benefits. In June 2007, Entergy Gulf States Reconstruction Funding I, LLC (Entergy Gulf States Reconstruction Funding), a company wholly-owned and consolidated by Entergy Gulf States, issued $329.5 million of senior secured transition bonds (securitization bonds). With the proceeds, Entergy Gulf States Reconstruction Funding purchased from Entergy Gulf States the transition property, which is the right to recover from customers through a transition charge amounts sufficient to service the securitization bonds. Entergy Gulf States will use the proceeds to refinance or retire debt and to reduce equity. Entergy Gulf States began cost recovery through the transition charge in July 2007, and the transition charge is expected to remain in place over a 15-year period. See Note 4 to the financial statements for additional information regarding the securitization bonds.

Entergy Gulf States - Louisiana and Entergy Louisiana

In February 2007, Entergy Louisiana and Entergy Gulf States filed rebuttal testimony and filed a second supplemental and amending application by which they seek authority from the LPSC to securitize their storm cost recovery and storm reserve amounts, together with certain debt retirement costs and upfront and ongoing costs of the securitized debt issued. Securitization is authorized by a law signed by the Governor of Louisiana in May 2006. Hearings on the quantification of the amounts eligible for securitization began in late-April 2007. At the start of the hearing, a stipulation among Entergy Gulf States, Entergy Louisiana, the LPSC staff, and most other parties in the proceeding was read into the record. The stipulation quantifies the balance of storm restoration costs for recovery as $545 million for Entergy Louisiana and $187 million for Entergy Gulf States, and sets the storm reserve amounts at $152 million for Entergy Louisiana and $87 million for Entergy Gulf States. The stipulation also calls for securitization of the storm restoration costs and storm reserves in those same amounts. Hearings on authorization of securitization of the storm costs and reserves were held in June 2007. In August 2007, the LPSC issued orders approving recovery of the stipulated storm cost recovery and storm reserve amounts plus certain debt retirement and upfront and ongoing costs through securitization financing.

Entergy Mississippi

In October 2006 the MPSC issued a financing order authorizing the issuance of state bonds to finance $8 million of Entergy Mississippi's certified Hurricane Katrina restoration costs and $40 million for an increase in Entergy Mississippi's storm damage reserve. $30 million of the storm damage reserve will be set aside in a restricted account. A Mississippi state entity issued the bonds in May 2007, and Entergy Mississippi received proceeds of $48 million. Entergy Mississippi will not report the bonds on its balance sheet because the bonds are the obligation of the state entity, and there is no recourse against Entergy Mississippi in the event of a bond default. To service the bonds, Entergy Mississippi will collect a system restoration charge on behalf of the state, and will remit the collections to the state. By analogy to and in accordance with Entergy's accounting policy for collection of sales taxes, Entergy Mississippi will not report the collections as revenue because it is merely acting as the billing and collection agent for the state.

38

Entergy New Orleans

In March 2007, the City Council certified that Entergy New Orleans has incurred $205 million in storm-related costs through December 2006 that are eligible for CDBG funding under the state action plan, and certified Entergy New Orleans' estimated costs of $465 million for its gas system rebuild. In April 2007, Entergy New Orleans executed an agreement with the Louisiana Office of Community Development under which $200 million of CDBG funds will be made available to Entergy New Orleans. Entergy New Orleans submitted the agreement to the bankruptcy court, which approved it on April 25, 2007. Entergy New Orleans has received $180.8 million of the funds as of September 30, 2007, and the remainder will be paid to Entergy New Orleans as it incurs and submits additional eligible costs.

Retail Rate Proceedings

See Note 2 to the financial statements in the Form 10-K for information regarding retail rate proceedings involving the Utility operating companies. The following are updates to the Form 10-K.

Filings with the APSC (Entergy Arkansas)

In June 2007, after hearings on Entergy Arkansas' August 2006 base rate filing requesting an adjusted annual increase of $106.5 million, the APSC ordered Entergy Arkansas to reduce its annual rates by $5 million, and set a return on common equity of 9.9% with a hypothetical common equity level lower than Entergy Arkansas' actual capital structure. For the purpose of setting rates, the APSC disallowed a portion of costs associated with incentive compensation based on financial measures and all costs associated with Entergy's stock-based compensation plans. In addition, under the terms of the APSC's decision, recovery of storm restoration costs in the future will be limited to a fixed annual amount of $14.4 million, regardless of the actual annual amount of future restoration costs. The APSC's decision also threatens Entergy Arkansas' ability to recover $52 million of costs previously accumulated in Entergy Arkansas' storm reserve and $18 million of removal costs associated with the termination of a lease. Management believes, however, that Entergy Arkansas is entitled to recover these prudently incurred costs and will vigorously pursue its right to recover them. The APSC rejected Entergy Arkansas' request for a capacity management rider to recover incremental capacity costs, but directed Entergy Arkansas and the other parties in the case to develop an annual earnings review process that may address this issue.

The APSC denied Entergy Arkansas' request for rehearing of the APSC's June 2007 decision. In September 2007, Entergy Arkansas appealed the decision to the Arkansas Court of Appeals. In its Notice of Appeal, Entergy Arkansas states that the APSC's decision represents arbitrary decision-making, and enumerates seventeen reasons why the APSC's decision is unlawful. A briefing schedule that concludes in the first quarter 2008 has been established by the appeals court.

See Entergy Corporation and Subsidiaries' "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Federal Regulation - System Agreement Litigation" for a discussion of Entergy's compliance filing in that proceeding. In its June 2007 decision on Entergy Arkansas' rate filing, the APSC approved through December 31, 2008 a production cost allocation rider for recovery from customers of the retail portion of the costs allocated to Entergy Arkansas as a result of the System Agreement litigation.

Filings with the PUCT (Entergy Gulf States)

Entergy Gulf States made a rate filing in September 2007 with the PUCT requesting an annual rate increase totaling $107.5 million, including a base rate increase of $64.3 million and special riders totaling $43.2 million. The base rate increase includes $12.2 million for the storm damage reserve. Entergy Gulf States is requesting an 11% return on common equity.

 

39

In September 2007, Entergy Gulf States filed with the PUCT a request to increase its incremental purchased capacity recovery rider to collect approximately $25 million on an annual basis. This filing also includes a request to implement an interim surcharge to collect approximately $10 million in under-recovered incremental purchased capacity costs incurred through July 2007. A decision is expected in the first quarter 2008. Amounts collected through the rider and interim surcharge are subject to final reconciliation.

Filings with the LPSC

(Entergy Gulf States)

In May 2007, Entergy Gulf States made its formula rate plan filing with the LPSC for the 2006 test year. The filing reflected a 10.0% return on common equity, which is within the allowed earnings bandwidth, and an anticipated formula rate plan decrease of $23 million annually attributable to adjustments outside of the formula rate plan sharing mechanism related to capacity costs and the anticipated securitization of storm costs related to Hurricane Katrina and Hurricane Rita and the securitization of a storm reserve. In September 2007, Entergy Gulf States modified the formula rate plan filing to reflect a 10.07% return on common equity, which is still within the allowed bandwidth. The modified filing also reflected implementation of a $4.1 million rate increase attributable to recovery of additional LPSC approved incremental deferred and ongoing capacity costs. The rate decrease anticipated in the original filing did not occur because of the additional capacity costs approved by the LPSC, and because securitization of storm costs associated with Hurricane Katrina and Hurricane Rita and the establishment of a storm reserve have not yet occurred. Entergy Gulf States is currently exploring its securitization options.

In May 2006, Entergy Gulf States made its formula rate plan filing with the LPSC for the 2005 test year. Entergy Gulf States modified the filing in August 2006 to reflect an 11.1% return on common equity which is within the allowed bandwidth. The modified filing includes a formula rate plan increase of $17.2 million annually that provides for 1) interim recovery of $10.5 million of storm costs from Hurricane Katrina and Hurricane Rita and 2) recovery of $6.7 million of LPSC-approved incremental deferred and ongoing capacity costs. The increase was implemented, subject to refund, with the first billing cycle of September 2006. In May 2007 the LPSC approved a settlement between Entergy Gulf States and the LPSC staff, affirming the rates that were implemented in September 2006.

(Entergy Louisiana)

In May 2007, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2006 test year, indicating a 7.6% return on common equity and an anticipated formula rate plan decrease of $6.9 million. The filing also included Entergy Louisiana's request to recover $39.8 million in unrecovered fixed costs associated with the loss of customers that resulted from Hurricane Katrina and Hurricane Rita, which if approved by the LPSC would increase the return on common equity under the original filing to 9.4%, which is within the band of no change adjacent to the lower end of the sharing bandwidth. In September 2007, Entergy Louisiana modified its formula rate plan filing to reflect its implementation of certain adjustments proposed by the LPSC staff in its review of Entergy Louisiana's original filing with which Entergy Louisiana agreed, and to reflect its implementation of an $18.4 million annual formula rate plan rate increase comprised of (1) a $23.8 million increase representing 60% of Entergy Louisiana's revenue deficiency, and (2) a $5.4 million decrease for reduced incremental and deferred capacity costs. The return on common equity in the modified filing is 7.63%. The LPSC authorized Entergy Louisiana to defer for accounting purposes the difference between its $39.8 million claim for unrecovered fixed costs and 60% of the revenue deficiency to preserve Entergy Louisiana's right to pursue that claim in full during the formula rate plan proceeding. The rate decrease anticipated in the original filing did not occur because securitization of storm costs associated with Hurricane Katrina and Hurricane Rita and the establishment of a storm reserve have not yet occurred. Entergy Louisiana is currently exploring its securitization options.

40

Retail Rates- Gas (Entergy Gulf States)

In January 2007, Entergy Gulf States filed with the LPSC its gas rate stabilization plan for the test year ending September 30, 2006.  The filing showed a revenue deficiency of $3.5 million based on a return on common equity mid-point of 10.5%.  In March 2007, Entergy Gulf States filed a set of rate and rider schedules that reflected all proposed LPSC staff adjustments and implemented a $2.4 million base rate increase effective with the first billing cycle of April 2007 pursuant to the rate stabilization plan. 

Filings with the MPSC (Entergy Mississippi)

In March 2007, Entergy Mississippi made its annual scheduled formula rate plan filing for the 2006 test year with the MPSC.  The filing showed that an increase of $12.9 million in annual electric revenues is warranted.  In June 2007 the MPSC approved a joint stipulation between Entergy Mississippi and the Mississippi Public Utilities staff that provides for a $10.5 million rate increase, which was effective beginning with July 2007 billings.

Electric Industry Restructuring

Texas (Entergy Gulf States)

Refer to Note 2 to the financial statements in the Form 10-K for the current Texas legislation and Entergy Gulf States' proposed transition to competition plan.

As required by the June 2005 legislation, Entergy Gulf States filed its proposed transition to competition plan in December 2006. The plan provides that to achieve full customer choice, Entergy Gulf States should join ERCOT because ERCOT already has all of the prerequisites for retail choice. Pursuant to PUCT order, on June 4, 2007 Entergy Gulf States filed a restatement of the plan, in which Entergy Gulf States requested that the PUCT approve a "Financial Stability Provision" that is designed to ensure that Entergy Gulf States' proposed integration with ERCOT will not, during the necessary construction period, cause deterioration of its credit quality and financial strength. The June 4, 2007 filing also proposes a rule making process to implement the Financial Stability Provision and to consider the construction and ownership of necessary ERCOT integration facilities by third parties. The filing also eliminated from the plan certain provisions whereby Entergy Gulf States had the ability in its sole discretion to cease pursuit of the plan. Under Entergy Gulf States' plan, retail open access could commence as early as 2013, although that is unlikely given the PUCT's decision described below. Entergy Gulf States' plan includes an estimate that direct construction costs for facilities to interconnect Entergy Gulf States' Texas operations with ERCOT could be approximately $1 billion. The Texas Legislature did not pass legislation addressing Entergy Gulf States' transition plan before adjourning its 2007 session. PUCT hearings on Entergy Gulf States' plan were completed in July 2007. In October 2007, the PUCT abated the proceeding to allow the Southwest Power Pool (SPP) to develop additional information about the costs and benefits of Entergy Gulf States joining the SPP similar to information presented regarding Entergy Gulf States joining ERCOT. The SPP has stated that it would take a minimum of six to nine months to develop this type of information. Entergy Gulf States filed a motion for reconsideration, in which it asks the PUCT to also allow for an update to the ERCOT cost study.

In December 2006, the PUCT asked for parties to brief the effects of the 2005 legislation on the competition dockets of Entergy Gulf States, most notably, the settlement that the parties entered with respect to the unbundling of Entergy Gulf States for retail open access. Finding that the 2005 legislation now provides the mechanism by which Entergy Gulf States will transition to competition, the PUCT, on February 1, 2007, dismissed Entergy Gulf States' unbundled cost of service proceeding. After analyzing the PUCT's decision, Entergy Gulf States recorded a provision for its estimated exposure related to certain past fuel cost recoveries that may be credited to customers.

41

Co-Owner-Initiated Proceeding at the FERC

(Entergy Arkansas)

In October 2004, Arkansas Electric Cooperative (AECC) filed a complaint at the FERC against Entergy Arkansas relating to a contract dispute over the pricing of substitute energy at the co-owned Independence and White Bluff coal plants. The main issue in the case related to the consequences under the governing contracts when the dispatch of the coal units is constrained due to system operating conditions.  A hearing was held on the AECC complaint and an ALJ Initial Decision was issued in January 2006 in which the ALJ found AECC's claims to be without merit. On October 25, 2006, the FERC issued its order in the proceeding. In the order, the FERC reversed the ALJ's findings. Specifically, the FERC found that the governing contracts do not recognize the effects of dispatch constraints on the co-owned units. The FERC explained that for over twenty-three years the course of conduct of the parties was such that AECC received its full entitlement to the two coal units, regardless of any reduced output caused by system operating constraints. Based on the order, Entergy Arkansas is required to refund to AECC all excess amounts billed to AECC as a result of the system operating constraints. The FERC denied Entergy Arkansas' request for rehearing and Entergy Arkansas refunded $22.1 million (including interest) to AECC in September 2007. Entergy Arkansas had previously recorded a provision for the estimated effect of this refund. AECC has filed a protest at the FERC claiming that Entergy Arkansas owes an additional $2.5 million plus interest. Entergy Arkansas has appealed the FERC's decision to the D.C. Circuit.

 

NOTE 3. COMMON EQUITY

Common Stock

Earnings per Share

The following tables present Entergy's basic and diluted earnings per share calculations included on the consolidated income statement:

 

 

For the Three Months Ended September 30,

 

 

2007

 

2006

 

 

(In Millions, Except Per Share Data)

 

 

 

 

$/share

 

 

 

$/share

Consolidated net income

 

$461.2

 

 

 

$388.9

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares
  outstanding - basic

 


194.9

 


$2.37 

 


208.4

 


$1.87 

Average dilutive effect of:

 

 

 

 

 

 

 

 

 

Stock Options

 

4.6

 

(0.055)

 

3.8

 

(0.034)

 

Equity Units

 

0.9

 

(0.011)

 

-

 

 

Deferred Units

 

0.1

 

(0.001)

 

0.2

 

(0.002)

Average number of common shares
  outstanding - diluted

 


200.5

 


$2.30 

 


212.4

 


$1.83 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42

 

 

For the Nine Months Ended September 30,

 

 

2007

 

2006

 

 

(In Millions, Except Per Share Data)

 

 

 

 

$/share

 

 

 

$/share

Consolidated net income

 

$941.0

 

 

 

$864.3

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares
  outstanding - basic

 


197.4

 


$4.77 

 


208.0

 


$4.16 

Average dilutive effect of:

 

 

 

 

 

 

 

 

 

Stock Options

 

4.9

 

(0.115)

 

3.6

 

(0.070)

 

Equity Units

 

1.0

 

(0.023)

 

-

 

 

Deferred Units

 

0.1

 

(0.003)

 

0.2

 

(0.004)

Average number of common shares
  outstanding - diluted

 


203.4

 


$4.63 

 


211.8

 


$4.08 

 

 

 

 

 

 

 

 

 

Entergy's stock option and other equity compensation plans are discussed in Note 12 to the consolidated financial statements in the Form 10-K.

Treasury Stock

During the nine months ended September 30, 2007, Entergy Corporation issued 1,556,977 shares of its previously repurchased common stock to satisfy stock option exercises and other stock-based awards. Also during the nine months ended September 30, 2007, Entergy Corporation purchased 9,962,542 shares of its common stock for a total purchase price of $1.0 billion.

Retained Earnings

On October 26, 2007, Entergy Corporation's Board of Directors declared a common stock dividend of $0.75 per share, payable on December 1, 2007 to holders of record as of November 9, 2007.

Accumulated Other Comprehensive Income

Cash flow hedges with net unrealized losses of approximately $8.7 million net-of-tax at September 30, 2007 are expected to be reclassified into earnings during the next twelve months.

 

NOTE 4. LINES OF CREDIT, RELATED SHORT-TERM BORROWINGS, AND LONG-TERM DEBT

Entergy Corporation had in place as of September 30, 2007, a five-year credit facility, which expires in August 2012 and has a borrowing capacity of $3.5 billion. Entergy Corporation also has the ability to issue letters of credit against the total borrowing capacity of the credit facility. The facility fee is currently 0.09% of the commitment amount. Facility fees and interest rates on loans under the credit facility can fluctuate depending on the senior unsecured debt ratings of Entergy Corporation. The weighted average interest rate as of September 30, 2007 was 5.88% on the drawn portion of the facility. Following is a summary of the borrowings outstanding and capacity available under the facility as of September 30, 2007.

43


Capacity

 


Borrowings

 

Letters
of Credit

 

Capacity
Available

(In Millions)

             

$3,500 

 

$2,116 

 

$71

 

$1,313

Entergy Corporation's facility requires it to maintain a consolidated debt ratio of 65% or less of its total capitalization. If Entergy fails to meet this ratio, or if Entergy or one of the Registrant Subsidiaries (except Entergy New Orleans) default on other indebtedness or are in bankruptcy or insolvency proceedings, an acceleration of the facility maturity date may occur.

Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and Entergy Mississippi each had credit facilities available as of September 30, 2007 as follows:


Company

 


Expiration Date

 

Amount of
Facility

 

Amount Drawn as of
September 30, 2007

 

 

 

 

 

 

 

Entergy Arkansas

 

April 2008

 

$100 million (a)

 

$60 million

Entergy Gulf States

 

February 2011

 

$2 million (b)

 

-

Entergy Gulf States

 

August 2012

 

$200 million (c)

 

-

Entergy Louisiana

 

August 2012

 

$200 million (d)

 

-

Entergy Mississippi

 

May 2008

 

$30 million (e)

 

-

Entergy Mississippi

 

May 2008

 

$20 million (e)

 

-

(a)

The credit facility requires Entergy Arkansas to maintain a total shareholders' equity of at least 25% of its total assets. The interest rate on the outstanding borrowings is 7.25% as of September 30, 2007.

(b)

The credit facility allows Entergy Gulf States to issue letters of credit against the borrowing capacity of the facility. As of September 30, 2007, $1.4 million in letters of credit were outstanding. Entergy Gulf States downsized this facility from a $50 million facility in August 2007.

(c)

The credit facility allows Entergy Gulf States to issue letters of credit against the borrowing capacity of the facility. As of September 30, 2007, no letters of credit were outstanding.

(d)

The credit facility allows Entergy Louisiana to issue letters of credit against the borrowing capacity of the facility. As of September 30, 2007, no letters of credit were outstanding.

(e)

Borrowings under the Entergy Mississippi credit facilities may be secured by a security interest in its accounts receivable.

On August 2, 2007, Entergy Gulf States entered into a $200 million, 5-year bank credit facility. Entergy Gulf States has the ability to issue letters of credit against the facility. The credit agreement requires Entergy Gulf States to maintain a consolidated debt ratio of 65% or less of its total capitalization. The facility has a variable interest rate that would currently be approximately 5.54% on borrowings under the facility, and has a facility fee that is currently 0.125% of the commitment amount. The facility fee and interest rate can fluctuate depending on the senior unsecured debt ratings of Entergy Gulf States. As of September 30, 2007, there were no borrowings or letters of credit outstanding under the Entergy Gulf States $200 million facility.

On August 2, 2007, Entergy Louisiana entered into a $200 million, 5-year bank credit facility. Entergy Louisiana has the ability to issue letters of credit against the facility. The credit agreement requires Entergy Louisiana to maintain a consolidated debt ratio of 65% or less of its total capitalization. The facility has a variable interest rate that would currently be approximately 5.48% on borrowings under the facility, and has a facility fee that is currently 0.09% of the commitment amount. The facility fee and interest rate can fluctuate depending on the senior unsecured debt ratings of Entergy Louisiana. As of September 30, 2007, there were no borrowings or letters of credit outstanding under the Entergy Louisiana $200 million facility.

44

The short-term borrowings of the Registrant Subsidiaries and certain other Entergy subsidiaries are limited to amounts authorized by the FERC. The current FERC-authorized limits are effective through March 31, 2008 (except for Entergy New Orleans, which is effective through May 4, 2009). In addition to borrowings from commercial banks, these companies are authorized under a FERC order to borrow from the Entergy System money pool. The money pool is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries' dependence on external short-term borrowings. Borrowings from the money pool and external borrowings combined may not exceed the FERC-authorized limits. As of September 30, 2007, Entergy's subsidiaries' aggregate money pool and external short-term borrowings authorized limit was $2.0 billion, the aggregate outstanding borrowing from the money pool was $311.1 million, and Entergy's subsidiaries had $60 million in outstanding borrowings from external sources.

The following are the FERC-authorized limits for short-term borrowings and the outstanding short-term borrowings from the money pool and external sources for the Registrant Subsidiaries as of September 30, 2007:

 

 

Authorized

 

Borrowings

 

 

(In Millions)

 

 

 

 

 

Entergy Arkansas

 

$250

 

$90

Entergy Gulf States

 

$350

 

-

Entergy Louisiana

 

$250

 

$63

Entergy Mississippi

 

$175

 

-

Entergy New Orleans

 

$100

 

-

System Energy

 

$200

 

-

Debt Issuances

(Entergy Gulf States)

In April 2007, the PUCT issued a financing order authorizing the issuance of securitization bonds to recover $353 million of Entergy Gulf States' Hurricane Rita reconstruction costs and up to $6 million of transaction costs, offset by $32 million of related deferred income tax benefits. In June 2007, Entergy Gulf States Reconstruction Funding I, LLC, a company wholly-owned and consolidated by Entergy Gulf States, issued $329.5 million of senior secured transition bonds (securitization bonds), as follows:

 

Amount

 

(In Thousands)

Senior Secured Transition Bonds, Series A:

 

Tranche A-1 (5.51%) due October 2013

$93,500

Tranche A-2 (5.79%) due October 2018

121,600

Tranche A-3 (5.93%) due June 2022

114,400

Total senior secured transition bonds

$329,500

Although the principal amount of each tranche is not due until the dates given above, Entergy Gulf States Reconstruction Funding expects to make principal payments on the bonds over the next five years in the amounts of $19.1 million for 2008, $17.7 million for 2009, $18.6 million for 2010, $19.7 million for 2011, and $20.8 million for 2012. All of the scheduled principal payments for 2008-2012 are for Tranche A-1, except for $2.3 million for Tranche A-2 in 2012.

With the proceeds, Entergy Gulf States Reconstruction Funding purchased from Entergy Gulf States the transition property, which is the right to recover from customers through a transition charge amounts sufficient to service the securitization bonds. Entergy Gulf States began cost recovery through the transition charge in July 2007. The creditors of Entergy Gulf States do not have recourse to the assets or revenues of Entergy Gulf States Reconstruction Funding, including the transition property, and the creditors of Entergy Gulf States Reconstruction Funding

 

45

 

do not have recourse to the assets or revenues of Entergy Gulf States. Entergy Gulf States has no payment obligations to Entergy Gulf States Reconstruction Funding except to remit transition charge collections.

(Entergy Mississippi)

In January 2007, Entergy Mississippi redeemed, prior to maturity, its $100 million, 4.35% Series First Mortgage Bonds due April 2008.

(Entergy New Orleans)

Pursuant to its plan of reorganization, in May 2007 Entergy New Orleans issued notes due in three years in satisfaction of its affiliate prepetition accounts payable (approximately $74 million, including interest), including its indebtedness to the Entergy System money pool. Entergy New Orleans included in the principal amount of the notes accrued interest from September 23, 2005 at the Louisiana judicial rate of interest for 2005 (6%) and 2006 (8%), and at the Louisiana judicial rate of interest plus 1% for 2007 through the date of issuance of the notes. The Louisiana judicial rate of interest is 9.5% for 2007. Entergy New Orleans will pay interest on the notes from their date of issuance at the Louisiana judicial rate of interest plus 1%.

(System Energy)

In September 2007, System Energy issued $70 million of 6.20% Series First Mortgage Bonds due October 2012. System Energy used the proceeds to redeem, at maturity, $70 million of 4.875% Series First Mortgage Bonds in October 2007.

Entergy New Orleans Debtor-in-Possession Credit Facility

See Note 4 in the Form 10-K for a discussion of the Entergy New Orleans $200 million debtor-in-possession (DIP) credit facility. Pursuant to the terms of its plan of reorganization, which became effective in May 2007, Entergy New Orleans fully repaid its DIP credit facility borrowings.

 

NOTE 5. ACQUISITIONS

In April 2007, Entergy's Non-Utility Nuclear business purchased the 798 MW Palisades nuclear energy plant located near South Haven, Michigan from Consumers Energy Company for a net cash payment of $336 million. Entergy received the plant, nuclear fuel, inventories, and other assets. The liability to decommission the plant, as well as related decommissioning trust funds, was also transferred to Entergy's Non-Utility Nuclear business. Entergy's Non-Utility Nuclear business executed a unit-contingent, 15-year purchased power agreement (PPA) with Consumers Energy for 100% of the plant's output, excluding any future uprates. Prices under the PPA range from $43.50/MWh in 2007 to $61.50/MWh in 2022, and the average price under the PPA is $51/MWh. In the first quarter 2007, the NRC renewed Palisades' operating license until 2031. As part of the transaction, Entergy's Non-Utility Nuclear business assumed responsibility for spent fuel at the decommissioned Big Rock Point nuclear plant, which is located near Charlevoix, Michigan.  Palisades' financial results since April 2007 are included in Entergy's Non-Utility Nuclear business segment.  The following table summarizes the assets acquired and liabilities assumed at the date of acquisition.

46

 

 

Amount

 

 

(In Millions)

 

 

 

Plant (including nuclear fuel)

 

$727 

Decommissioning trust funds

 

252 

Other assets

 

41 

Total assets acquired

 

 1,020 

     

Purchased power agreement (below market)

 

420 

Decommissioning liability

 

220 

Other liabilities

 

44 

Total liabilities assumed

 

684 

     

Net assets acquired

 

$336 

Subsequent to the closing, Entergy received approximately $6 million from Consumers Energy Company as part of the Post-Closing Adjustment defined in the Asset Sale Agreement. The Post-Closing Adjustment amount resulted in an approximately $6 million reduction in plant and a corresponding reduction in other liabilities.

Non-Utility Nuclear will amortize the PPA liability to revenue over the life of the agreement. The amount that will be amortized each period is based upon the difference between the present value calculated at the date of acquisition of each year's difference between revenue under the agreement and revenue based on estimated market prices. The amounts to be amortized to revenue for the next five years will be $50 million for 2007 (including $33 million through September 30, 2007), $76 million for 2008, $53 million for 2009, $46 million for 2010, and $43 million for 2011.

 

NOTE 6. STOCK-BASED COMPENSATION

Entergy grants equity-based awards including, but not limited to, stock option awards, which are described more fully in Note 12 to the consolidated financial statements in the Form 10-K. Entergy adopted SFAS 123R, "Share-Based Payment" on January 1, 2006. The adoption of the standard did not materially affect Entergy's financial position, results of operations, or cash flows because Entergy adopted the fair value based method of accounting for stock options prescribed by SFAS 123, "Accounting for Stock-Based Compensation" on January 1, 2003. Prior to 2003, Entergy applied the recognition and measurement principles of APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for those plans. Awards under Entergy's plans generally vest over three years.

The following table includes financial information for stock options for each of the years presented:

 

2007

 

2006

 

(In Millions)

Compensation expense included in Entergy's Net Income for the third quarter

$3.9

 

$3.2

Tax benefit recognized in Entergy's Net Income for the third quarter

$1.5

 

$1.2

       

Compensation expense included in Entergy's Net Income for the nine months ended
  September 30,


$11.0

 


$9.2

Tax benefit recognized in Entergy's Net Income for the nine months ended
  September 30,

$4.2

 

$3.5

Compensation cost capitalized as part of fixed assets and inventory as of September 30,

$1.8

 

$1.6

Entergy granted 1,854,900 stock options during the first quarter 2007 with a weighted-average fair value of $14.15. At September 30, 2007, there were 11,043,483 stock options outstanding with a weighted-average exercise price of $57.96. The aggregate intrinsic value of the stock options outstanding was $556 million.

 

47

NOTE 7. RETIREMENT AND OTHER POSTRETIREMENT BENEFITS

Components of Net Pension Cost

Entergy's qualified pension cost, including amounts capitalized, for the third quarters of 2007 and 2006, included the following components:

 

 

2007

 

2006

 

 

(In Thousands)

 

 

 

 

 

Service cost - benefits earned during the period

 

$24,263 

 

$23,176 

Interest cost on projected benefit obligation

 

46,508 

 

41,814 

Expected return on assets

 

(51,008)

 

(44,482)

Amortization of prior service cost

 

1,383 

 

1,365 

Amortization of loss

 

11,444 

 

10,931 

Net pension costs

 

$32,590 

 

$32,804 

Entergy's qualified pension cost, including amounts capitalized, for the nine months ended September 30, 2007 and 2006, included the following components:

 

 

2007

 

2006

 

 

(In Thousands)

 

 

 

 

 

Service cost - benefits earned during the period

 

$72,301 

 

$69,529 

Interest cost on projected benefit obligation

 

138,662 

 

125,443 

Expected return on assets

 

(152,514)

 

(133,447)

Amortization of prior service cost

 

4,149 

 

4,096 

Amortization of loss

 

34,332 

 

32,790 

Net pension costs

 

$96,930 

 

$98,411 

The Registrant Subsidiaries' qualified pension cost, including amounts capitalized, for the third quarters of 2007 and 2006, included the following components:

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2007

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

  during the period

 

$3,638 

 

$3,011 

 

$2,231 

 

$1,089 

 

$470 

 

$1,021 

Interest cost on projected

 

 

 

 

 

 

 

 

 

 

 

 

  benefit obligation

 

10,498 

 

8,139 

 

6,251 

 

3,371 

 

1,260 

 

1,710 

Expected return on assets

 

(11,009)

 

(10,750)

 

(7,808)

 

(3,837)

 

(1,446)

 

(2,136)

Amortization of prior service cost

 

412 

 

304 

 

160 

 

114 

 

44 

 

12 

Amortization of loss

 

2,721 

 

623 

 

1,433 

 

749 

 

368 

 

151 

Net pension cost

 

$6,260 

 

$1,327 

 

$2,267 

 

$1,486 

 

$696 

 

$758 

48

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2006

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

  during the period

 

$3,626 

 

$2,993 

 

$2,182 

 

$1,077 

 

$501 

 

$1,031 

Interest cost on projected

 

 

 

 

 

 

 

 

 

 

 

 

  benefit obligation

 

9,915 

 

7,914 

 

6,052 

 

3,252 

 

1,282 

 

1,604 

Expected return on assets

 

(9,834)

 

(10,176)

 

(7,114)

 

(3,683)

 

(884)

 

(1,775)

Amortization of prior service cost

 

415 

 

309 

 

141 

 

128 

 

56 

 

12 

Amortization of loss

 

2,438 

 

640 

 

1,509 

 

725 

 

509 

 

167 

Net pension cost

 

$6,560 

 

$1,680 

 

$2,770 

 

$1,499 

 

$1,464 

 

$1,039 

The Registrant Subsidiaries' qualified pension cost, including amounts capitalized, for the nine months ended September 30, 2007 and 2006, included the following components:

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2007

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

  during the period

 

$10,914 

 

$9,033 

 

$6,693 

 

$3,267 

 

$1,410 

 

$3,063 

Interest cost on projected

 

 

 

 

 

 

 

 

 

 

 

 

  benefit obligation

 

31,494 

 

24,417 

 

18,753 

 

10,113 

 

3,780 

 

5,130 

Expected return on assets

 

(33,027)

 

(32,250)

 

(23,424)

 

(11,511)

 

(4,338)

 

(6,408)

Amortization of prior service cost

 

1,236 

 

912 

 

480 

 

342 

 

132 

 

36 

Amortization of loss

 

8,163 

 

1,869 

 

4,299 

 

2,247 

 

1,104 

 

453 

Net pension cost

 

$18,780 

 

$3,981 

 

$6,801 

 

$4,458 

 

$2,088 

 

$2,274 

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2006

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

  during the period

 

$10,878 

 

$8,979 

 

$6,547 

 

$3,231 

 

$1,503 

 

$3,093 

Interest cost on projected

 

 

 

 

 

 

 

 

 

 

 

 

  benefit obligation

 

29,745 

 

23,743 

 

18,155 

 

9,756 

 

3,845 

 

4,813 

Expected return on assets

 

(29,501)

 

(30,527)

 

(21,341)

 

(11,050)

 

(2,651)

 

(5,326)

Amortization of prior service cost

 

1,246 

 

926 

 

422 

 

385 

 

169 

 

37 

Amortization of loss

 

7,313 

 

1,919 

 

4,527 

 

2,175 

 

1,527 

 

500 

Net pension cost

 

$19,681 

 

$5,040 

 

$8,310 

 

$4,497 

 

$4,393 

 

$3,117 

Entergy recognized $4.0 million and $5.2 million in pension cost for its non-qualified pension plans in the third quarters of 2007 and 2006, respectively. Entergy recognized $12.0 million and $13.1 million in pension cost for its non-qualified pension plans for the nine months ended September 30, 2007 and 2006, respectively.

 

49

 

The Registrant Subsidiaries recognized the following pension cost for their non-qualified pension plans in the third quarters of 2007 and 2006:

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

 

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

 

 

(In Thousands)

Non-Qualified Pension Cost
  Third Quarter 2007

 

$123 

 

$317 

 

$6 

 

$44 

 

$57 

 

Non-Qualified Pension Cost
  Third Quarter 2006

 

$125 

 

$319 

 

$6 

 

$43 

 

$55 

 

The Registrant Subsidiaries recognized the following pension cost for their non-qualified pension plans for the nine months ended September 30, 2007 and 2006:

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

 

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

 

 

(In Thousands)

Non-Qualified Pension Cost Nine
  Months Ended September 30,2007

 

$369 

 

$951 

 

$18 

 

$131 

 

$171 

 

Non-Qualified Pension Cost Nine
  Months Ended September 30, 2006

 

$350 

 

$758 

 

$17 

 

$116 

 

$163 

 

Components of Net Other Postretirement Benefit Cost

Entergy's other postretirement benefit cost, including amounts capitalized, for the third quarters of 2007 and 2006, included the following components:

 

 

2007

 

2006

 

 

(In Thousands)

 

 

 

 

 

Service cost - benefits earned during the period

 

$11,105 

 

$10,370 

Interest cost on APBO

 

15,869 

 

14,316 

Expected return on assets

 

(6,358)

 

(4,756)

Amortization of transition obligation

 

958 

 

542 

Amortization of prior service cost

 

(3,959)

 

(3,688)

Amortization of loss

 

4,743 

 

5,698 

Net other postretirement benefit cost

 

$22,358 

 

$22,482 

Entergy's other postretirement benefit cost, including amounts capitalized, for the nine months ended September 30, 2007 and 2006, included the following components:

 

 

2007

 

2006

 

 

(In Thousands)

 

 

 

 

 

Service cost - benefits earned during the period

 

$33,032 

 

$31,110 

Interest cost on APBO

 

47,363 

 

42,947 

Expected return on assets

 

(18,943)

 

(14,268)

Amortization of transition obligation

 

2,874 

 

1,627 

Amortization of prior service cost

 

(11,877)

 

(11,063)

Amortization of loss

 

14,230 

 

17,092 

Net other postretirement benefit cost

 

$66,679 

 

$67,445 

50

The Registrant Subsidiaries' other postretirement benefit cost, including amounts capitalized, for the third quarters of 2007 and 2006, included the following components:

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2007

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

  during the period

 

$1,525 

 

$1,547 

 

$973 

 

$476 

 

$255 

 

$451 

Interest cost on APBO

 

3,037 

 

2,876 

 

1,941 

 

1,049 

 

870 

 

433 

Expected return on assets

 

(2,231)

 

(1,697)

 

 

(819)

 

(682)

 

(470)

Amortization of transition obligation

 

205 

 

151 

 

96 

 

88 

 

416 

 

Amortization of prior service cost

 

(197)

 

218 

 

117 

 

(62)

 

90 

 

(283)

Amortization of loss

 

1,500 

 

793 

 

764 

 

613 

 

282 

 

149 

Net other postretirement benefit cost

 

$3,839 

 

$3,888 

 

$3,891 

 

$1,345 

 

$1,231 

 

$282 

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2006

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

  during the period

 

$1,337 

 

$1,254 

 

$854 

 

$419 

 

$232 

 

$414 

Interest cost on APBO

 

2,844 

 

2,747 

 

1,856 

 

944 

 

856 

 

407 

Expected return on assets

 

(1,797)

 

(1,489)

 

 

(709)

 

(611)

 

(421)

Amortization of transition obligation

 

205 

 

151 

 

96 

 

88 

 

416 

 

Amortization of prior service cost

 

(408)

 

 

(24)

 

(137)

 

10 

 

(301)

Amortization of loss

 

1,671 

 

1,002 

 

893 

 

644 

 

343 

 

207 

Net other postretirement benefit cost

 

$3,852 

 

$3,665 

 

$3,675 

 

$1,249 

 

$1,246 

 

$308 

The Registrant Subsidiaries' other postretirement benefit cost, including amounts capitalized, for the nine months ended September 30, 2007 and 2006, included the following components:

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2007

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

  during the period

 

$4,575 

 

$4,641 

 

$2,919 

 

$1,428 

 

$765 

 

$1,353 

Interest cost on APBO

 

9,111 

 

8,628 

 

5,823 

 

3,147 

 

2,610 

 

1,299 

Expected return on assets

 

(6,693)

 

(5,091)

 

 

(2,457)

 

(2,046)

 

(1,410)

Amortization of transition obligation

 

615 

 

453 

 

288 

 

264 

 

1,248 

 

Amortization of prior service cost

 

(591)

 

654 

 

351 

 

(186)

 

270 

 

(849)

Amortization of loss

 

4,500 

 

2,379 

 

2,292 

 

1,839 

 

846 

 

447 

Net other postretirement benefit cost

 

$11,517 

 

$11,664 

 

$11,673 

 

$4,035 

 

$3,693 

 

$846 

51

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2006

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned
  during the period

 


$4,010 

 


$3,761 

 


$2,561 

 


$1,256 

 


$696 

 


$1,242 

Interest cost on APBO

 

8,531 

 

8,242 

 

5,569 

 

2,833 

 

2,569 

 

1,220 

Expected return on assets

 

(5,390)

 

(4,466)

 

 

(2,127)

 

(1,832)

 

(1,263)

Amortization of transition obligation

 

616 

 

453 

 

287 

 

263 

 

1,247 

 

Amortization of prior service cost

 

(1,223)

 

 

(73)

 

(410)

 

29 

 

(903)

Amortization of loss

 

5,013 

 

3,006 

 

2,682 

 

1,931 

 

1,028 

 

620 

Net other postretirement benefit cost

 

$11,557 

 

$10,996 

 

$11,026 

 

$3,746 

 

$3,737 

 

$923 

Employer Contributions

As of the end of October 2007, Entergy had contributed $177 million to its qualified pension plans and expects to make no additional contributions in 2007.

The Registrant Subsidiaries expect to contribute the following to qualified pension plans in 2007:

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

 

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Expected 2007 pension contributions
  disclosed in Form 10-K

 


$6,987

 


$25,346

 


$ -

 


$784

 


$43,585

 


$5,688

Pension contributions made through
  October 2007

 

$6,987

 


$25,346

 


$ -

 

$784

 

$43,585

 


$5,688

Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Medicare Act)

Based on actuarial analysis, the estimated impact of future Medicare subsidies reduced the December 31, 2006 Accumulated Postretirement Benefit Obligation by $183 million, and reduced the third quarter 2007 and 2006 other postretirement benefit cost by $6.7 million and $6.9 million, respectively. It reduced the nine months ended September 30, 2007 and 2006 other postretirement benefit cost by $19.9 million and $20.8 million, respectively. In the nine months ended September 30, 2007, Entergy received $4.6 million in Medicare subsidies for prescription drug claims.

Based on actuarial analysis, the estimated impact of future Medicare subsidies reduced the December 31, 2006 APBO, the third quarters 2007 and 2006, and the nine months ended September 30, 2007 and 2006 other postretirement benefit cost for the Registrant Subsidiaries as follows:

52

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

 

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Reduction in 12/31/2006 APBO

 

($40,636)

 

($35,991)

 

($22,486)

 

($13,560)

 

($10,110)

 

($5,966)

Reduction in third quarter 2007

 

 

 

 

 

 

 

 

 

 

 

 

  other postretirement benefit cost

 

($1,376)

 

($1,222)

 

($762)

 

($438)

 

($311)

 

($246)

Reduction in third quarter 2006

 

 

 

 

 

 

 

 

 

 

 

 

  other postretirement benefit cost

 

($1,562)

 

($1,332)

 

($865)

 

($512)

 

($376)

 

($268)

Reduction in nine months ended

 

 

 

 

 

  September 30, 2007 other

  postretirement benefit cost

($4,128)

 

($3,666)

 

($2,286)

 

($1,314)

 

($933)

 

($738)

Reduction in nine months ended

 

 

 

 

 

  September 30, 2006 other

  postretirement benefit cost

($4,685)

($3,996)

($2,595)

($1,535)

($1,127)

($803)

Medicare subsidies received in the

  nine months ended September 30,

  2007

$1,195 

 

$1,136 

 

$701 

 

$395 

 

$409 

 

$86 

For further information on the Medicare Act refer to Note 11 to the financial statements in the Form 10-K.

 

NOTE 8. BUSINESS SEGMENT INFORMATION

Entergy's reportable segments as of September 30, 2007 are Utility and Non-Utility Nuclear. "All Other" includes the parent company, Entergy Corporation, and other business activity, including the non-nuclear wholesale assets business and earnings on the proceeds of sales of previously-owned businesses. As a result of the Entergy New Orleans bankruptcy filing, Entergy discontinued the consolidation of Entergy New Orleans retroactive to January 1, 2005 and reported Entergy New Orleans results under the equity method of accounting in the Utility segment in 2006 and 2005. On May 7, 2007, the bankruptcy judge entered an order confirming Entergy New Orleans' plan of reorganization. With confirmation of the plan of reorganization, Entergy reconsolidated Entergy New Orleans in the second quarter 2007, retroactive to January 1, 2007.

Entergy's segment financial information for the third quarters of 2007 and 2006 is as follows:

 


Utility

 

Non-Utility
Nuclear*

 


All Other*

 


Eliminations

 


Consolidated

(In Thousands)

2007

 

 

 

 

 

 

 

 

 

Operating Revenues

$2,677,291

$554,128

$64,460 

($6,792)

$3,289,087

Equity in earnings of

 unconsolidated equity affiliates

$-

$-

$1,432 

$- 

$1,432

Income Taxes (Benefit)

$189,062

$61,863

($20,085)

$- 

$230,840

Net Income (Loss)

$333,098

$160,913

($32,852)

$- 

$461,159

 

 

 

 

 

 

2006

 

 

 

 

 

 

 

 

 

Operating Revenues

$2,774,447

 

$409,431

 

$77,571 

 

($6,730)

 

$3,254,719 

Equity in earnings of

 

 

 

 

 

 unconsolidated equity affiliates

$7,336

 

$-

 

$7,436 

 

$- 

 

$14,772 

Income Taxes

$141,009

 

$57,494

 

$3,934 

 

$- 

 

$202,437 

Net Income (Loss)

$290,033

 

$106,898

 

($8,174) 

 

$126 

 

$388,883 

53

Entergy's segment financial information for the nine months ended September 30, 2007 and 2006 is as follows:

 


Utility

 

Non-Utility
Nuclear*

 


All Other*

 


Eliminations

 


Consolidated

(In Thousands)

2007

 

 

 

 

 

 

 

 

 

Operating Revenues

$7,112,945 

$1,483,900

$175,326 

($19,673)

$8,752,498

Equity in earnings of

 unconsolidated equity affiliates

($1)

$-

$3,534 

$- 

$3,533

Income Taxes (Benefit)

$368,215 

$210,527

($95,385)

$- 

$483,357

Net Income (Loss)

$585,741 

$397,808

($42,593)

$- 

$940,956

Total Assets

$26,472,335 

$6,857,774

$1,937,032 

($1,508,624)

$33,758,517

2006

 

 

 

 

 

 

 

 

 

Operating Revenues

$7,097,362 

 

$1,159,803

 

$227,043 

 

($32,954)

 

$8,451,254

Equity in earnings of

 

 

 

 

 

 unconsolidated equity affiliates

$23,661 

 

$-

 

$3,182 

 

$- 

 

$26,843

Income Taxes (Benefit)

$311,760 

 

$151,742

 

($19,332)

 

$- 

 

$444,170

Net Income (Loss)

$609,407 

 

$251,806

 

$3,091 

 

$10 

 

$864,314

Total Assets

$24,751,827 

$5,230,065

$2,851,702 

($2,275,940) 

$30,557,654

Businesses marked with * are sometimes referred to as the "competitive businesses," with the exception of the parent company, Entergy Corporation. Eliminations are primarily intersegment activity.

NOTE 9. ENTERGY NEW ORLEANS BANKRUPTCY PROCEEDING

See Note 18 to the financial statements in the Form 10-K for a discussion of the Entergy New Orleans bankruptcy proceeding. On May 7, 2007, the bankruptcy judge entered an order confirming Entergy New Orleans' plan of reorganization. With the receipt of CDBG funds, and the agreement on insurance recovery with one of its excess insurers, Entergy New Orleans waived the conditions precedent in its plan of reorganization, and the plan became effective on May 8, 2007.

Following are significant terms in Entergy New Orleans' plan of reorganization:

  • Entergy New Orleans paid in full, in cash, the allowed third-party prepetition accounts payable (approximately $29 million, including interest). Entergy New Orleans paid interest from September 23, 2005 at the Louisiana judicial rate of interest for 2005 (6%) and 2006 (8%), and at the Louisiana judicial rate of interest plus 1% for 2007 through the date of payment. The Louisiana judicial rate of interest for 2007 is 9.5%.
  • Entergy New Orleans issued notes due in three years in satisfaction of its affiliate prepetition accounts payable (approximately $74 million, including interest), including its indebtedness to the Entergy System money pool. Entergy New Orleans included in the principal amount of the notes accrued interest from September 23, 2005 at the Louisiana judicial rate of interest for 2005 (6%) and 2006 (8%), and at the Louisiana judicial rate of interest plus 1% for 2007 through the date of issuance of the notes. The Louisiana judicial rate of interest is 9.5% for 2007. Entergy New Orleans will pay interest on the notes from their date of issuance at the Louisiana judicial rate of interest plus 1%.
  • Entergy New Orleans repaid to Entergy Corporation, in full, in cash, the outstanding borrowings under the debtor-in-possession (DIP) credit agreement (approximately $67 million).
  • Entergy New Orleans' first mortgage bonds will remain outstanding with their current maturity dates and interest terms. Pursuant to an agreement with its first mortgage bondholders, Entergy New Orleans paid the first mortgage bondholders an amount equal to the one year of interest from the bankruptcy petition date that the bondholders had waived previously in the bankruptcy proceeding (approximately $12 million).

 

54

 

  • Entergy New Orleans' preferred stock will remain outstanding on its current dividend terms, and Entergy New Orleans paid its unpaid preferred dividends in arrears (approximately $1 million).
  • Litigation claims will generally be unaltered, and will generally proceed as if Entergy New Orleans had not filed for bankruptcy protection, with exceptions for certain claims.

(Entergy Corporation)

With confirmation of the plan of reorganization, Entergy reconsolidated Entergy New Orleans in the second quarter 2007, retroactive to January 1, 2007. Because Entergy owns all of the common stock of Entergy New Orleans, reconsolidation does not affect the amount of net income that Entergy records from Entergy New Orleans' operations for any current or prior period, but does result in Entergy New Orleans' results being included in each individual income statement line item in 2007, rather than just its net income being presented as "Equity in earnings (loss) of unconsolidated equity affiliates," as will remain the case for 2005 and 2006.

(Entergy New Orleans)

Reorganization items reported as operating expenses in 2006 in the Entergy New Orleans income statement primarily consist of professional fees associated with the bankruptcy case.

 

NOTE 10. INCOME TAXES

Entergy or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. With few exceptions, as discussed below, Entergy is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by taxing authorities for years before 2002.

Entergy entered into an agreement with the IRS Appeals Division in the second quarter 2007 to partially settle tax years 1999 - 2001. Entergy will litigate the following issues that it is not settling:

  • The ability to credit the U.K. Windfall Tax against U.S. tax as a foreign tax credit - Entergy expects that the total tax to be included in IRS Notices of Deficiency already issued and to be issued in the future on this issue will be $152 million. The U.K. Windfall Tax relates to Entergy's former investment in London Electricity. The tax and interest associated with this issue total $212 million for all open tax years.
  • The validity of Entergy's change in method of tax accounting for street lighting assets and the related increase in depreciation deductions - Entergy expects that the total tax to be included in IRS Notices of Deficiency already issued and to be issued in the future on this issue will be $26 million. The federal and state tax and interest associated with this issue total $42 million for all open tax years.
  • The allowance of depreciation deductions that resulted from Entergy's purchase price allocations on its acquisitions of its nuclear power plants - Entergy expects that the total tax to be included in IRS Notices of Deficiency already issued and to be issued in the future on this issue will be $34 million. The federal and state tax and interest associated with this issue total $39 million for all open tax years.

The U.K. Windfall Tax and street lighting issues are already docketed in U.S. Tax Court for tax years 1997 and 1998 with a trial date set in the first quarter 2008.

The IRS completed its examination of the 2002 and 2003 tax returns and issued an Examination Report on June 29, 2007. During the examination, Entergy agreed to adjustments related to its method of accounting for income tax purposes related to 1) its wholesale electric power contracts and 2) the simplified method of allocating overhead or "mixed service costs" provided for under IRS regulations, which affects the amount of cost of goods sold related to the production of electricity.

55

Entergy's agreement with the IRS on electric power contracts involved an adjustment to reduce Entergy Louisiana Holdings' deduction related to its accounting for the contract to purchase power from the Vidalia hydroelectric project. The adjustment did not have a material impact on Entergy Louisiana Holdings' earnings. The agreement on overhead allocation methodology related to the Registrant Subsidiaries' 2003 filing of a change in tax accounting method for the allocation of "mixed service costs" to self-produced assets. Entergy reached a settlement agreement concerning the Registrant Subsidiaries' deductions related to the method change for the year ended December 31, 2003. As Entergy has a consolidated net operating loss for 2003, these adjustments have the effect of reducing the consolidated net operating loss carryover and do not require a payment to the IRS at this time. The settlement did not have a material impact on the Registrant Subsidiaries' earnings.

In the report for the 2002-2003 audit cycle, the IRS also proposed adjustments which Entergy did not agree to as follows: 1) the U.K. Windfall Tax foreign tax credit issue mentioned above; 2) the street lighting issue mentioned above; 3) certain repair deductions; 4) deductions claimed for research and experimentation (R&E) expenditures; 5) income tax credits claimed for R&E; and 6) a 2003 deduction associated with the revisions to the emergency plans at the Indian Point Energy Center. Regarding all of these issues, Entergy disagrees with the IRS Examination Division position and filed a formal protest on July 30, 2007 with the IRS and will pursue administrative relief within the IRS Appeals Division.

Entergy believes that the provisions recorded in its financial statements are sufficient to address these issues as well as other liabilities that are reasonably estimable, including an estimate of probable interest expense, associated with all uncertain tax positions.

Entergy has $237 million in deposits on account with the IRS to cover its uncertain tax positions.

FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48) was issued in July 2006. FIN 48 establishes a "more-likely-than-not" recognition threshold that must be met before a tax benefit can be recognized in the financial statements. If a tax deduction is taken on a tax return, but does not meet the more-likely-than-not recognition threshold, an increase in income tax liability, above what is payable on the tax return, is required to be recorded. Entergy and the Registrant Subsidiaries adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48), on January 1, 2007. As a result of the implementation of FIN 48, Entergy recognized an increase in the liability for unrecognized tax benefits of approximately $5 million, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.

As of January 1, 2007, Entergy had a total balance of unrecognized tax benefits of approximately $2 billion. Included in this balance of unrecognized tax benefits are $1.7 billion of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the effect of deferred tax accounting, other than on interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective income tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. Entergy's January 1, 2007 balance of unrecognized tax benefits includes $244 million which could affect the effective income tax rate. Entergy accrues interest and penalties expenses related to unrecognized tax benefits in income tax expense. Entergy's January 1, 2007 balance of unrecognized tax benefits includes approximately $52 million accrued for the possible payment of interest and penalties.

56

As of January 1, 2007, Entergy and the Registrant Subsidiaries had total balances of unrecognized tax benefits reflected in their balance sheets as follows:

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

 

Entergy

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

(In Thousands)

Taxes accrued

 

($184,372)

($43,445)

 

($640)

 

$234 

 

$5,830 

 

$4,304 

 

($35,506)

Accumulated deferred
  income taxes and
  taxes accrued

 



2,161,372 



194,718 

 



193,949 

 



58,839 

 



44,599 

 



16,118 

 



209,599 

Total unrecognized
  tax benefit

 


$1,977,000 


$151,273 

 


$193,309 

 


$59,073 

 


$50,429 

 


$20,422 

 


$174,093 

The Registrant Subsidiaries' January 1, 2007 balances of unrecognized tax benefits included amounts that could affect the effective income tax rate as follows (in millions):

Entergy Arkansas

$0.8

Entergy Gulf States

$3.6

Entergy Louisiana

$1.2

Entergy Mississippi

$3.4

Entergy New Orleans

$1.4

System Energy

$1.7

The Registrant Subsidiaries accrue interest and penalties related to unrecognized tax benefits in income tax expense. Included in the January 1, 2007 balance of unrecognized tax benefits were accruals for the possible payment of interest and penalty as follows (in millions):

Entergy Arkansas

$1.6

Entergy Gulf States

$4.0

Entergy Louisiana

$0.8

Entergy Mississippi

$3.9

Entergy New Orleans

$0.9

System Energy

$0.8

Entergy and the Registrant Subsidiaries do not expect that total unrecognized tax benefits will significantly change within the next twelve months.

 

NOTE 11. NEW ACCOUNTING PRONOUNCEMENTS

In September 2006 the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" (SFAS 157), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 generally does not require any new fair value measurements. However, in some cases, the application of SFAS 157 in the future may change Entergy's practice for measuring and disclosing fair values under other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for Entergy in the first quarter 2008 and will be applied prospectively. Entergy is currently evaluating SFAS 157 and its potential future effects on its financial position, results of operations, and cash flows.

The FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159) during the first quarter 2007. SFAS 159 provides an option for companies to select certain financial assets and liabilities to be

 

57

 

accounted for at fair value with changes in the fair value of those assets or liabilities being reported through earnings. The intent of the standard is to mitigate volatility in reported earnings caused by the application of the more complicated fair value hedging accounting rules. Under SFAS 159, companies can select existing assets or liabilities for this fair value option concurrent with the effective date of January 1, 2008 for companies with fiscal years ending December 31 or can select future assets or liabilities as they are acquired or entered into. Entergy is in the process of evaluating the potential effect of making this accounting election, but does not expect the provisions of this standard to have a material effect on its financial position, results of operations, or cash flows.

In June 2006, the EITF reached a consensus on EITF Issue 06-3 "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)" (EITF 06-3). The scope of this issue includes any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, and may include, but is not limited to, sales, use, value added, and some excise taxes. Under EITF 06-3, the presentation of taxes within the scope of this issue on either a gross basis (included in revenues and costs) or a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. For any such taxes reported on a gross basis, the amounts of those taxes in interim and annual financial statements, for each period for which an income statement is presented, should be disclosed if those amounts are significant. Entergy's policy is to present such taxes on a net basis, unless required to report differently by a regulatory authority. EITF 06-3 did not affect Entergy's financial statements.

__________________________________

In the opinion of the management of Entergy Corporation, Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy, the accompanying unaudited financial statements contain all adjustments (consisting primarily of normal recurring accruals and reclassification of previously reported amounts to conform to current classifications) necessary for a fair statement of the results for the interim periods presented. The business of the Registrant Subsidiaries is subject to seasonal fluctuations, however, with the peak periods occurring during the third quarter. The results for the interim periods presented should not be used as a basis for estimating results of operations for a full year.

58

 

Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk

Refer to "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Market and Credit Risk Sensitive Instruments."

Part I, Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of September 30, 2007, evaluations were performed under the supervision and with the participation of Entergy Corporation, Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy Resources (each individually a "Registrant" and collectively the "Registrants") management, including their respective Chief Executive Officers (CEO) and Chief Financial Officers (CFO). The evaluations assessed the effectiveness of the Registrants' disclosure controls and procedures. Based on the evaluations, each CEO and CFO has concluded that, as to the Registrant or Registrants for which they serve as CEO or CFO, the Registrant's or Registrants' disclosure controls and procedures are effective to ensure that information required to be disclosed by each Registrant in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms; and that the Registrant's or Registrants' disclosure controls and procedures are also effective in reasonably assuring that such information is accumulated and communicated to the Registrant's or Registrants' management, including their respective CEOs and CFOs, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

Under the supervision and with the participation of the Registrants' management, including their respective CEOs and CFOs, the Registrants evaluated changes in internal control over financial reporting that occurred during the quarter ended September 30, 2007 and found no change that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

 

59

ENTERGY ARKANSAS, INC.

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

Results of Operations

Net Income

Third Quarter 2007 Compared to Third Quarter 2006

Net income decreased $5.1 million primarily due to a higher effective income tax rate, partially offset by higher net revenue.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Net income decreased $30.3 million primarily due to a higher effective income tax rate, higher other operation and maintenance expenses, higher depreciation and amortization expenses, and higher interest charges. The decrease was partially offset by higher net revenue.

Net Revenue

Third Quarter 2007 Compared to Third Quarter 2006

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory credits. Following is an analysis of the change in net revenue comparing the third quarter 2007 to the third quarter 2006.

 

 

Amount

 

 

(In Millions)

 

 

 

2006 net revenue

 

$344.1 

Net wholesale revenue

 

20.2 

Pass-through rider revenue

 

 (15.3)

Other

 

7.1 

2007 net revenue

 

$356.1 

The net wholesale revenue variance is primarily due to lower wholesale revenues in the third quarter 2006 due to an October 2006 FERC order requiring Entergy Arkansas to make a refund to a coal plant co-owner resulting from a contract dispute, in addition to re-pricing revisions, retroactive to 2003, of $5.9 million of purchased power agreements among Entergy system companies as directed by the FERC.

The pass-through rider revenue variance is primarily due to a change effective in the third quarter 2006 in the accounting for city franchise tax revenues as directed by the APSC. The change resulted in an increase in 2006 in rider revenue with a corresponding increase in taxes other than income taxes, resulting in no effect on net income.

Gross operating revenues and fuel and purchased power expenses

Gross operating revenues decreased primarily due to a decrease of $108.5 million in fuel cost recovery revenues due to a decrease in the energy cost recovery rider effective April 2007 and lower pass-through rider revenue of $15.3 million, as discussed above. The energy cost recovery rider filings are discussed in Note 2 to the financial statements in the Form 10-K. The decrease was partially offset by production cost allocation rider revenues of $69.6 million which became effective in July 2007 as a result of the System Agreement litigation. As a result of the System

 

60

 

Agreement litigation, Entergy Arkansas also has a corresponding increase in fuel expense for payments to other Entergy system companies such that there is no effect on net income. The System Agreement litigation is referenced below under "Significant Factors and Known Trends."

Fuel and purchased power expenses decreased primarily due to a decrease in deferred fuel expense partially offset by the rough production cost equalization payments to affiliate companies as a result of the System Agreement litigation.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory credits. Following is an analysis of the change in net revenue comparing the nine months ended September 30, 2007 to the nine months ended September 30, 2006.

 

 

Amount

 

 

(In Millions)

 

 

 

2006 net revenue

 

$835.6 

Net wholesale revenue

 

12.3 

Deferred fuel cost revision

 

8.6 

Transmission revenue

 

7.8 

Reserve equalization

 

4.9 

Other

 

7.8 

2007 net revenue

 

877.0 

The net wholesale revenue variance is primarily due to lower wholesale revenues in the third quarter 2006 due to an October 2006 FERC order requiring Entergy Arkansas to make a refund to a coal plant co-owner resulting from a contract dispute, in addition to re-pricing revisions, retroactive to 2003, of $5.9 million of purchased power agreements among Entergy system companies as directed by the FERC.

The deferred fuel cost revision variance is primarily due to the 2006 energy cost recovery true-up, made in the first quarter 2007, which increased net revenue by $6.6 million.

The transmission revenue variance is due to higher rates and the addition of new transmission customers in late-2006.

The reserve equalization variance is due to lower reserve equalization expense related to changes in the Entergy System generation mix compared to the same period in 2006.

Gross operating revenues and fuel and purchased power expenses

Gross operating revenues decreased primarily due to a decrease of $94.6 million in fuel cost recovery revenues due to a decrease in the energy cost recovery rider effective April 2007. The energy cost recovery rider filings are discussed in Note 2 to the financial statements in the Form 10-K. The decrease was partially offset by production cost allocation rider revenues of $69.6 million which became effective in July 2007 as a result of the System Agreement litigation. As a result of the System Agreement litigation, Entergy Arkansas also has a corresponding increase in fuel expense for payments to other Entergy system companies such that there is no effect on net income. The System Agreement litigation is referenced below under "Significant Factors and Known Trends."

Fuel and purchased power expenses decreased primarily due to a decrease in deferred fuel expense partially offset by the rough production cost equalization payments to affiliate companies as a result of the System Agreement litigation.

 

61

Other Income Statement Variances

Third Quarter 2007 Compared to Third Quarter 2006

Other operation and maintenance expenses decreased primarily due to:

  • a decrease of $7.9 million in payroll, payroll-related, and benefit costs; and
  • a decrease of $4.4 million in transmission spending due to lower transmission equalization expenses.

Taxes other than income taxes decreased primarily due to a decrease in city franchise tax expense due to a change effective in August 2006 in the accounting for city franchise tax revenues as directed by the APSC. The change resulted in an increase in taxes other than income taxes in 2006 with a corresponding increase in rider revenue, resulting in no effect on net income.

Interest and other charges increased primarily due to higher interest accrued of $3 million on advances from independent power producers.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Other operation and maintenance expenses increased primarily due to:

  • an increase of $4.3 million in legal spending due to increased litigation and legal fees;
  • an increase of $4.2 million in distribution spending due to vegetation maintenance work and increased contract labor costs;
  • an increase of $2.8 million in nuclear spending due to higher NRC fees and labor costs;
  • an increase of $2.4 million in fossil spending due to outage scopes differing compared to prior year; and
  • an increase of $1.9 million in transmission spending related to the Independent Coordinator of Transmission.

Partially offsetting the increase was a decrease of $9.6 million in payroll, payroll-related, and benefits costs.

Depreciation and amortization expenses increased primarily due to an increase in plant in service and a revision in 2006 of estimated depreciable lives involving certain intangible assets.

Interest and other charges increased primarily due to higher interest accrued of $6.5 million recorded on advances from independent power producers.

Income Taxes

The effective income tax rate was 34.9% for the third quarter 2007 and 37.7% for the nine months ended September 30, 2007. The difference in the effective income tax rate for the nine months ended September 30, 2007 versus the federal statutory rate of 35.0% is primarily due to book and tax differences related to utility plant items and state income taxes.

The effective income tax rate was 13.8% for the third quarter 2006 and 19.7% for the nine months ended September 30, 2006. The differences in the effective income tax rates for the third quarter 2006 and the nine months ended September 30, 2006 versus the federal statutory rate of 35.0% are primarily due to the flow-through of a pension item.

 

62

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2007 and 2006 were as follows:

 

 

2007

 

2006

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$34,815 

 

$9,393 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

262,234 

 

379,580 

 

Investing activities

 

(196,893)

 

(205,230)

 

Financing activities

 

(96,831)

 

(164,843)

Net increase (decrease) in cash and cash equivalents

 

(31,490)

 

9,507 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$3,325 

 

$18,900 

Operating Activities

Cash flow from operations decreased $117.3 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 primarily due to decreased recovery of deferred fuel costs and income tax payments of $25.8 million in 2007 compared to income tax refunds of $23.9 million in 2006. The decrease was offset by the timing of payments to vendors and collection of receivables from customers and a decrease of $107.6 million in pension contributions.

Investing Activities

Net cash flow used in investing activities decreased $8.3 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 primarily due to money pool activity. The decrease was partially offset by an increase in construction expenditures resulting from additional spending on substations and transmission lines.

Financing Activities

Net cash flow used in financing activities decreased $68 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 primarily due to borrowings on a credit facility in 2007 and money pool activity, partially offset by an increase in common stock dividends paid.

Capital Structure

Entergy Arkansas' capitalization is balanced between equity and debt, as shown in the following table.

 

 

September 30,
2007

 

December 31,
2006

 

 

 

 

 

Net debt to net capital

 

49.3%

 

47.5%

Effect of subtracting cash from debt

 

0.1%

 

0.6%

Debt to capital

 

49.4%

 

48.1%

Net debt consists of debt less cash and cash equivalents. Debt consists of notes payable, capital lease obligations, and long-term debt, including the currently maturing portion. Capital consists of debt and shareholders' equity. Net capital consists of capital less cash and cash equivalents. Entergy Arkansas uses the net debt to net capital ratio in analyzing its financial condition and believes it provides useful information to its investors and creditors in evaluating Entergy Arkansas' financial condition.

 

63

Uses and Sources of Capital

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources" in the Form 10-K for a discussion of Entergy Arkansas' uses and sources of capital. Following are updates to the information provided in the Form 10-K.

See the table in the Form 10-K under "Uses of Capital" which sets forth the amounts of Entergy Arkansas' planned construction and other capital investments for 2007 through 2009. In July 2007, Entergy Arkansas signed an agreement to purchase for $210 million the Ouachita Power Facility, a 789 MW natural gas-fired, combined-cycle, load-following generating facility located in north Louisiana and owned by Quachita Power, LLC.  Entergy Arkansas also plans to invest approximately $43 million in plant upgrades and transaction costs.  Upgrades to the Utility operating companies' transmission system also are expected to be required to obtain long-term transmission service for this resource.  The identity and cost of the transmission upgrades have not yet been determined definitively; additional transmission studies are currently underway.  The initial results of those additional studies are expected by the end of November 2007.  The Ouachita plant will be 100 percent owned by Entergy Arkansas, and the acquisition is expected to close in 2008.  Entergy Arkansas expects to sell to Entergy Gulf States-Louisiana, under a separate agreement, approximately one-third of the output of the Ouachita plant on a long-term basis.  The purchase of the plant is contingent upon obtaining necessary approvals, including full cost recovery, from various federal and state regulatory and permitting agencies.  Entergy Arkansas filed with the APSC in September 2007 for its approval of the acquisition, including full cost recovery, and the APSC approved a bifurcated procedural schedule whereby a hearing will be conducted first on an interim tolling agreement connected with the acquisition in December 2007, with a later hearing on the acquisition being conducted by April 2008.  APSC staff and Arkansas attorney general witnesses have filed testimony that generally oppose cost recovery by a separate rider, but argue that the cost recovery should be by the annual earnings review process currently being developed. An APSC staff witness also opposes allocating one-third of the output for sale to Entergy Gulf States-Louisiana. In November 2007, Entergy Gulf States filed a request with the LPSC for authorization for Entergy Gulf States-Louisiana to purchase one-third of the capacity and energy of the Ouachita plant during the term of the interim tolling agreement and for authorization for Entergy Gulf States-Louisiana to purchase one-third of the plant's capacity and energy on a life-of-unit basis after the plant's acquisition. The planned capital investments estimate in the Form 10-K included $190 million in 2008 for the estimated cost of an acquisition of this type.

In April 2007, Entergy Arkansas renewed its credit facility through April 2008 and increased the amount of the credit facility to $100 million. There were $60 million in borrowings under the Entergy Arkansas credit facility as of September 30, 2007. The interest rate on the outstanding borrowings is 7.25% as of September 30, 2007.

Entergy Arkansas' receivables from or (payables to) the money pool were as follows:

September 30,
2007

 

December 31,
2006

 

September 30,
2006

 

December 31,
2005

(In Thousands)

 

 

 

 

 

 

 

($29,924)

 

$16,109

 

$19,659

 

($27,346)

See Note 4 to the financial statements in the Form 10-K for further description of the money pool and the credit facility.

Significant Factors and Known Trends

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends" in the Form 10-K for a discussion of state and local rate regulation, energy cost rate investigation, federal regulation, utility restructuring, nuclear matters, and environmental risks. Following are updates to the information provided in the Form 10-K.

 

64

State and Local Rate Regulation

In June 2007, after hearings on Entergy Arkansas' August 2006 base rate filing requesting an adjusted annual increase of $106.5 million, the APSC ordered Entergy Arkansas to reduce its annual rates by $5 million, and set a return on common equity of 9.9% with a hypothetical common equity level lower than Entergy Arkansas' actual capital structure. For the purpose of setting rates, the APSC disallowed a portion of costs associated with incentive compensation based on financial measures and all costs associated with Entergy's stock-based compensation plans. In addition, under the terms of the APSC's order, recovery of storm restoration costs in the future will be limited to a fixed annual amount of $14.4 million, regardless of the actual annual amount of future restoration costs. The APSC's order also threatens Entergy Arkansas' ability to recover $52 million of costs previously accumulated in Entergy Arkansas' storm reserve and $18 million of removal costs associated with the termination of a lease. Management believes, however, that Entergy Arkansas is entitled to recover these prudently incurred costs and will vigorously pursue its right to recover them. The APSC rejected Entergy Arkansas' request for a capacity management rider to recover incremental capacity costs, but directed Entergy Arkansas and the other parties in the case to develop an annual earnings review process that may address this issue.

The APSC denied Entergy Arkansas' request for rehearing of the APSC's June 2007 decision. In September 2007, Entergy Arkansas appealed the decision to the Arkansas Court of Appeals. In its Notice of Appeal, Entergy Arkansas states that the APSC's decision represents arbitrary decision-making, and enumerates seventeen reasons why the APSC's decision is unlawful. A briefing schedule that concludes in the first quarter 2008 has been established by the appeals court.

See Entergy Corporation and Subsidiaries' "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Federal Regulation - System Agreement Litigation" for a discussion of Entergy's compliance filing in that proceeding. In its June 2007 decision on Entergy Arkansas' rate filing, the APSC approved through December 31, 2008 a production cost allocation rider for recovery from customers of the retail portion of the costs allocated to Entergy Arkansas as a result of the System Agreement litigation.

Energy Cost Rate Investigation

In March 2007, in order to allow further consideration by the APSC, the APSC granted Entergy Arkansas' petition for rehearing and for stay of the APSC's January 2007 order in the proceeding investigating Entergy Arkansas' interim energy cost rate. The APSC has taken no action in this proceeding since its March 2007 order.

In its June 2007 order regarding Entergy Arkansas' rate case, the APSC approved the continuation of Entergy Arkansas' energy cost recovery rider through December 31, 2008.

Federal Regulation

See "System Agreement Proceedings", "Independent Coordinator of Transmission", and "Available Flowgate Capacity Proceeding" in the "Significant Factors and Known Trends" section of Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis for updates to the discussion in the Form 10-K.

Critical Accounting Estimates

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy Arkansas' accounting for nuclear decommissioning costs, unbilled revenue, and qualified pension and other postretirement benefits.

65

 

New Accounting Pronouncements

See "New Accounting Pronouncements" section of Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis for a discussion of new accounting pronouncements.

66

 

ENTERGY ARKANSAS, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
         
    Three Months Ended   Nine Months Ended
    2007   2006   2007   2006
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Electric   $624,664    $660,885    $1,561,428    $1,612,730 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   (6,674)   130,942    114,173    318,219 
  Purchased power   277,627    186,758    587,122    473,669 
  Nuclear refueling outage expenses   7,137    7,509    21,410    22,235 
  Other operation and maintenance   111,723    120,140    326,781    317,790 
Decommissioning   8,271    7,737    24,405    22,828 
Taxes other than income taxes   23,011    38,489    59,245    57,091 
Depreciation and amortization   57,278    54,547    170,107    161,508 
Other regulatory credits - net   (2,405)   (907)   (16,896)   (14,793)
TOTAL   475,968    545,215    1,286,347    1,358,547 
                 
OPERATING INCOME   148,696    115,670    275,081    254,183 
                 
OTHER INCOME                
Allowance for equity funds used during construction   1,794    2,242    9,191    6,060 
Interest and dividend income   3,687    4,972    15,420    16,645 
Miscellaneous - net   (594)   (784)   (2,400)   (2,356)
TOTAL   4,887    6,430    22,211    20,349 
                 
INTEREST AND OTHER CHARGES  
Interest on long-term debt   19,325    19,394    58,456    57,733 
Other interest - net   6,396    650    13,211    3,518 
Allowance for borrowed funds used during construction   (748)   (960)   (4,261)   (2,639)
TOTAL   24,973    19,084    67,406    58,612 
                 
INCOME BEFORE INCOME TAXES   128,610    103,016    229,886    215,920 
                 
Income taxes   44,909    14,204    86,709    42,450 
                 
NET INCOME   83,701    88,812    143,177    173,470 
                 
Preferred dividend requirements and other   1,718    1,718    5,155    5,841 
                 
EARNINGS APPLICABLE TO                
COMMON STOCK   $81,983    $87,094    $138,022    $167,629 
                 
See Notes to Financial Statements.                

 

67

 

 

 

 

 

 

 

 

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68

 

ENTERGY ARKANSAS, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
     
    2007   2006
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $143,177    $173,470 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Reserve for regulatory adjustments   (18,607)   21,323 
  Other regulatory credits - net   (16,896)   (14,793)
  Depreciation, amortization, and decommissioning   194,512    184,336 
  Deferred income taxes and investment tax credits   2,770    (105,087)
  Changes in working capital:        
    Receivables   (20,717)   (70,335)
    Fuel inventory   3,555    (5,389)
    Accounts payable   83,139    (28,836)
    Taxes accrued   (37,161)   168,985 
    Interest accrued   1,339    3,521 
    Deferred fuel costs   (68,021)   144,778 
    Other working capital accounts   (135,837)   11,967 
  Provision for estimated losses and reserves   (183)   (1,396)
  Changes in other regulatory assets   26,956    (58,208)
  Other   104,208    (44,756)
Net cash flow provided by operating activities   262,234    379,580 
         
INVESTING ACTIVITIES        
Construction expenditures   (212,835)   (183,878)
Allowance for equity funds used during construction   9,191    6,060 
Nuclear fuel purchases   (40,353)   (49,269)
Proceeds from sale/leaseback of nuclear fuel   42,220    49,027 
Proceeds from nuclear decommissioning trust fund sales   59,155    84,126 
Investment in nuclear decommissioning trust funds   (68,569)   (91,168)
Change in money pool receivable - net   14,298    (19,659)
Other regulatory investments   -    (469)
Net cash flow used in investing activities   (196,893)   (205,230)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of preferred stock   -    73,355 
Redemption of preferred stock   -    (75,885)
Change in credit borrowing - net   60,000    - 
Change in money pool payable - net   29,924    (27,346)
Dividends paid:   -     
  Common stock   (181,600)   (128,900)
  Preferred stock   (5,155)   (6,067)
Net cash flow used in financing activities   (96,831)   (164,843)
         
Net increase (decrease) in cash and cash equivalents   (31,490)   9,507 
         
Cash and cash equivalents at beginning of period   34,815    9,393 
         
Cash and cash equivalents at end of period   $3,325    $18,900 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid/(received) during the period for:        
  Interest - net of amount capitalized   $60,050    $48,682 
  Income taxes   $25,795    ($23,883)
         
See Notes to Financial Statements.        
         

69

 

 

ENTERGY ARKANSAS, INC.
BALANCE SHEETS
ASSETS
September 30, 2007 and December 31, 2006
(Unaudited)
   
  2007   2006
  (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents:        
  Cash   $3,325    $2,849 
  Temporary cash investments - at cost,        
   which approximates market   -    31,966 
     Total cash and cash equivalents   3,325    34,815 
Accounts receivable:        
  Customer   140,054    105,347 
  Allowance for doubtful accounts   (15,676)   (15,257)
  Associated companies   42,984    57,554 
  Other   79,154    114,108 
  Accrued unbilled revenues   86,116    66,876 
     Total accounts receivable   332,632    328,628 
Deferred fuel costs   70,178    2,157 
Accumulated deferred income taxes   -    19,232 
Fuel inventory - at average cost   19,418    22,973 
Materials and supplies - at average cost   105,792    100,061 
Deferred nuclear refueling outage costs   24,370    23,678 
System agreement cost equalization   107,886    - 
Prepayments and other   36,354    6,368 
TOTAL   699,955    537,912 
         
OTHER PROPERTY AND INVESTMENTS        
Investment in affiliates - at equity   11,205    11,206 
Decommissioning trust funds   467,709    439,408 
Non-utility property - at cost (less accumulated depreciation)   1,443    1,446 
Other   5,390    2,976 
TOTAL   485,747    455,036 
         
UTILITY PLANT        
Electric   6,737,752    6,599,348 
Property under capital lease   3,122    5,260 
Construction work in progress   136,093    113,069 
Nuclear fuel under capital lease   93,347    124,850 
Nuclear fuel   17,334    21,044 
TOTAL UTILITY PLANT   6,987,648    6,863,571 
Less - accumulated depreciation and amortization   3,088,984    2,986,576 
UTILITY PLANT - NET   3,898,664    3,876,995 
         
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  SFAS 109 regulatory asset - net   95,606    93,682 
  Other regulatory assets   520,860    542,052 
Other   36,556    35,359 
TOTAL   653,022    671,093 
         
TOTAL ASSETS   $5,737,388    $5,541,036 
         
See Notes to Financial Statements.        
 
70
 
ENTERGY ARKANSAS, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2007 and December 31, 2006
(Unaudited)
   
  2007   2006
  (In Thousands)
 
CURRENT LIABILITIES        
Notes payable   $60,000    $- 
Accounts payable:         
  Associated companies   179,022    64,546 
  Other   115,028    117,655 
Customer deposits   56,074    49,978 
Taxes accrued   -    37,161 
Accumulated deferred income taxes   16,739    - 
Interest accrued   20,918    19,579 
Deferred fuel costs     - 
Obligations under capital leases   55,289    56,265 
Other   17,734    15,372 
TOTAL   520,804    360,556 
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   1,333,108    1,243,855 
Accumulated deferred investment tax credits   56,849    59,834 
Obligations under capital leases   41,180    73,845 
Other regulatory liabilities   122,237    103,350 
Decommissioning   497,216    472,810 
Accumulated provisions   14,356    14,539 
Pension and other postretirement liabilities   253,370    259,147 
Long-term debt   1,312,763    1,306,201 
Other   78,808    96,623 
TOTAL   3,709,887    3,630,204 
         
Commitments and Contingencies        
         
SHAREHOLDERS' EQUITY        
Preferred stock without sinking fund   116,350    116,350 
Common stock, $0.01 par value, authorized 325,000,000        
 shares; issued and outstanding 46,980,196 shares in 2007        
 and 2006   470    470 
Paid-in capital   588,527    588,528 
Retained earnings   801,350    844,928 
TOTAL   1,506,697    1,550,276 
         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $5,737,388    $5,541,036 
         
See Notes to Financial Statements.        
         

71

 

ENTERGY ARKANSAS, INC.
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
 
 
    Three Months Ended   Increase/    
Description   2007   2006   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 239   $ 265   ($ 26)   (10)
  Commercial   127   144   (17)   (12)
  Industrial   122   140   (18)   (13)
  Governmental   6   6    
     Total retail   494   555   (61)   (11)
  Sales for resale                
    Associated companies   74   70    
    Non-associated companies   41   29   12    41 
  Other   16   7     129 
     Total   $ 625   $ 661   ($ 36)   (5)
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   2,515   2,550   (35)   (1)
  Commercial   1,809   1,792   17   
  Industrial   2,022   2,112   (90)   (4)
  Governmental   77   81   (4)   (5)
     Total retail   6,423   6,535   (112)   (2)
  Sales for resale                
    Associated companies   1,686   1,680    
    Non-associated companies   503   714   (211)   (30)
     Total   8,612   8,929   (317)   (4)
                 
                 
    Nine Months Ended   Increase/    
Description   2007   2006   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 545   $ 554   ($ 9)   (2)
  Commercial   309   315   (6)   (2)
  Industrial   304   323   (19)   (6)
  Governmental   15   15    
     Total retail   1,173   1,207   (34)   (3)
  Sales for resale                
    Associated companies   222   253   (31)   (12)
    Non-associated companies   110   113   (3)   (3)
  Other   56   40   16    40 
     Total   $ 1,561   $ 1,613   ($ 52)   (3)
                 
Billed Electric Energy                
 Sales (GWh):                 
  Residential   6,070   6,052   18   
  Commercial   4,519   4,462   57   
  Industrial   5,542   5,727   (185)   (3)
  Governmental   210   209    
     Total retail   16,341   16,450   (109)   (1)
  Sales for resale                
    Associated companies   5,257   5,977   (720)   (12)
    Non-associated companies   1,758   2,245   (487)   (22)
     Total   23,356   24,672   (1,316)   (5)
                 
                 

72

 

 

ENTERGY GULF STATES, INC.

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

Hurricane Rita and Hurricane Katrina

See the Form 10-K for a discussion of the effects of Hurricanes Katrina and Rita, which hit Entergy Gulf States' service territory in the Texas and Louisiana jurisdictions in August and September 2005, which resulted in power outages, significant damage to electric distribution, transmission, and generation and gas infrastructure, and the loss of sales and customers due to mandatory evacuations, and Entergy Gulf States' efforts to recover storm restoration costs. Following are updates to that discussion.

Entergy reached an agreement with one of its excess insurers under which Entergy received $69.5 million in the second quarter 2007 in settlement of its Hurricane Katrina claim with that insurer. Entergy Gulf States was allocated $2.1 million of the proceeds. Entergy Gulf States has received a total of $33.2 million as of September 30, 2007 on its Hurricanes Katrina and Rita insurance claims, including $6.1 million in 2007. Refer to Note 8 to the financial statements in the Form 10-K for a further description of Entergy's Hurricane Katrina and Hurricane Rita insurance claims and the non-nuclear property insurance coverage in place at the time the claims occurred.

Storm Cost Recovery Filings with Retail Regulators

In April 2007, the PUCT issued its financing order authorizing the issuance of securitization bonds to recover $353 million of hurricane reconstruction costs and up to $6 million of transaction costs, offset by $32 million of related deferred income tax benefits. In June 2007, Entergy Gulf States Reconstruction Funding I, LLC, a company wholly-owned and consolidated by Entergy Gulf States, issued $329.5 million of senior secured transition bonds (securitization bonds). With the proceeds, Entergy Gulf States Reconstruction Funding purchased from Entergy Gulf States the transition property, which is the right to recover from customers through a transition charge amounts sufficient to service the securitization bonds. Entergy Gulf States will use the proceeds to refinance or retire debt and to reduce equity. Entergy Gulf States began cost recovery through the transition charge in July 2007, and the transition charge is expected to remain in place over a 15-year period. See Note 4 to the financial statements for additional information regarding the securitization bonds.

In February 2007, Entergy Louisiana and Entergy Gulf States filed rebuttal testimony and filed a second supplemental and amending application by which they seek authority from the LPSC to securitize their storm cost recovery and storm reserve amounts, together with certain debt retirement costs and upfront and ongoing costs of the securitized debt issued. Securitization is authorized by a law signed by the Governor of Louisiana in May 2006. Hearings on the quantification of the amounts eligible for securitization began in late-April 2007. At the start of the hearing, a stipulation among Entergy Gulf States, Entergy Louisiana, the LPSC staff, and most other parties in the proceeding was read into the record. The stipulation quantifies the balance of storm restoration costs for recovery as $545 million for Entergy Louisiana and $187 million for Entergy Gulf States, and sets the storm reserve amounts at $152 million for Entergy Louisiana and $87 million for Entergy Gulf States. The stipulation also calls for securitization of the storm restoration costs and storm reserves in those same amounts. Hearings on authorization of securitization of the storm costs and reserves were held in June 2007. In August 2007, the LPSC issued orders approving recovery of the stipulated storm cost recovery and storm reserve amounts plus certain debt retirement and upfront and ongoing costs through securitization financing.

73

Results of Operations

Net Income

Third Quarter 2007 Compared to Third Quarter 2006

Net income increased $29.0 million primarily due to higher net revenue and higher other income, partially offset by higher other operation and maintenance expenses and higher interest and other charges.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Net income decreased $8.2 million primarily due to lower net revenue, higher other operation and maintenance expenses, and higher interest and other charges. This decrease was substantially offset by higher other income and lower taxes other than income taxes.

Net Revenue

Third Quarter 2007 Compared to Third Quarter 2006

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges. Following is an analysis of the change in net revenue comparing the third quarter 2007 to the third quarter 2006.

 

 

Amount

 

 

(In Millions)

 

 

 

2006 net revenue

 

$364.0 

Net wholesale revenue

 

15.4 

Fuel recovery

 

5.8 

Securitization transition charge

 

4.9 

Transmission revenue

 

3.5 

Other

 

1.2 

2007 net revenue

 

$394.8 

The net wholesale revenue variance is primarily due to re-pricing revisions, retroactive to 2003, of $8.4 million of purchased power agreements among Entergy system companies as directed by the FERC in addition to higher margins on sales from the non-regulated portion of River Bend.

The fuel recovery variance resulted primarily from increased recovery of fuel costs from special rate customers in 2007 in addition to the under-recovery of fuel costs in 2006 from retail customers.

The securitization transition charge variance is due to the issuance of securitization bonds. In June 2007, Entergy Gulf States Reconstruction Funding I, LLC, a company wholly-owned and consolidated by Entergy Gulf States, issued securitization bonds and with the proceeds purchased from Entergy Gulf States the transition property, which is the right to recover from customers through a transition charge amounts sufficient to service the securitization bonds. See Note 4 to the financial statements herein for details of the securitization bond issuance.

The transmission revenue variance is due to higher rates and the addition of new transmission customers in late-2006.

74

Gross operating revenues, fuel and purchased power expenses, and other regulatory charges

Gross operating revenues decreased primarily due to a decrease in fuel cost recovery revenues of $116.6 million due to lower fuel rates and refunds. Refer to Note 2 to the financial statements for a discussion of the fuel refund filing with the PUCT. The decrease in gross operating revenues was partially offset by wholesale revenue from the system agreement cost equalization payments from Entergy Arkansas. The receipt of such payments for the Texas jurisdiction is being refunded to customers by crediting deferred fuel costs and reducing fuel rates ultimately charged to customers. As a result, the system agreement cost equalization receipt and refund to customers have no effect on net income.

Fuel and purchased power expenses decreased primarily due to a decrease in deferred fuel expense as a result of a decrease in fuel cost recovery revenues, as discussed above.

Other regulatory charges increased primarily due to the recovery in the Texas jurisdiction, effective July 2007, of bond expenses related to the bond securitization, as discussed above. The increase was also due to the amortization of storm costs in 2007 as a result of the May 2006 formula rate plan filing (for the 2005 test year) with the LPSC to recover such costs through base rates effective September 2006. See Note 4 to the financial statements herein for details of the securitization bond issuance.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges. Following is an analysis of the change in net revenue comparing the nine months ended September 30, 2007 to the nine months ended September 30, 2006.

 

 

Amount

 

 

(In Millions)

 

 

 

2006 net revenue

 

$985.6 

Fuel recovery

 

(30.7)

Purchased power capacity

 

(9.0)

Volume/weather

 

10.1 

Transmission revenue

 

9.3 

Net wholesale revenue

 

6.5 

Securitization transition charge

 

4.9 

Other

 

5.2 

2007 net revenue

 

$981.9 

The fuel recovery variance resulted primarily from adjustments of fuel clause recoveries in the first quarter 2006 in Entergy Gulf States' Louisiana jurisdiction and a reserve for potential rate refunds in the first quarter 2007 in Entergy Gulf States' Texas jurisdiction as a result of a PUCT ruling related to the application of past PUCT rulings addressing transition to competition in Texas.

The purchased power capacity variance is primarily due to ongoing purchased power capacity expense and the amortization of deferred capacity charges. A portion of the increase in purchased power capacity costs is being recovered through base rate increases implemented to recover incremental deferred and ongoing purchased power capacity charges. The base rate increases are discussed in Note 2 to the financial statements in the Form 10-K.

The volume/weather variance is primarily due to increased electricity usage primarily in the residential and commercial sectors, including increased usage during the unbilled sales period. The increase in usage was substantially offset by decreased usage in the industrial sector in addition to less favorable weather compared to the same period in 2006. See Note 1 to the financial statements in the Form 10-K for a discussion of the accounting for unbilled revenues.

75

The transmission revenue variance is due to higher rates and the addition of new transmission customers in late-2006.

The net wholesale revenue variance is primarily due to re-pricing revisions, retroactive to 2003, of $8.4 million of purchased power agreements among Entergy system companies as directed by the FERC.

The securitization transition charge variance is due to the issuance of securitization bonds. In June 2007, Entergy Gulf States Reconstruction Funding I, LLC, a company wholly-owned and consolidated by Entergy Gulf States, issued securitization bonds and with the proceeds purchased from Entergy Gulf States the transition property, which is the right to recover from customers through a transition charge amounts sufficient to service the securitization bonds. See Note 4 to the financial statements herein for details of the securitization bond issuance.

Gross operating revenues, fuel and purchased power expenses, and other regulatory charges

Gross operating revenues decreased primarily due to a decrease in fuel cost recovery revenues of $222.7 million due to lower fuel rates and refunds. Refer to Note 2 to the financial statements for a discussion of the fuel refund filing with the PUCT. The decrease was partially offset by more favorable volume/weather as discussed above and higher wholesale revenue from the system agreement cost equalization payments from Entergy Arkansas. The receipt of such payments for the Texas jurisdiction is being refunded to customers by crediting deferred fuel costs and reducing fuel rates ultimately charged to customers. As a result, the system agreement cost equalization receipt and refund to customers have no effect on net income.

Fuel and purchased power expenses decreased primarily due to a decrease in deferred fuel expense as a result of a decrease in fuel cost recovery revenues, as discussed above. The decrease was partially offset by an increase in the average market price of associated purchased power and an increase in demand.

Other regulatory charges increased primarily due to:

  • an increase of $5.2 million as a result of higher capacity charges and the amortization of capacity charges;
  • the recovery of $4.9 million in the Texas jurisdiction, effective July 2007, of bond expenses related to the bond securitization, as discussed above. See Note 4 to the financial statements herein for details of the securitization bond issuance; and
  • a regulatory credit of $4.5 million recorded during the second quarter 2006 as a result of Entergy Gulf States reinstating the application of regulatory accounting principles to its wholesale business. Refer to "Application of SFAS 71" in Note 1 to the financial statements in the Form 10-K for further discussion.

Other Income Statement Variances

Third Quarter 2007 Compared to Third Quarter 2006

Other operation and maintenance expenses increased primarily due to:

  • an increase of $9.3 million in transmission spending due to higher transmission equalization expenses and an increase in spending due to additional labor and materials costs related to substation and transmission line maintenance;
  • an increase of $2.7 million in nuclear expenses due to a non-refueling plant outage and a higher radwaste accrual; and
  • an increase of $1.5 million in vegetation maintenance expenses.

The increase was partially offset by a decrease of $8.1 million in payroll, payroll-related, and benefit costs.

76

Taxes other than income taxes decreased primarily due to Texas franchise tax accruals recorded in August 2006 retroactive to April 2006 related to three new franchise agreements with cities in Texas in addition to lower Louisiana franchise taxes due to lower revenues.

Other income increased primarily due to carrying charges on storm restoration costs approved by the PUCT, in addition to interest earned on money pool investments. The PUCT approval and the securitization filing for the recovery of reconstruction costs are discussed in Note 2 to the financial statements in the Form 10-K and Note 2 to the financial statements herein.

Interest and other charges increased primarily due to the increase in long-term debt outstanding as a result of the issuance of securitization bonds during the second quarter 2007.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Other operation and maintenance expenses increased primarily due to:

  • an increase of $11.6 million in transmission spending due to higher transmission equalization expenses, additional costs related to the Independent Coordinator of Transmission, additional loss reserve accruals related to public liability litigation, and an increase in spending due to additional labor and materials costs related to substation and transmission line maintenance;
  • an increase of $9.2 million in nuclear expenses due to a non-refueling plant outage, a higher radwaste accrual, and increased NRC fees;
  • an increase of $4.2 million in vegetation maintenance expenses;
  • an increase of $2.5 million due to unfavorable litigation resolutions;
  • an increase of $2.0 million in distribution expenses due to the return to normal operations work in 2007 versus storm restoration activities in 2006 as a result of the hurricanes; and
  • an increase of $1.7 million due to higher insurance premiums as a result of amending coverage in June 2006 and the timing of premium payments in 2007 compared to 2006.

The increase was partially offset by a decrease of $7.0 million in payroll, payroll-related, and benefit costs and a decrease of $5 million due to a change in the accounting treatment of a gas storage facility which is included in fuel expense in 2007.

Taxes other than income taxes decreased primarily due to lower Louisiana franchise taxes resulting from lower fuel recovery revenues, as discussed above, partially offset by a payment in June 2007 for Texas corporate franchise taxes for amended returns filed for the years 1997 - 2001 as a result of an IRS audit settlement.

Other income increased primarily due to carrying charges on storm restoration costs approved by the PUCT, in addition to interest earned on money pool investments. The PUCT approval and the securitization filing for the recovery of reconstruction costs are discussed in Note 2 to the financial statements in the Form 10-K and Note 2 to the financial statements herein.

Interest and other charges increased primarily due to:

  • an increase in long-term debt outstanding as a result of the issuance of securitization bonds during the second quarter 2007;
  • an increase in interest recorded on advances from independent power producers as directed by the FERC; and
  • an increase in interest recorded on deferred fuel costs.

 

77

 

Income Taxes

The effective income tax rate was 39.6% for the third quarter 2007 and 40.0% for the nine months ended September 30, 2007. The differences in the effective income tax rates for the third quarter 2007 and the nine months ended September 30, 2007 versus the federal statutory rate of 35.0% are primarily due to book and tax differences related to utility plant items and state income taxes, partially offset by flow-through book and tax timing differences related to a pension payment, book and tax differences related to allowance for equity funds used during construction, and the amortization of investment tax credits.

The effective income tax rate was 37.5% for the third quarter 2006 and 35.7% for the nine months ended September 30, 2006. The difference in the effective income tax rate for the third quarter 2006 versus the federal statutory rate of 35.0% is primarily due to state income taxes and book and tax differences related to utility plant items, partially offset by the amortization of investment tax credits and the flow-through of a pension item. The difference in the effective income tax rate for the nine months ended September 30, 2006 versus the federal statutory rate of 35.0% is primarily due to state income taxes and book and tax differences related to utility plant items partially offset by the amortization of investment tax credits, book and tax differences related to the allowance for equity funds used during construction, and the flow-through of a pension item.

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2007 and 2006 were as follows:

 

 

2007

 

2006

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$180,381 

 

$25,373 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

380,945 

 

514,774 

 

Investing activities

 

(361,600)

 

(323,392)

 

Financing activities

 

239,609 

 

(172,158)

Net increase in cash and cash equivalents

 

258,954 

 

19,224 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$439,335 

 

$44,597 

Operating Activities

Net cash provided by operating activities decreased $133.8 million primarily due to the timing of the collection of receivables from customers, decreased recovery of deferred fuel costs, and income tax payments of $15.1 million for the nine months ended September 30, 2007 compared to income tax refunds of $54.9 million for the same period in 2006. This decrease was partially offset by the timing of payments to vendors.

Investing Activities

Net cash used in investing activities increased $38.2 million primarily due to money pool activity, partially offset by a decrease in construction expenditures due to storm-related projects in 2006.

Financing Activities

Financing activities provided cash of $239.6 million for the nine months ended September 30, 2007 compared to using cash of $172.2 million for the nine months ended September 30, 2006 primarily due to the issuance of $329.5 million of securitization bonds in 2007 and a decrease of $88.1 million in common stock dividends. See Note 4 to the financial statements for details of the securitization bond issuance.

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Capital Structure

Entergy Gulf States' capitalization is balanced between equity and debt, as shown in the following table. The increase in the debt to capital percentages as of September 30, 2007 is primarily due to the issuance of the securitization bonds in June 2007.

 

 

September 30,
2007

 

December 31,
2006

 

 

 

 

 

 

 

Net debt to net capital

 

50.0%

 

50.1%

 

Effect of subtracting cash from debt

 

4.3%

 

1.9%

 

Debt to capital

 

54.3%

 

52.0%

 

Net debt consists of debt less cash and cash equivalents. Debt consists of notes payable, capital lease obligations, preferred stock with sinking fund, and long-term debt, including the currently maturing portion. Capital consists of debt and shareholders' equity. Net capital consists of capital less cash and cash equivalents. Entergy Gulf States uses the net debt to net capital ratio in analyzing its financial condition and believes it provides useful information to its investors and creditors in evaluating Entergy Gulf States' financial condition.

Uses and Sources of Capital

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources" in the Form 10-K for a discussion of Entergy Gulf States' uses and sources of capital. Following are updates to the information provided in the Form 10-K.

Entergy Gulf States' receivables from the money pool were as follows:

September 30,
2007

 

December 31,
2006

 

September 30,
2006

 

December 31,
2005

(In Thousands)

 

 

 

 

 

 

 

$195,371

 

$75,048

 

$62,356

 

$64,011

See Note 4 to the financial statements in the Form 10-K for a description of the money pool.

As discussed in the Form 10-K, Entergy Gulf States had in place a $50 million line of credit. In August 2007, the line of credit was reduced to $2 million. The line of credit allows Entergy Gulf States to borrow money and to issue letters of credit. $1.4 million in letters of credit were issued under the facility at September 30, 2007, and no borrowings were outstanding. The line of credit terminates in February 2011.

In August 2007, Entergy Gulf States entered into a new, five-year, $200 million credit facility which expires in August 2012. Entergy Gulf States has the ability to issue letters of credit against the facility. The credit agreement requires Entergy Gulf States to maintain a consolidated debt ratio of 65% or less of its total capitalization. The facility has a variable interest rate that would currently be approximately 5.54% on borrowings under the facility, and has a facility fee that is currently 0.125% of the commitment amount. The facility fee and interest rate can fluctuate depending on the senior unsecured debt ratings of Entergy Gulf States. As of September 30, 2007, there were no borrowings or letters of credit outstanding under the $200 million facility.

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Significant Factors and Known Trends

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends" in the Form 10-K for a discussion of transition to retail competition; state and local rate regulation; federal regulation; the Energy Policy Act of 2005; industrial, commercial, and wholesale customers; nuclear matters; environmental risks; and litigation risks. Following are updates to the information disclosed in the Form 10-K.

Transition to Retail Competition

See the Form 10-K for a discussion of the current Texas legislation and Entergy Gulf States' proposed transition to competition plan.

As required by the June 2005 legislation, Entergy Gulf States filed its proposed transition to competition plan in December 2006. The plan provides that to achieve full customer choice, Entergy Gulf States should join ERCOT because ERCOT already has all of the prerequisites for retail choice. Pursuant to PUCT order, on June 4, 2007 Entergy Gulf States filed a restatement of the plan, in which Entergy Gulf States requested that the PUCT approve a "Financial Stability Provision" that is designed to ensure that Entergy Gulf States' proposed integration with ERCOT will not, during the necessary construction period, cause deterioration of its credit quality and financial strength. The June 4, 2007 filing also proposes a rule making process to implement the Financial Stability Provision and to consider the construction and ownership of necessary ERCOT integration facilities by third parties. The filing also eliminated from the plan certain provisions whereby Entergy Gulf States had the ability in its sole discretion to cease pursuit of the plan. Under Entergy Gulf States' plan, retail open access could commence as early as 2013, although that is unlikely given the PUCT's decision described below. Entergy Gulf States' plan includes an estimate that direct construction costs for facilities to interconnect Entergy Gulf States' Texas operations with ERCOT could be approximately $1 billion. The Texas Legislature did not pass legislation addressing Entergy Gulf States' transition plan before adjourning its 2007 session. PUCT hearings on Entergy Gulf States' plan were completed in July 2007. In October 2007, the PUCT abated the proceeding to allow the Southwest Power Pool (SPP) to develop additional information about the costs and benefits of Entergy Gulf States joining the SPP similar to information presented regarding Entergy Gulf States joining ERCOT. The SPP has stated that it would take a minimum of six to nine months to develop this type of information. Entergy Gulf States filed a motion for reconsideration, in which it asks the PUCT to also allow for an update to the ERCOT cost study.

Jurisdictional Separation Plan

In March 2007, Entergy Gulf States filed an application with the FERC requesting authorization to implement its jurisdictional separation plan that will result in the restructuring of Entergy Gulf States into two separate utilities, one subject solely to the retail jurisdiction of the LPSC (EGS-LA) and the other subject solely to the retail jurisdiction of the PUCT (ETI). The FERC approved the application in July 2007.

In addition to the terms of the plan described in the Form 10-K, additional terms of the plan include that EGS-LA would remain primarily liable on all Entergy Gulf States long-term debt outstanding when the plan is implemented. Under one or more debt assumption agreements with EGS-LA, ETI would assume its pro rata share of this long-term debt. The assumption would not discharge EGS-LA's liability on the long-term debt. EGS-LA would record an assumption asset to reflect the long-term debt assumed by ETI. ETI would grant EGS-LA a first lien on its assets to secure its debt obligations under the debt assumption agreement or agreements. ETI would have three years from the date of plan implementation to pay off the assumed debt. In addition, under the proposal, the currently outstanding preferred stock of Entergy Gulf States would be redeemed in anticipation of the jurisdictional separation. Entergy Gulf States expects that the redemption would occur at the call prices reported in Note 6 to the financial statements in the Form 10-K.

Entergy Gulf States has also filed with the FERC an application, on behalf of ETI, for authority from the end of 2007 through March 31, 2010 to issue up to $200 million of short-term debt, up to $300 million of tax-exempt bonds, and up to $1.3 billion of other long-term securities, including common and preferred stock and long-term debt. Entergy Gulf States, on behalf of EGS-LA, has filed with the FERC a similar

 

80

 

application for authority over the same time period to issue up to $200 million of short-term debt, up to $500 million of tax-exempt bonds and up to $750 million of other long-term securities, including common and preferred membership interests and long-term debt.  On November 8, 2007 the FERC issued orders granting the requested authority for a two-year period from the date that the orders were issued.

In May 2007, Entergy Gulf States filed with the NRC an application for transfer of the River Bend operating license, which was approved in November 2007. Additional FERC notice filings will also be made before the separation can occur. In addition, under the LPSC order approving the jurisdictional separation plan, jurisdictional separation will not occur if Entergy Gulf States cannot obtain reasonable assurances from the rating agencies that upon the separation there will not be a downgrade in ETI's or EGS-LA's credit ratings from Entergy Gulf States' credit ratings. Entergy Gulf States' current target for completing the jurisdictional separation is the end of 2007.

State and Local Rate Regulation

Entergy Gulf States made a rate filing in September 2007 with the PUCT requesting an annual rate increase totaling $107.5 million, including a base rate increase of $64.3 million and special riders totaling $43.2 million. The base rate increase includes $12.2 million for the storm damage reserve. Entergy Gulf States is requesting an 11% return on common equity. The rate filing also includes a request to reconcile $858 million in fuel and purchased power costs on a Texas retail basis incurred over the period January 2006 through March 2007.

In September 2007, Entergy Gulf States filed with the PUCT a request to increase its incremental purchased capacity recovery rider to collect approximately $25 million on an annual basis. This filing also includes a request to implement an interim surcharge to collect approximately $10 million in under-recovered incremental purchased capacity costs incurred through July 2007. A decision is expected in the first quarter 2008. Amounts collected through the rider and interim surcharge are subject to final reconciliation.

In May 2007, Entergy Gulf States made its formula rate plan filing with the LPSC for the 2006 test year. The filing reflected a 10.0% return on common equity, which is within the allowed earnings bandwidth, and an anticipated formula rate plan decrease of $23 million annually attributable to adjustments outside of the formula rate plan sharing mechanism related to capacity costs and the anticipated securitization of storm costs related to Hurricane Katrina and Hurricane Rita and the securitization of a storm reserve. In September 2007, Entergy Gulf States modified the formula rate plan filing to reflect a 10.07% return on common equity, which is still within the allowed bandwidth. The modified filing also reflected implementation of a $4.1 million rate increase attributable to recovery of additional LPSC approved incremental deferred and ongoing capacity costs. The rate decrease anticipated in the original filing did not occur because of the additional capacity costs approved by the LPSC, and because securitization of storm costs associated with Hurricane Katrina and Hurricane Rita and the establishment of a storm reserve have not yet occurred. Entergy Gulf States is currently exploring its securitization options.

In March 2007, Entergy Gulf States filed a request with the PUCT to refund $78.5 million, including interest, of fuel cost recovery over-collections through January 2007. In June 2007, the PUCT approved a unanimous stipulation and settlement agreement that updated the over-collection balance through April 2007 and established a refund amount, including interest, of $109.4 million. The refund was made over a two-month period beginning with the first billing cycle in July 2007. Amounts refunded through the interim fuel refund are subject to final reconciliation in a future fuel reconciliation proceeding.

In January 2007, Entergy Gulf States filed with the LPSC its gas rate stabilization plan for the test year ending September 30, 2006.  The filing showed a revenue deficiency of $3.5 million based on a return on common equity mid-point of 10.5%.  In March 2007, Entergy Gulf States filed a set of rate and rider schedules that reflected all proposed LPSC staff adjustments and implemented a $2.4 million base rate increase effective with the first billing cycle of April 2007 pursuant to the rate stabilization plan.

In May 2006, Entergy Gulf States filed with the PUCT a fuel and purchased power reconciliation case covering the period September 2003 through December 2005 for costs recoverable through the Texas fixed fuel factor rate and the incremental purchased capacity recovery rider. Entergy Gulf States reconciled $1.6 billion of fuel and purchased power costs on a Texas retail basis. A hearing was conducted before ALJs in

 

81

 

April 2007. In July 2007, the ALJs issued a proposal for decision recommending that Entergy Gulf States be authorized to reconcile all of its requested Texas fixed fuel factor expenses and recommending a minor adjustment to the incremental purchased capacity recovery calculation. The ALJs also recommend granting an exception to PUCT rules to allow for recovery of an additional $11.4 million in Texas-jurisdictional purchased power capacity costs. In September 2007, the PUCT issued a final order, which affirmed the ultimate result of the ALJ's proposal for decision. Upon motions for rehearing, the PUCT added additional language in its order on rehearing.  In order to preserve any appeals, the parties will have to file a subsequent motion for rehearing to the PUCT's order on rehearing.

In May 2006, Entergy Gulf States made its formula rate plan filing with the LPSC for the 2005 test year. Entergy Gulf States modified the filing in August 2006 to reflect an 11.1% return on common equity which is within the allowed bandwidth. The modified filing includes a formula rate plan increase of $17.2 million annually that provides for 1) interim recovery of $10.5 million of storm costs from Hurricane Katrina and Hurricane Rita and 2) recovery of $6.7 million of LPSC-approved incremental deferred and ongoing capacity costs. The increase was implemented, subject to refund, with the first billing cycle of September 2006. In May 2007 the LPSC approved a settlement between Entergy Gulf States and the LPSC staff, affirming the rates that were implemented in September 2006. 

Federal Regulation

See "System Agreement Proceedings", "Independent Coordinator of Transmission", and "Available Flowgate Capacity Proceeding" in the "Significant Factors and Known Trends" section of Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis for updates to the discussion in the Form 10-K.

Critical Accounting Estimates

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy Gulf States' accounting for nuclear decommissioning costs, the application of SFAS 71, unbilled revenue, and qualified pension and other postretirement benefits.

New Accounting Pronouncements

See "New Accounting Pronouncements" section of Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis for a discussion of new accounting pronouncements.

82

 

ENTERGY GULF STATES, INC.
CONSOLIDATED INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
 
  Three Months Ended   Nine Months Ended
    2007   2006   2007   2006
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Electric   $946,222    $1,043,264    $2,606,045    $2,766,558 
Natural gas   11,818    12,495    66,836    63,521 
TOTAL   958,040    1,055,759    2,672,881    2,830,079 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   210,890    342,828    643,081    842,959 
  Purchased power   341,278    348,318    1,024,478    999,244 
  Nuclear refueling outage expenses   2,529    4,199    10,000    13,299 
  Other operation and maintenance   128,154    121,560    395,283    367,113 
Decommissioning   2,961    2,731    8,707    8,028 
Taxes other than income taxes   35,838    40,624    101,980    108,312 
Depreciation and amortization   50,925    53,802    156,400    154,981 
Other regulatory charges - net   11,102    608    23,445    2,246 
TOTAL   783,677    914,670    2,363,374    2,496,182 
                 
OPERATING INCOME   174,363    141,089    309,507    333,897 
                 
OTHER INCOME                
Allowance for equity funds used during construction   2,512    1,697    8,943    9,498 
Interest and dividend income   29,020    6,336    61,314    20,805 
Miscellaneous - net   214    (477)   871    (876)
TOTAL   31,746    7,556    71,128    29,427 
                 
INTEREST AND OTHER CHARGES  
Interest on long-term debt   39,878    35,004    109,567    102,997 
Other interest - net   3,433    1,992    11,899    5,989 
Allowance for borrowed funds used during construction   (1,610)   (1,027)   (5,784)   (5,428)
TOTAL   41,701    35,969    115,682    103,558 
                 
INCOME BEFORE INCOME TAXES   164,408    112,676    264,953    259,766 
                  
Income taxes   65,026    42,268    106,014    92,604 
                  
NET INCOME   99,382    70,408    158,939    167,162 
                 
Preferred dividend requirements and other   955    1,009    2,846    3,041 
                 
EARNINGS APPLICABLE TO COMMON STOCK   $98,427    $69,399    $156,093    $164,121 
                 
See Notes to Financial Statements.                

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84

 

ENTERGY GULF STATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
     
    2007   2006
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $158,939    $167,162 
Adjustments to reconcile net income to net cash flow provided by operating activities:         
  Reserve for regulatory adjustments   270    6,305 
  Other regulatory charges - net   23,445    2,246 
  Depreciation, amortization, and decommissioning   165,107    163,009 
  Deferred income taxes and investment tax credits, and non-current taxes accrued   1,126    95,333 
  Changes in working capital:        
    Receivables   (178,606)   89,178 
    Fuel inventory   (8,685)   (8,996)
    Accounts payable   38,139    (94,479)
    Taxes accrued   22,199    68,055 
    Interest accrued   6,270    706 
    Deferred fuel costs   8,884    151,118 
    Other working capital accounts   59,625    8,332 
  Provision for estimated losses and reserves   (4,236)   (4,252)
  Changes in other regulatory assets   (48,544)   (117,618)
  Other   137,012    (11,325)
Net cash flow provided by operating activities   380,945    514,774 
         
INVESTING ACTIVITIES        
Construction expenditures   (226,941)   (311,255)
Allowance for equity funds used during construction   8,943    9,498 
Insurance proceeds   6,580   
Nuclear fuel purchases   (35,376)   (38,357)
Proceeds from sale/leaseback of nuclear fuel   13,839    37,647 
Proceeds from nuclear decommissioning trust fund sales  

48,918 

  39,344 
Investment in nuclear decommissioning trust funds  

(59,621)

  (49,217)
Change in money pool receivable - net   (120,323)   1,655 
Changes in other investments - net   2,381    915 
Other regulatory investments     (13,622)
Net cash flow used in investing activities   (361,600)   (323,392)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt   323,486   
Redemption of preferred stock   (3,450)   (3,450)
Dividends paid:        
  Common stock   (77,600)   (165,700)
  Preferred stock   (2,827)   (3,008)
Net cash flow provided by (used in) financing activities   239,609    (172,158)
         
Net increase in cash and cash equivalents   258,954    19,224 
         
Cash and cash equivalents at beginning of period   180,381    25,373 
         
Cash and cash equivalents at end of period   $439,335    $44,597 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
  Cash paid/(received) during the period for:        
    Interest - net of amount capitalized   $108,372    $101,059 
    Income taxes   $15,066    ($54,920)
         
See Notes to Financial Statements.        

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ENTERGY GULF STATES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2007 and December 31, 2006
(Unaudited)
       
  2007   2006
  (In Thousands)
       
CURRENT ASSETS          
Cash and cash equivalents:          
  Cash     $11,587    $2,923 
  Temporary cash investments - at cost,          
   which approximates market     427,748    177,458 
     Total cash and cash equivalents     439,335    180,381 
Accounts receivable:          
  Customer     182,065    146,144 
  Allowance for doubtful accounts     (2,165)   (1,618)
  Associated companies     289,527    106,990 
  Other     113,751    50,811 
  Accrued unbilled revenues     94,251    79,538 
     Total accounts receivable     677,429    381,865 
Accumulated deferred income taxes     24,291    20,352 
Fuel inventory - at average cost     77,896    69,211 
Materials and supplies - at average cost     128,950    120,245 
Deferred nuclear refueling outage costs     3,457    12,971 
Prepayments and other     28,152    16,725 
TOTAL     1,379,510    801,750 
           
OTHER PROPERTY AND INVESTMENTS        
Decommissioning trust funds     368,580    344,911 
Non-utility property - at cost (less accumulated depreciation)     98,109    94,776 
Other     29,632    25,218 
TOTAL     496,321    464,905 
           
UTILITY PLANT        
Electric     8,914,545    8,857,166 
Natural gas     97,547    92,368 
Construction work in progress     187,984    149,392 
Nuclear fuel under capital lease     79,615    73,422 
Nuclear fuel     7,375    10,821 
TOTAL UTILITY PLANT     9,287,066    9,183,169 
Less - accumulated depreciation and amortization     4,372,770    4,263,307 
UTILITY PLANT - NET     4,914,296    4,919,862 
           
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:          
  SFAS 109 regulatory asset - net     467,651    465,259 
  Other regulatory assets     1,067,001    1,001,016 
  Deferred fuel costs     100,124    100,124 
Long-term receivables     5,804    9,833 
Other     31,022    23,928 
TOTAL     1,671,602    1,600,160 
           
TOTAL ASSETS     $8,461,729    $7,786,677 
           
See Notes to Financial Statements.          
 
86
 
ENTERGY GULF STATES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2007 and December 31, 2006
(Unaudited)
 
  2007   2006
  (In Thousands)
 
CURRENT LIABILITIES        
Currently maturing long-term debt   $325,000    $- 
Accounts payable:          
  Associated companies     115,765    79,584 
  Other     195,107    200,746 
Customer deposits     73,857    68,844 
Taxes accrued     49,980    27,781 
Interest accrued     40,753    34,483 
Deferred fuel costs     35,146    26,262 
Obligations under capital leases     24,769    24,769 
Pension and other postretirement liabilities     7,884    7,662 
System agreement cost equalization     51,474   
Other     45,484    31,933 
TOTAL     965,219    502,064 
           
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued     1,907,466    1,803,461 
Accumulated deferred investment tax credits     122,922    127,202 
Obligations under capital leases     54,847    48,653 
Other regulatory liabilities     74,707    53,648 
Decommissioning and asset retirement cost liabilities     203,551    191,036 
Transition to competition     79,098    79,098 
Accumulated provisions     20,647    21,245 
Pension and other postretirement liabilities     119,099    141,834 
Long-term debt     2,363,474    2,358,327 
Preferred stock with sinking fund     7,050    10,500 
Other     211,274    196,731 
TOTAL     5,164,135    5,031,735 
           
Commitments and Contingencies          
           
SHAREHOLDERS' EQUITY        
Preferred stock without sinking fund     47,327    47,327 
Common stock, no par value, authorized 200,000,000          
 shares; issued and outstanding 100 shares in 2007 and 2006     114,055    114,055 
Paid-in capital     1,457,486    1,457,486 
Retained earnings     732,417    653,924 
Accumulated other comprehensive loss     (18,910)   (19,914)
TOTAL     2,332,375    2,252,878 
           
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY     $8,461,729    $7,786,677 
           
See Notes to Financial Statements.          

 

87

 

ENTERGY GULF STATES, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS AND COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
                     
        Three Months Ended
        2007   2006
        (In Thousands)
RETAINED EARNINGS                    
Retained Earnings - Beginning of period       $666,090        $670,824     
                     
  Add: Net Income       99,382    $99,382    70,408    $70,408 
                     
  Deduct:                    
    Dividends declared on common stock       32,100        82,700     
    Preferred dividend requirements and other       955    955    1,009    1,009 
        33,055        83,709     
                     
Retained Earnings - End of period       $732,417        $657,523     
                     
ACCUMULATED OTHER COMPREHENSIVE                    
LOSS (Net of Taxes):                    
Balance at beginning of period:                    
  Pension and other postretirement liabilities       ($19,245)       $ -     
  Other accumulated comprehensive income items             (2,233)    
                     
Pension and other postretirement liabilities (net of tax expense of $326)       335    335     
Net derivative instrument fair value changes                    
 arising during the period           617    617 
                     
Balance at end of period:                    
  Pension and other postretirement liabilities       (18,910)          
  Other accumulated comprehensive income items             (1,616)    
  Total       ($18,910)       ($1,616)    
Comprehensive Income           $98,762        $70,016 
                     
                     
        Nine Months Ended
        2007   2006
        (In Thousands)
RETAINED EARNINGS                    
Retained Earnings - Beginning of period       $653,924        $659,102     
                     
  Add: Net Income       158,939    $158,939    167,162    $167,162 
                     
  Deduct:                    
    Dividends declared on common stock       77,600        165,700     
    Preferred dividend requirements and other       2,846    2,846    3,041    3,041 
        80,446        168,741     
                     
Retained Earnings - End of period       $732,417        $657,523     
                     
ACCUMULATED OTHER COMPREHENSIVE                    
LOSS (Net of Taxes):                    
Balance at beginning of period:                    
  Pension and other postretirement liabilities       ($19,914)       $ -     
  Other accumulated comprehensive income items             (1,409)    
                     
Pension and other postretirement liabilities (net of tax expense of $978)       1,004    1,004     
Net unrealized investment gains             (824)    
Net derivative instrument fair value changes                    
 arising during the period           617    617 
                     
Balance at end of period:                    
  Pension and other postretirement liabilities       (18,910)          
  Other accumulated comprehensive income items             (1,616)    
  Total       ($18,910)       ($1,616)    
Comprehensive Income           $157,097        $164,738 
                     
                     
See Notes to Financial Statements.                    

88

 

ENTERGY GULF STATES, INC.
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2007   2006   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $320    $375    ($55)   (15)
  Commercial   210    249    (39)   (16)
  Industrial   247    288    (41)   (14)
  Governmental   10    13    (3)   (23)
     Total retail   787    925    (138)   (15)
  Sales for resale                
    Associated companies   85    46    39    85 
    Non-associated companies   51    57    (6)   (11)
  Other   23    15      53 
     Total   $946    $1,043    ($97)   (9)
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   3,359    3,393    (34)   (1)
  Commercial   2,577    2,553    24   
  Industrial   3,815    3,920    (105)   (3)
  Governmental   114    118    (4)   (3)
     Total retail   9,865    9,984    (119)   (1)
  Sales for resale                
    Associated companies   728    1,073    (345)   (32)
    Non-associated companies   704    918    (214)   (23)
     Total   11,297    11,975    (678)   (6)
                 
                 
    Nine Months Ended   Increase/    
Description   2007   2006   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $800    $874    ($74)   (8)
  Commercial   612    671    (59)   (9)
  Industrial   785    889    (104)   (12)
  Governmental   34    37    (3)   (8)
     Total retail   2,231    2,471    (240)   (10)
  Sales for resale                
    Associated companies   151    95    56    59 
    Non-associated companies   153    157    (4)   (3)
  Other   71    44    27    61 
     Total   $2,606    $2,767    ($161)   (6)
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   7,890    7,841    49   
  Commercial   6,761    6,681    80   
  Industrial   11,317    11,430    (113)   (1)
  Governmental   335    340    (5)   (1)
     Total retail   26,303    26,292    11   
  Sales for resale                
    Associated companies   1,962    2,225    (263)   (12)
    Non-associated companies   2,248    2,213    35   
     Total   30,513    30,730    (217)   (1)
                 
                 
                 

89

 

ENTERGY LOUISIANA, LLC

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

Hurricane Rita and Hurricane Katrina

See the Form 10-K for a discussion of the effects of Hurricanes Katrina and Rita, which caused catastrophic damage to Entergy Louisiana's service territory in August and September 2005, including the effect of extensive flooding that resulted from levee breaks in and around Entergy Louisiana's service territory, and Entergy Louisiana's efforts to recover storm restoration costs.

In February 2007, Entergy Louisiana and Entergy Gulf States filed rebuttal testimony and filed a second supplemental and amending application by which they seek authority from the LPSC to securitize their storm cost recovery and storm reserve amounts, together with certain debt retirement costs and upfront and ongoing costs of the securitized debt issued. Securitization is authorized by a law signed by the Governor of Louisiana in May 2006. Hearings on the quantification of the amounts eligible for securitization began in late-April 2007. At the start of the hearing, a stipulation among Entergy Gulf States, Entergy Louisiana, the LPSC staff, and most other parties in the proceeding was read into the record. The stipulation quantifies the balance of storm restoration costs for recovery as $545 million for Entergy Louisiana and $187 million for Entergy Gulf States, and sets the storm reserve amounts at $152 million for Entergy Louisiana and $87 million for Entergy Gulf States. The stipulation also calls for securitization of the storm restoration costs and storm reserves in those same amounts. Hearings on authorization of securitization of the storm costs and reserves were held in June 2007. In August 2007, the LPSC issued orders approving recovery of the stipulated storm cost recovery and storm reserve amounts plus certain debt retirement and upfront and ongoing costs through securitization financing.

Entergy reached an agreement with one of its excess insurers under which Entergy received $69.5 million in the second quarter 2007 in settlement of its Hurricane Katrina claim with that insurer. Entergy Louisiana was allocated $9.7 million of the proceeds. Entergy Louisiana has received a total of $24.8 million as of September 30, 2007 on its Hurricanes Katrina and Rita insurance claims, including $12.0 million in 2007. In the third quarter 2007, Entergy filed a lawsuit in the U.S. District Court for the Eastern District of Louisiana against its other excess insurer on the Hurricane Katrina claim. At issue in the lawsuit is whether any policy exclusions limit the extent of coverage provided by that insurer. Refer to Note 8 to the financial statements in the Form 10-K for a further description of Entergy's Hurricane Katrina and Hurricane Rita insurance claims and the non-nuclear property insurance coverage in place at the time the claims occurred.

Results of Operations

Net Income

Third Quarter 2007 Compared to Third Quarter 2006

Net income increased $5.5 million primarily due to higher net revenue, lower depreciation and amortization expenses, and a lower effective income tax rate, substantially offset by higher other operation and maintenance expenses and higher interest and other charges.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Net income increased $4.7 million primarily due to higher net revenue and a lower effective income tax rate, substantially offset by higher other operation and maintenance expenses, lower other income, and higher interest and other charges.

90

Net Revenue

Third Quarter 2007 Compared to Third Quarter 2006

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges (credits). Following is an analysis of the change in net revenue comparing the third quarter 2007 to the third quarter 2006.

 

 

Amount

 

 

(In Millions)

 

 

 

2006 net revenue

 

$304.7 

Base revenues

 

14.2 

Purchased power capacity

 

(19.3)

Other

 

9.8 

2007 net revenue

 

$309.4 

The base revenues variance is primarily due to increases effective September 2006 for the 2005 formula rate plan filing to recover LPSC-approved incremental deferred and ongoing capacity costs. See Note 2 to the financial statements in the Form 10-K for a discussion of the formula rate plan filing.

The purchased power capacity variance is primarily due to higher purchased power capacity charges and the amortization of capacity charges effective September 2006 as a result of the formula rate plan filing in May 2006. A portion of the purchased power capacity costs is offset in base revenues due to a base rate increase implemented to recover incremental deferred and ongoing purchased power capacity charges, as mentioned above. See Note 2 to the financial statements in the Form 10-K for a discussion of the formula rate plan filing.

Gross operating revenues, fuel and purchased power expenses, and other regulatory charges (credits)

Gross operating revenues increased primarily due to:

  • an increase of $14.2 million in base revenues, as discussed above;
  • an increase of $9.3 million in gross wholesale revenue due to increased sales to affiliated systems; and
  • an increase of $5.1 million in fuel cost recovery revenues due to higher fuel rates.

Fuel and purchased power expenses increased primarily due to an increase in the market price of natural gas, partially offset by a decrease in deferred fuel expense.

Other regulatory credits decreased primarily due to the deferral of capacity charges in 2006 in addition to the amortization of these capacity charges in 2007 as a result of the May 2006 formula rate plan filing (for the 2005 test year) with the LPSC to recover such costs through base rates effective September 2006.

91

 

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges (credits). Following is an analysis of the change in net revenue comparing the nine months ended September 30, 2007 to the nine months ended September 30, 2006.

 

 

Amount

 

 

(In Millions)

 

 

 

2006 net revenue

 

$737.3 

Base revenues

 

73.1 

Volume/weather

 

32.2 

Purchased power capacity

 

(77.9)

Other

 

5.5 

2007 net revenue

 

$770.2 

The base revenues variance is primarily due to increases effective September 2006 for the 2005 formula rate plan filing to recover LPSC-approved incremental deferred and ongoing capacity costs. See Note 2 to the financial statements in the Form 10-K for a discussion of the formula rate plan filing.

The volume/weather variance is due to increased electricity usage in all sectors, including electricity sales during the unbilled service period. Billed retail electricity usage increased a total of 653 GWh in all sectors. See Note 1 to the financial statements in the Form 10-K for a discussion of the accounting for unbilled revenues.

The purchased power capacity variance is primarily due to higher purchased power capacity charges and the amortization of capacity charges effective September 2006 as a result of the formula rate plan filing in May 2006. A portion of the purchased power capacity costs is offset in base revenues due to a base rate increase implemented to recover incremental deferred and ongoing purchased power capacity charges, as mentioned above. See Note 2 to the financial statements in the Form 10-K for a discussion of the formula rate plan filing.

Gross operating revenues, fuel and purchased power expenses, and other regulatory charges (credits)

Gross operating revenues increased primarily due to:

  • an increase of $114 million in fuel cost recovery revenues due to higher fuel rates and usage;
  • an increase of $73.1 million in base revenues, as discussed above; and
  • an increase of $32.2 million related to volume/weather, as discussed above.

The increase was partially offset by a decrease of $30.6 million in gross wholesale revenue due to decreased sales to affiliated systems.

Fuel and purchased power expenses increased primarily due to an increase in the average market price of purchased power, an increase in net area demand, and an increase in deferred fuel expense as a result of higher fuel rates, as discussed above.

Other regulatory credits decreased primarily due to the deferral of capacity charges in 2006 in addition to the amortization of these capacity charges in 2007 as a result of the May 2006 formula rate plan filing (for the 2005 test year) with the LPSC to recover such costs through base rates effective September 2006.

 

92

Other Income Statement Variances

Third Quarter 2007 Compared to Third Quarter 2006

Other operation and maintenance expenses increased primarily due to:

  • an increase of $10.7 million in customer service costs, primarily a result of an increase in the write-off of uncollectible customer accounts;
  • an increase of $2.2 million in nuclear spending due to higher NRC fees and labor costs;
  • an increase of $2.1 million due to higher insurance premiums as a result of amending coverage in June 2006 and the timing of premium payments in 2007 compared to 2006; and
  • an increase of $1.5 million in distribution labor and contract costs due to the return to normal operations work in 2007 versus storm restoration activities in 2006 as a result of the hurricanes.

The increase was partially offset by a decrease of $6.7 million in payroll, payroll-related, and benefits costs.

Depreciation and amortization expenses decreased primarily due to a revision in the third quarter 2007 related to depreciation previously recorded on storm-related assets. Recovery of the cost of those assets will now be through the securitization of storm costs approved by the LPSC in the third quarter 2007. The securitization approval is discussed above under "Hurricane Rita and Hurricane Katrina".

Interest and other charges increased primarily due to interest recorded on advances from independent power producers.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Other operation and maintenance expenses increased primarily due to:

  • an increase of $7.8 million in customer service costs, primarily a result of an increase in the write-off of uncollectible customer accounts;
  • an increase of $5 million due to higher insurance premiums as a result of amending coverage in June 2006 and the timing of premium payments in 2007 compared to 2006;
  • an increase of $4.6 million in distribution labor, contract costs, and maintenance due to the return to normal operations work in 2007 versus storm restoration activities in 2006 as a result of the hurricanes;
  • an increase of $4.3 million in transmission spending due to additional costs related to the Independent Coordinator of Transmission and additional costs related to substation maintenance;
  • an increase of $3.9 million due to the amortization in 2006 of proceeds received from the radwaste settlement which is discussed in "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYIS - Significant Factors and Known Trends - Central States Compact Claim" in the Form 10-K;
  • an increase of $3.0 million in nuclear spending due to higher NRC fees and labor costs; and
  • an increase of $2.1 million in vegetation maintenance expenses.

The increase was partially offset by a decrease of $8.1 million in payroll, payroll-related, and benefits costs.

Other income decreased primarily due to:

  • a decrease in interest earned on deferred capacity charges as a result of the recovery of deferred capacity charges;
  • a decrease related to proceeds received in 2006 from the radwaste settlement discussed in "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYIS - Significant Factors and Known Trends - Central States Compact Claim" in the Form 10-K; and
  • a decrease in the allowance for equity funds used during construction due to more construction work in progress in 2006 as a result of Hurricanes Katrina and Rita.

93

Interest and other charges increased primarily due to interest recorded on advances from independent power producers and a higher allowance for borrowed funds used during construction in 2006 as a result of Hurricanes Katrina and Rita.

Income Taxes

The effective income tax rate was 34.8% for the third quarter 2007 and 36.2% for the nine months ended September 30, 2007. The difference in the effective income tax rate for the nine months ended September 30, 2007 versus the federal statutory rate of 35.0% is primarily due to book and tax differences related to utility plant items and state income taxes, partially offset by book and tax differences related to the allowance for equity funds used during construction and the amortization of investment tax credits and excess deferred income taxes.

The effective income tax rate was 39.1% for the third quarter 2006 and 39.0% for the nine months ended September 30, 2006. The difference in the effective income tax rate for the third quarter 2006 versus the federal statutory rate of 35.0% is primarily due to book and tax differences related to utility plant items and state income taxes. The difference in the effective income tax rate for the nine months ended September 30, 2006 versus the federal statutory rate of 35.0% is primarily due to book and tax differences related to utility plant items and state income taxes, partially offset by book and tax differences related to the allowance for equity funds used during construction and the amortization of investment tax credits.

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2007 and 2006 were as follows:

 

 

2007

 

2006

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$2,743 

 

$105,285 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

193,117 

 

245,122 

 

Investing activities

 

(199,231)

 

(362,824)

 

Financing activities

 

3,898 

 

16,365 

Net decrease in cash and cash equivalents

 

(2,216)

 

(101,337)

 

 

 

 

 

Cash and cash equivalents at end of period

 

$527 

 

$3,948 

Operating Activities

Cash flow provided by operating activities decreased $52 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 primarily due to:

  • the timing of collections of receivables from customers and payments to vendors, including the catch-up in receivable collections in 2006 due to delays caused by the hurricanes in 2005; and
  • an increase of $81.7 million in income tax payments.

The decrease was partially offset by increased recovery of deferred fuel costs and higher pension contributions in 2006.

 

94

 

Investing Activities

The decrease of $163.6 million in net cash used in investing activities for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 is primarily due to:

  • higher distribution and transmission construction expenditures in 2006 due to Hurricanes Katrina and Rita;
  • a decrease in 2006 due to capacity costs that were deferred and expected to be recovered over a period greater than twelve months; and
  • insurance proceeds received in 2007 relating to Hurricanes Katrina and Rita.

The decrease was partially offset by higher spending on nuclear projects in 2007.

Financing Activities

The decrease of $12.5 million in net cash provided by financing activities for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 is primarily due to proceeds of $50 million from an equity contribution in 2006 from its parent, Entergy Louisiana Holdings, and money pool activity. The decrease was partially offset by the payment of $40 million on a credit facility in 2006 and the retirement of $25 million of long-term debt in 2006.

Capital Structure

Entergy Louisiana's capitalization is balanced between equity and debt, as shown in the following table. The decrease in the debt to capital percentage from 2006 to 2007 is primarily due to an increase in members' equity resulting from net income in 2007.

 

 

September 30,
2007

December 31,
2006

 

 

Net debt to net capital

 

43.7%

46.4%

Effect of subtracting cash from debt

 

-

-   

Debt to capital

 

43.7%

46.4%

Net debt consists of debt less cash and cash equivalents. Debt consists of notes payable, capital lease obligations, and long-term debt, including the currently maturing portion. Capital consists of debt and members' equity. Net capital consists of capital less cash and cash equivalents. Entergy Louisiana uses the net debt to net capital ratio in analyzing its financial condition and believes it provides useful information to its investors and creditors in evaluating Entergy Louisiana's financial condition.

Uses and Sources of Capital

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources" in the Form 10-K for a discussion of Entergy Louisiana's uses and sources of capital. Following are updates to the information provided in the Form 10-K.

In April 2007, Entergy Louisiana announced that it plans to pursue the self-build solid fuel repowering of a 538 MW unit at its Little Gypsy plant.  Petroleum coke and coal will be the unit's primary fuel sources.  In July 2007 Entergy Louisiana filed with the LPSC for approval of the repowering project, and stated that it expects to spend $1.55 billion on the project. In addition to seeking a finding that the project is in the public interest, the filing with the LPSC asks that Entergy Louisiana be allowed to recover a portion of the project's financing costs during the construction period. Hearings were held in October 2007 and an LPSC decision could come in the fourth quarter 2007. Entergy Louisiana expects the project to be completed in 2011-2012. The planned capital investment estimate in the Form 10-K included capital required for a project of this type, although Entergy Louisiana now expects to spend approximately $100 million more through 2009 than the amounts included in the Form 10-K for the project.

95

Entergy Louisiana plans to replace the Waterford 3 steam generators, along with the reactor vessel closure head and control element drive mechanisms, in 2011.  Replacement of these components is common to pressurized water reactors throughout the nuclear industry.  The nuclear industry continues to address susceptibility to stress corrosion cracking of certain materials associated with these components within the reactor coolant system.  The issue is applicable to Waterford 3 and is managed in accordance with standard industry practices and guidelines.  Routine inspections of the steam generators during Waterford 3's Fall 2006 refueling outage identified additional degradation of certain tube spacer supports in the steam generators that required repair beyond that anticipated prior to the outage.  Corrective measures were successfully implemented to permit continued operation of the steam generators. While potential future replacement of these components had been contemplated, the discovery of the additional steam generator degradation necessitates replacement of the steam generators as soon as reasonably achievable.  2011 is the earliest that new steam generators can be manufactured and delivered for installation. The reactor vessel head and control element drive mechanisms will be replaced at the same time, utilizing the same reactor building construction opening that is necessary for the steam generator replacement.  Entergy Louisiana estimates that it will spend approximately $485 million on this project.

Entergy Louisiana's payables to the money pool were as follows:

September 30,
2007

 

December 31,
2006

 

September 30,
2006

 

December 31,
2005

(In Thousands)

 

 

 

 

 

 

 

($63,151)

 

($54,041)

 

($104,952)

 

($68,677)

See Note 4 to the financial statements in the Form 10-K for a description of the money pool.

On August 2, 2007, Entergy Louisiana entered into a $200 million, 5-year bank credit facility. Entergy Louisiana has the ability to issue letters of credit against the facility. The credit agreement requires Entergy Louisiana to maintain a consolidated debt ratio of 65% or less of its total capitalization. The facility has a variable interest rate that would currently be approximately 5.48% on borrowings under the facility, and has a facility fee that is currently 0.09% of the commitment amount. The facility fee and interest rate can fluctuate depending on the senior unsecured debt ratings of Entergy Louisiana. As of September 30, 2007, there were no borrowings or letters of credit outstanding under the Entergy Louisiana $200 million facility.

Significant Factors and Known Trends

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends" in the Form 10-K for a discussion of state and local rate regulation, federal regulation, the Energy Policy Act of 2005, utility restructuring, nuclear matters, environmental risks, and litigation risks. Following are updates to the information provided in the Form 10-K.

State and Local Rate Regulation

In May 2007, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2006 test year, indicating a 7.6% return on common equity and an anticipated formula rate plan decrease of $6.9 million. The filing also included Entergy Louisiana's request to recover $39.8 million in unrecovered fixed costs associated with the loss of customers that resulted from Hurricane Katrina and Hurricane Rita, which if approved by the LPSC would increase the return on common equity under the original filing to 9.4%, which is within the band of no change adjacent to the lower end of the sharing bandwidth. In September 2007, Entergy Louisiana modified its formula rate plan filing to reflect its implementation of certain adjustments proposed by the LPSC staff in its review of Entergy Louisiana's original filing with which Entergy Louisiana agreed, and to reflect its implementation of an $18.4 million annual formula rate plan rate increase comprised of (1) a $23.8 million increase representing 60% of Entergy Louisiana's revenue deficiency, and (2) a $5.4 million decrease for reduced incremental and deferred capacity costs. The return on common equity in the modified filing is 7.63%. The LPSC authorized Entergy Louisiana to defer for accounting purposes the difference between

 

96

 

its $39.8 million claim for unrecovered fixed costs and 60% of the revenue deficiency to preserve Entergy Louisiana's right to pursue that claim in full during the formula rate plan proceeding. The rate decrease anticipated in the original filing did not occur because securitization of storm costs associated with Hurricane Katrina and Hurricane Rita and the establishment of a storm reserve have not yet occurred. Entergy Louisiana is currently exploring its securitization options.

Federal Regulation

See "System Agreement Proceedings", "Independent Coordinator of Transmission", and "Available Flowgate Capacity Proceeding" in the "Significant Factors and Known Trends" section of Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis for updates to the discussion in the Form 10-K.

Critical Accounting Estimates

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy Louisiana's accounting for nuclear decommissioning costs, unbilled revenue, and qualified pension and other postretirement benefits.

New Accounting Pronouncements

See "New Accounting Pronouncements" section of Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis for a discussion of new accounting pronouncements.

 

97

ENTERGY LOUISIANA, LLC
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
 
  Three Months Ended   Nine Months Ended
    2007   2006   2007   2006
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Electric   $801,890    $762,840    $2,075,668    $1,865,477 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   266,674    253,915    633,392    563,389 
  Purchased power   214,769    215,682    638,697    604,349 
  Nuclear refueling outage expenses   4,494    3,766    13,109    12,263 
  Other operation and maintenance   108,055    96,699    304,216    279,263 
Decommissioning   4,673    4,350    13,772    12,817 
Taxes other than income taxes   15,296    16,075    44,072    47,254 
Depreciation and amortization   36,097    48,366    134,289    137,868 
Other regulatory charges (credits) - net   11,071    (11,474)   33,363    (39,518)
TOTAL   661,129    627,379    1,814,910    1,617,685 
                 
OPERATING INCOME   140,761    135,461    260,758    247,792 
                 
OTHER INCOME                
Allowance for equity funds used during construction   2,737    2,572    8,994    11,749 
Interest and dividend income   (526)   63    4,929    9,315 
Miscellaneous - net   (876)   (782)   (2,565)   (2,200)
TOTAL   1,335    1,853    11,358    18,864 
                 
INTEREST AND OTHER CHARGES  
Interest on long-term debt   20,084    18,658    60,667    59,661 
Other interest - net   5,271    2,692    10,989    7,023 
Allowance for borrowed funds used during construction   (1,842)   (1,906)   (6,142)   (8,419)
TOTAL   23,513    19,444    65,514    58,265 
                 
INCOME BEFORE INCOME TAXES   118,583    117,870    206,602    208,391 
                 
Income taxes   41,272    46,068    74,725    81,239 
                 
NET INCOME   77,311    71,802    131,877    127,152 
                 
Preferred dividend requirements and other   1,738    1,738    5,213    5,213 
                 
EARNINGS APPLICABLE TO                
COMMON EQUITY   $75,573    $70,064    $126,664    $121,939 
                 
See Notes to Financial Statements.                

 

98

 

ENTERGY LOUISIANA, LLC
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
     
    2007   2006
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $131,877    $127,152 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Other regulatory charges (credits) - net   33,363    (39,518)
  Depreciation, amortization, and decommissioning   148,061    150,685 
  Deferred income taxes, investment tax credits, and non-current taxes accrued   (38,843)   (116,203)
  Changes in working capital:        
    Receivables   (125,163)   49,810 
    Accounts payable   (96,906)   (35,973)
    Taxes accrued   71,381    77,641 
    Interest accrued   4,253    (2,904)
    Deferred fuel costs   44,518    (81,410)
    Other working capital accounts   29,030    151,536 
  Provision for estimated losses and reserves   (5,425)   4,281 
  Changes in other regulatory assets   (96,758)   3,899 
  Other   93,729    (43,874)
Net cash flow provided by operating activities   193,117    245,122 
         
INVESTING ACTIVITIES        
Construction expenditures   (223,734)   (343,938)
Allowance for equity funds used during construction   8,994    11,749 
Insurance proceeds   10,065   
Nuclear fuel purchases   (3,131)   (44,819)
Proceeds from the sale/leaseback of nuclear fuel   14,279    44,819 
Proceeds from nuclear decommissioning trust fund sales   17,768    13,013 
Investment in nuclear decommissioning trust funds   (23,472)   (19,233)
Other regulatory investments     (24,415)
Net cash flow used in investing activities   (199,231)   (362,824)
         
FINANCING ACTIVITIES        
Additional equity from parent   1,119    50,013 
Retirement of long-term debt     (25,000)
Change in money pool payable - net   9,110    36,275 
Changes in credit borrowing, net     (40,000)
Distributions paid:        
  Preferred membership interests   (6,331)   (4,923)
Net cash flow provided by financing activities   3,898    16,365 
         
Net decrease in cash and cash equivalents   (2,216)   (101,337)
         
Cash and cash equivalents at beginning of period   2,743    105,285 
         
Cash and cash equivalents at end of period   $527    $3,948 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
  Cash paid during the period for:        
    Interest - net of amount capitalized   $64,457    $66,605 
    Income taxes   $98,904    $17,230 
         
See Notes to Financial Statements.        

 

99

 

ENTERGY LOUISIANA, LLC
BALANCE SHEETS
ASSETS
September 30, 2007 and December 31, 2006
(Unaudited)
         
  2007   2006
  (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents   $527    $2,743 
Accounts receivable:        
  Customer   154,485    97,207 
  Allowance for doubtful accounts   (2,693)   (1,856)
  Associated companies   76,586    28,621 
  Other   19,523    22,652 
  Accrued unbilled revenues   88,789    69,628 
     Total accounts receivable   336,690    216,252 
Deferred fuel costs   1,792    46,310 
Materials and supplies - at average cost   108,260    98,284 
Deferred nuclear refueling outage costs   11,642    23,639 
Prepayments and other   11,844    5,769 
TOTAL   470,755    392,997 
          
OTHER PROPERTY AND INVESTMENTS        
Decommissioning trust funds   223,568    208,926 
Non-utility property - at cost (less accumulated depreciation)   1,533    1,670 
Note receivable - Entergy New Orleans   9,353   
Other    
TOTAL   234,458    210,600 
         
UTILITY PLANT        
Electric   6,512,950    6,693,633 
Property under capital lease   252,972    252,972 
Construction work in progress   236,277    190,454 
Nuclear fuel under capital lease   53,719    82,464 
TOTAL UTILITY PLANT   7,055,918    7,219,523 
Less - accumulated depreciation and amortization   3,073,686    2,959,422 
UTILITY PLANT - NET   3,982,232    4,260,101 
         
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  SFAS 109 regulatory asset - net   165,543    157,789 
  Other regulatory assets   857,854    539,309 
  Deferred fuel costs   67,998    67,998 
Long-term receivables   5,986    5,986 
Other   23,122    20,062 
TOTAL   1,120,503    791,144 
         
TOTAL ASSETS   $5,807,948    $5,654,842 
         
See Notes to Financial Statements.        
 
100
 
ENTERGY LOUISIANA, LLC
BALANCE SHEETS
LIABILITIES AND MEMBERS' EQUITY
September 30, 2007 and December 31, 2006
(Unaudited)
   
  2007   2006
  (In Thousands)
 
CURRENT LIABILITIES        
Accounts payable:        
  Associated companies   $128,270    $160,555 
  Other   124,689    203,076 
Customer deposits   76,944    72,579 
Taxes accrued   77,618    6,237 
Accumulated deferred income taxes   16,731    32,026 
Interest accrued   34,742    30,489 
Obligations under capital leases   39,067    39,067 
Pension and other postretirement liabilities   8,551    8,276 
System agreement cost equalization   39,021   
Other   18,729    30,425 
TOTAL   564,362    582,730 
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   1,795,616    1,827,900 
Accumulated deferred investment tax credits   86,844    89,242 
Obligations under capital leases   14,652    43,397 
Other regulatory liabilities   136,998    50,210 
Decommissioning   252,308    238,536 
Accumulated provisions   18,373    23,798 
Pension and other postretirement liabilities   153,356    146,646 
Long-term debt   1,147,657    1,147,647 
Other   90,157    86,428 
TOTAL   3,695,961    3,653,804 
         
Commitments and Contingencies        
         
MEMBERS' EQUITY        
Preferred membership interests without sinking fund   100,000    100,000 
Members' equity   1,471,786    1,344,003 
Accumulated other comprehensive loss   (24,161)   (25,695)
TOTAL   1,547,625    1,418,308 
         
TOTAL LIABILITIES AND MEMBERS' EQUITY   $5,807,948    $5,654,842 
         
See Notes to Financial Statements.        

 

101

 

ENTERGY LOUISIANA, LLC
STATEMENTS OF MEMBERS' EQUITY AND COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
                 
    Three Months Ended
    2007   2006
    (In Thousands)
MEMBERS' EQUITY                
Members' Equity - Beginning of period   $1,396,213        $1,222,603     
                 
  Add:                
    Net income   77,311    $77,311    71,802    $71,802 
    Additional equity from parent   -        50,000     
    77,311        121,802     
                 
  Deduct:                
    Distributions declared:                
      Preferred membership interests   1,738    1,738    1,738    1,738 
    Other   -        17     
    1,738        1,755     
                 
Members' Equity - End of period   $1,471,786        $1,342,650     
                 
                 
                 
                 
ACCUMULATED OTHER COMPREHENSIVE                
INCOME (Net of Taxes):                
Balance at beginning of period:                
  Pension and other postretirement liabilities   ($24,673)       $-     
                 
Pension and other postretirement liabilities (net of tax expense of $465)   512    512    -    - 
                 
Balance at end of period:                
  Pension and other postretirement liabilities   ($24,161)       $-     
Comprehensive Income       $76,085        $70,064 
                 
                 
                 
    Nine Months Ended
    2007   2006
    (In Thousands)
MEMBERS' EQUITY                
Members' Equity - Beginning of period   $1,344,003        $1,105,172     
                 
  Add:                
    Net income   131,877    $131,877    127,152    $127,152 
    Additional equity from parent   1,119        115,703     
    132,996        242,855     
                 
  Deduct:                
    Distributions declared:                
      Preferred membership interests   5,213    5,213    5,213    5,213 
    Other   -        164     
    5,213        5,377     
                 
Members' Equity - End of period   $1,471,786        $1,342,650     
                 
                 
                 
                 
ACCUMULATED OTHER COMPREHENSIVE                
INCOME (Net of Taxes):                
Balance at beginning of period:                
  Pension and other postretirement liabilities   ($25,695)       $-     
                 
Pension and other postretirement liabilities (net of tax expense of $1,397)   1,534    1,534    -    - 
                 
Balance at end of period:                
  Pension and other postretirement liabilities   ($24,161)       $-     
Comprehensive Income       $128,198        $121,939 
                 
                 
                 
                 
See Notes to Financial Statements.                

 

102

 

ENTERGY LOUISIANA, LLC
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2007   2006   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $285   $286   ($1)   -
  Commercial   164   160   4   3
  Industrial   215   219   (4)   (2)
  Governmental   11   10   1   10
     Total retail   675   675   -   -
  Sales for resale                
    Associated companies   101   50   51   102
    Non-associated companies   3   5   (2)   (40)
  Other   23   33   (10)   (30)
     Total   $802   $763   $39   5
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   2,914   2,924   (10)   -
  Commercial   1,740   1,697   43   3
  Industrial   3,403   3,353   50   1
  Governmental   112   112   -   -
     Total retail   8,169   8,086   83   1
  Sales for resale                
    Associated companies   752   665   87   13
    Non-associated companies   34   50   (16)   (32)
     Total   8,955   8,801   154   2
                 
                 
    Nine Months Ended   Increase/    
Description   2007   2006   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $665   $610   $55   9
  Commercial   437   396   41   10
  Industrial   658   589   69   12
  Governmental   32   30   2   7
     Total retail   1,792   1,625   167   10
  Sales for resale                
    Associated companies   208   183   25   14
    Non-associated companies   9   10   (1)   (10)
  Other   67   47   20   43
     Total   $2,076   $1,865   $211   11
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   6,721   6,642   79   1
  Commercial   4,415   4,325   90   2
  Industrial   9,898   9,422   476   5
  Governmental   336   328   8   2
     Total retail (1)   21,370   20,717   653   3
  Sales for resale                
    Associated companies   1,704   1,960   (256)   (13)
    Non-associated companies   92   89   3   3
     Total   23,166   22,766   400   2
                 
(1) 2006 billed electric energy sales includes 96 GWh of billings related to 2005 deliveries that were billed in 2006 because of billing delays following Hurricane Katrina, which results in an increase of 666 GWh in 2007, or 5.3%.

103

 

ENTERGY MISSISSIPPI, INC.

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

Results of Operations

Net Income

Third Quarter 2007 Compared to Third Quarter 2006

Net income increased $4.9 million primarily due to lower other operation and maintenance expenses.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Net income increased $6.6 million primarily due to higher net revenue and higher other income, partially offset by higher depreciation and amortization expenses.

Net Revenue

Third Quarter 2007 Compared to Third Quarter 2006

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges (credits). Following is an analysis of the change in net revenue comparing the third quarter 2007 to the third quarter 2006.

   

Amount

   

(In Millions)

     

2006 net revenue

 

$149.4 

Various insignificant items

 

1.6 

2007 net revenue

 

$151.0 

 

Gross operating revenues and other regulatory charges (credits)

Gross operating revenues increased primarily due to an increase in gross wholesale revenue of $43.1 million primarily as a result of increased sales to affiliated systems and higher power management rider revenue of $10.9 million, partially offset by a decrease of $32.5 million in fuel cost recovery revenues due to lower fuel rates and decreased usage.

Other regulatory charges increased primarily due to the refunding in 2006, through the power management recovery rider, of gains recorded on gas hedging contracts in addition to the over-recovery in 2007, through the Grand Gulf rider, of Grand Gulf capacity charges. There is no material effect on net income due to quarterly adjustments to the power management recovery rider.

 

104

 

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges (credits). Following is an analysis of the change in net revenue comparing the nine months ended September 30, 2007 to the nine months ended September 30, 2006.

   

Amount

   

(In Millions)

     

2006 net revenue

 

$364.5 

Volume/weather

 

6.2 

Transmission revenue

 

3.3 

Transmission equalization

 

3.1 

Attala costs

 

(10.2)

Other

 

4.0 

2007 net revenue

 

$370.9 

The volume/weather variance is primarily due to increased electricity usage primarily in the residential and commercial sectors, including increased usage primarily during the unbilled sales period. The increase in usage was substantially offset by decreased usage in the industrial sector. See Note 1 to the financial statements in the Form 10-K for a discussion of the accounting for unbilled revenues.

The transmission revenue variance is due to higher rates and the addition of new transmission customers in late-2006.

The transmission equalization variance is primarily due to a revision made in 2006 of transmission equalization receipts among Entergy companies.

The Attala costs variance is primarily due to a decline in the Attala costs that are recovered through the power management rider. The net income effect of this cost deferral is partially offset by Attala costs in other operation and maintenance expenses, depreciation expense, and taxes other than income taxes.

Gross operating revenues, fuel and purchased power expenses, and other regulatory charges (credits)

Gross operating revenues decreased primarily due to a decrease of $275.9 million in fuel cost recovery revenues due to lower fuel rates, partially offset by higher power management rider revenue of $77.5 million and an increase of $67.1 million in gross wholesale revenue as a result of increased sales to affiliated systems.

Fuel and purchased power expenses decreased primarily due to decreased recovery of deferred fuel costs from customers and an increase in demand, partially offset by an increase in the market price of natural gas.

Other regulatory charges increased primarily due to the refunding in 2006, through the power management recovery rider, of gains recorded on gas hedging contracts in addition to the over-recovery in 2007, through the Grand Gulf rider, of Grand Gulf capacity charges. The increase was partially offset by the decreased recovery of Attala costs, as discussed above. There is no material effect on net income due to quarterly adjustments to the power management recovery rider.

105

Other Income Statement Variances

Third Quarter 2007 Compared to Third Quarter 2006

Other operation and maintenance expenses decreased primarily due to a decrease of $3.1 million in loss reserves for storm damage in 2007 and a decrease of $2.5 million in payroll and payroll-related costs.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Depreciation and amortization expenses increased primarily due to an increase in plant in service.

Other income increased primarily due to the gain recorded on the sale of non-utility property and higher interest earned on money pool investments.

Income Taxes

The effective income tax rate was 35.4% for the third quarter 2007 and 33.6% for the nine months ended September 30, 2007. The difference in the effective income tax rate for the nine months ended September 30, 2007 versus the federal statutory rate of 35% is primarily due to the amortization of investment tax credits and excess deferred income taxes, a federal tax reserve adjustment and book and tax differences related to the allowance for equity funds used during construction, partially offset by state income taxes and book and tax differences related to utility plant items.

The effective income tax rate was 36.9% for the third quarter 2006 and 34.8% for the nine months ended September 30, 2006. The difference in the effective tax rate for the third quarter 2006 versus the federal statutory rate of 35.0% is primarily due to state income taxes.

Hurricane Katrina Storm Cost Recovery

In October 2006 the MPSC issued a financing order authorizing the issuance of state bonds to finance $8 million of Entergy Mississippi's certified Hurricane Katrina restoration costs and $40 million for an increase in Entergy Mississippi's storm damage reserve. $30 million of the storm damage reserve will be set aside in a restricted account. A Mississippi state entity issued the bonds in May 2007, and Entergy Mississippi received proceeds of $48 million. Entergy Mississippi will not report the bonds on its balance sheet because the bonds are the obligation of the state entity, and there is no recourse against Entergy Mississippi in the event of a bond default. To service the bonds, Entergy Mississippi will collect a system restoration charge on behalf of the state, and will remit the collections to the state. By analogy to and in accordance with Entergy's accounting policy for collection of sales taxes, Entergy Mississippi will not report the collections as revenue because it is merely acting as the billing and collection agent for the state.

106

 

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2007 and 2006 were as follows:

 

 

2007

 

2006

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$73,417 

 

$4,523 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

106,474 

 

297,417 

 

Investing activities

 

(17,379)

 

(272,823)

 

Financing activities

 

(125,721)

 

8,180 

Net increase (decrease) in cash and cash equivalents

 

(36,626)

 

32,774 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$36,791 

 

$37,297 

Operating Activities

Cash flow from operating activities decreased $190.9 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 primarily due to decreased recovery of fuel costs and an income tax refund received in 2006, partially offset by securitization proceeds of $48 million and a decrease of $15.6 million in pension contributions.

Investing Activities

The decrease of $255.4 million in net cash used by investing activities for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 is primarily due to:

  • the receipt of proceeds in 2007 from funds held in trust in 2006 that were used for the redemption in January 2007, prior to maturity, of its $100 million, 4.35% Series First Mortgage Bonds;
  • money pool activity; and
  • the purchase of the Attala plant for $88 million in January 2006.

The decrease was partially offset by the transfer of $30 million to a storm damage reserve escrow account.

Financing Activities

Entergy Mississippi's financing activities used $125.7 million for the nine months ended September 30, 2007 compared to providing $8.2 million for the nine months ended September 30, 2006 primarily due to the redemption, prior to maturity, of $100 million of First Mortgage Bonds in January 2007, the issuance of $100 million of long-term debt in 2006, and an increase of $18.8 million in common stock dividends paid in 2007, partially offset by money pool activity.

 

107

Capital Structure

Entergy Mississippi's capitalization is balanced between equity and debt, as shown in the following table. The decrease in the debt to capital percentage as of September 30, 2007 is primarily due to the redemption of $100 million of First Mortgage Bonds in January 2007.

 

 

September 30,
2007

 

December 31,
2006

 

 

 

 

 

Net debt to net capital

 

48.7%

 

51.9%

Effect of subtracting cash from debt

 

1.3%

 

2.4%

Debt to capital

 

50.0%

 

54.3%

Net debt consists of debt less cash and cash equivalents. Debt consists of notes payable, capital lease obligations, and long-term debt, including the currently maturing portion. Capital consists of debt and shareholders' equity. Net capital consists of capital less cash and cash equivalents. Entergy Mississippi uses the net debt to net capital ratio in analyzing its financial condition and believes it provides useful information to its investors and creditors in evaluating Entergy Mississippi's financial condition.

Uses and Sources of Capital

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources" in the Form 10-K for a discussion of Entergy Mississippi's uses and sources of capital. Following are updates to the information presented in the Form 10-K.

Entergy Mississippi's receivables from or (payables to) the money pool were as follows:

September 30,
2007

 

December 31,
2006

 

September 30,
2006

 

December 31,
2005

(In Thousands)

 

 

 

 

 

 

 

$16,498

 

$39,573

 

$73,137

 

($84,066)

See Note 4 to the financial statements in the Form 10-K for a description of the money pool.

As discussed in the Form 10-K, Entergy Mississippi has two separate credit facilities in the aggregate amount of $50 million and renewed both facilities through May 2008. Borrowings under the credit facilities may be secured by a security interest in Entergy Mississippi's accounts receivable. No borrowings were outstanding under either facility as of September 30, 2007.

In January 2007, Entergy Mississippi redeemed, prior to maturity, its $100 million, 4.35% Series First Mortgage Bonds due April 2008.

Significant Factors and Known Trends

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends" in the Form 10-K for a discussion of state and local rate regulation, federal regulation, the Energy Policy Act of 2005, and utility restructuring. The following is an update to the information provided in the Form 10-K.

State and Local Rate Regulation

In March 2007, Entergy Mississippi made its annual scheduled formula rate plan filing for the 2006 test year with the MPSC.  The filing showed that an increase of $12.9 million in annual electric revenues is warranted.  In June 2007, the MPSC approved a joint stipulation between Entergy

 

108

 

Mississippi and the Mississippi Public Utilities staff that provides for a $10.5 million rate increase, which was effective beginning with July 2007 billings.

Federal Regulation

See "System Agreement Proceedings", "Independent Coordinator of Transmission", and "Available Flowgate Capacity Proceeding" in the "Significant Factors and Known Trends" section of Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis for updates to the discussion in the Form 10-K.

Critical Accounting Estimates

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy Mississippi's accounting for unbilled revenue and qualified pension and other postretirement benefits.

New Accounting Pronouncements

See "New Accounting Pronouncements" section of Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis for a discussion of new accounting pronouncements.

 

109

ENTERGY MISSISSIPPI, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
     
    Three Months Ended   Nine Months Ended
    2007   2006   2007   2006
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Electric   $447,244    $429,460    $1,063,685    $1,190,543 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   186,302    169,458    358,377    532,616 
  Purchased power   102,964    117,316    308,085    357,076 
  Other operation and maintenance   47,673    53,475    145,381    144,487 
Taxes other than income taxes   15,147    17,080    47,037    49,303 
Depreciation and amortization   20,218    19,698    60,429    55,768 
Other regulatory charges (credits) - net   7,005    (6,717)   26,289    (63,625)
TOTAL   379,309    370,310    945,598    1,075,625 
                 
OPERATING INCOME   67,935    59,150    118,087    114,918 
                 
OTHER INCOME                
Allowance for equity funds used during construction   756    747    3,149    2,861 
Interest and dividend income   1,458    1,979    4,099    2,934 
Miscellaneous - net   (541)   (289)   1,652    (1,321)
TOTAL   1,673    2,437    8,900    4,474 
                 
INTEREST AND OTHER CHARGES      
Interest on long-term debt   10,682    11,474    31,501    34,081 
Other interest - net   3,447    1,194    5,929    4,063 
Allowance for borrowed funds used during construction   (485)   (499)   (2,065)   (1,896)
TOTAL   13,644    12,169    35,365    36,248 
                 
INCOME BEFORE INCOME TAXES   55,964    49,418    91,622    83,144 
                 
Income taxes   19,839    18,232    30,757    28,914 
                 
NET INCOME   36,125    31,186    60,865    54,230 
                 
Preferred dividend requirements and other   707    707    2,121    2,121 
                 
EARNINGS APPLICABLE TO                
COMMON STOCK   $35,418    $30,479    $58,744    $52,109 
                 
See Notes to Financial Statements.                
                 
                 

 

110

 

ENTERGY MISSISSIPPI, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
     
    2007   2006
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $60,865    $54,230 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Other regulatory charges (credits) - net   26,289    (63,625)
  Depreciation and amortization   60,429    55,768 
  Deferred income taxes, investment tax credits, and non-current taxes accrued   (39,128)   79,589 
  Changes in working capital:        
    Receivables   (82,111)   (18,458)
    Fuel inventory   (236)   (3,033)
    Accounts payable   24,156    (39,966)
    Taxes accrued   36,677    6,654 
    Interest accrued   2,775    2,185 
    Deferred fuel costs   (63,150)   222,177 
    Other working capital accounts   14,449    17,470 
  Provision for estimated losses and reserves   39,907    (7)
  Changes in other regulatory assets   31,292    (39,436)
  Other   (5,740)   23,869 
Net cash flow provided by operating activities   106,474    297,417 
         
INVESTING ACTIVITIES        
Construction expenditures   (109,264)   (112,847)
Payment for purchase of plant   -    (88,199)
Allowance for equity funds used during construction   3,149    2,861 
Changes in other temporary investments - net   100,000    (1,501)
Proceeds from sale of assets   2,616    - 
Change in money pool receivable - net   16,474    (73,137)
Payment to storm reserve escrow account   (30,354)   - 
Net cash flow used in investing activities   (17,379)   (272,823)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt   -    99,167 
Retirement of long-term debt   (100,000)   - 
Change in money pool payable - net   -    (84,066)
Dividends paid:        
  Common stock   (23,600)   (4,800)
  Preferred stock   (2,121)   (2,121)
Net cash flow provided by (used in) financing activities   (125,721)   8,180 
         
Net increase (decrease) in cash and cash equivalents   (36,626)   32,774 
         
Cash and cash equivalents at beginning of period   73,417    4,523 
         
Cash and cash equivalents at end of period   $36,791    $37,297 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
  Cash paid/(received) during the period for:        
    Interest - net of amount capitalized   $32,768    $34,367 
    Income taxes   $8,290    ($65,803)
         
See Notes to Financial Statements        
         

 

111

 

ENTERGY MISSISSIPPI, INC.
BALANCE SHEETS
ASSETS
September 30, 2007 and December 31, 2006
(Unaudited)
         
  2007   2006
  (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents:        
  Cash   $756    $2,128 
  Temporary cash investment - at cost,        
   which approximates market   36,035    71,289 
     Total cash and cash equivalents   36,791    73,417 
Accounts receivable:        
  Customer   105,208    61,216 
  Allowance for doubtful accounts   (985)   (616)
  Associated companies   49,971    45,040 
  Other   9,824    9,032 
  Accrued unbilled revenues   41,231    32,550 
     Total accounts receivable   205,249    147,222 
Accumulated deferred income taxes   5,035   
Fuel inventory - at average cost   7,881    7,645 
Materials and supplies - at average cost   30,686    28,607 
Other special deposits     100,000 
Prepayments and other   7,179    7,398 
TOTAL   292,821    364,289 
         
OTHER PROPERTY AND INVESTMENTS        
Investment in affiliates - at equity   5,531    5,531 
Non-utility property - at cost (less accumulated depreciation)   5,174    6,061 
Storm reserve escrow account   30,354   
Note receivable - Entergy New Orleans   7,610   
TOTAL   48,669    11,592 
         
UTILITY PLANT         
Electric   2,806,011    2,692,971 
Property under capital lease   9,432    17 
Construction work in progress   62,574    79,950 
TOTAL UTILITY PLANT   2,878,017    2,772,938 
Less - accumulated depreciation and amortization   991,507    945,548 
UTILITY PLANT - NET   1,886,510    1,827,390 
         
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  SFAS 109 regulatory asset - net   32,027    26,378 
  Other regulatory assets   145,464    186,986 
Long-term receivables   2,288    2,288 
Other   22,614    21,968 
TOTAL   202,393    237,620 
         
TOTAL ASSETS   $2,430,393    $2,440,891 
         
See Notes to Financial Statements.        
 
112
 
ENTERGY MISSISSIPPI, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2007 and December 31, 2006
(Unaudited)
 
  2007   2006
  (In Thousands)
 
CURRENT LIABILITIES        
Accounts payable:        
  Associated companies   $33,138    $59,696 
  Other   86,925    38,097 
Customer deposits   54,809    51,568 
Taxes accrued   82,364    45,687 
Accumulated deferred income taxes     3,963 
Interest accrued   15,838    13,063 
Deferred fuel costs   32,086    95,236 
System agreement cost equalization   17,391   
Other   13,301    17,624 
TOTAL   335,852    324,934 
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   510,197    516,558 
Accumulated deferred investment tax credits   10,073    11,047 
Obligations under capital lease   8,140   
Asset retirement cost liabilities   4,441    4,254 
Accumulated provisions   49,943    10,036 
Pension and other postretirement liabilities   64,655    64,604 
Long-term debt   695,250    795,187 
Other   48,680    46,253 
TOTAL   1,391,379    1,447,939 
         
Commitments and Contingencies        
         
SHAREHOLDERS' EQUITY        
Preferred stock without sinking fund   50,381    50,381 
Common stock, no par value, authorized 15,000,000        
 shares; issued and outstanding 8,666,357 shares in 2007 and 2006   199,326    199,326 
Capital stock expense and other   (690)   (690)
Retained earnings   454,145    419,001 
TOTAL   703,162    668,018 
         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $2,430,393    $2,440,891 
         
See Notes to Financial Statements.        
         

113

 

ENTERGY MISSISSIPPI, INC.
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2007   2006   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 179   $ 189   ($ 10)   (5)
  Commercial   129   133   (4)   (3)
  Industrial   49   56   (7)   (13)
  Governmental   11   12   (1)   (8)
     Total retail   368   390   (22)   (6)
  Sales for resale                
    Associated companies   56   13   43    331 
    Non-associated companies   11   12   (1)   (8)
  Other   12   15   (3)   (20)
     Total   $ 447   $ 430   $ 17   
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   1,898   1,905   (7)  
  Commercial   1,470   1,443   27   
  Industrial   724   768   (44)   (6)
  Governmental   122   125   (3)   (2)
     Total retail   4,214   4,241   (27)   (1)
  Sales for resale                
    Associated companies   444   143   301    210 
    Non-associated companies   167   161    
     Total   4,825   4,545   280   
                 
                 
    Nine Months Ended   Increase/    
Description   2007   2006   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 393   $ 471   ($ 78)   (17)
  Commercial   323   391   (68)   (17)
  Industrial   139   188   (49)   (26)
  Governmental   30   37   (7)   (19)
     Total retail   885   1,087   (202)   (19)
  Sales for resale                
    Associated companies   108   36   72    200 
    Non-associated companies   26   31   (5)   (16)
  Other   45   37     22 
     Total   $ 1,064   $ 1,191   ($ 127)   (11)
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   4,291   4,235   56   
  Commercial   3,684   3,611   73   
  Industrial   2,072   2,189   (117)   (5)
  Governmental   317   318   (1)  
     Total retail   10,364   10,353   11   
  Sales for resale                
    Associated companies   893   397   496    125 
    Non-associated companies   370   342   28   
     Total   11,627   11,092   535   
                 
                 

114

 

ENTERGY NEW ORLEANS, INC.

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

Hurricane Katrina

See the Form 10-K for a discussion of the effects of Hurricane Katrina, which in August 2005 caused catastrophic damage to Entergy New Orleans' service territory, including the effect of extensive flooding that resulted from levee breaks in and around the New Orleans area, and Entergy New Orleans' efforts to seek recovery of storm restoration costs.

In March 2007, the City Council certified that Entergy New Orleans has incurred $205 million in storm-related costs through December 2006 that are eligible for CDBG funding under the state action plan, and certified Entergy New Orleans' estimated costs of $465 million for its gas system rebuild. In April 2007, Entergy New Orleans executed an agreement with the Louisiana Office of Community Development under which $200 million of CDBG funds will be made available to Entergy New Orleans. Entergy New Orleans submitted the agreement to the bankruptcy court, which approved it on April 25, 2007. Entergy New Orleans has received $180.8 million of the funds thus far, and the remainder will be paid to Entergy New Orleans as it incurs and submits additional eligible costs.

Entergy reached an agreement with one of its excess insurers under which Entergy received $69.5 million in the second quarter 2007 in settlement of its Hurricane Katrina claim with that insurer. Entergy New Orleans was allocated $53.8 million of the proceeds. Entergy New Orleans has received a total of $70.7 million as of September 30, 2007 on its Hurricane Katrina and Hurricane Rita insurance claims, including $60.4 million in 2007. In the third quarter 2007, Entergy filed a lawsuit in the U.S. District Court for the Eastern District of Louisiana against its other excess insurer on the Hurricane Katrina claim. At issue in the lawsuit is whether any policy exclusions limit the extent of coverage provided by that insurer. Refer to Note 8 to the financial statements in the Form 10-K for a further description of Entergy's Hurricane Katrina and Hurricane Rita insurance claims and the non-nuclear property insurance coverage in place at the time the claims occurred.

Bankruptcy Proceedings

See the Form 10-K for a discussion of the Entergy New Orleans bankruptcy proceeding. On May 7, 2007, the bankruptcy judge entered an order confirming Entergy New Orleans' plan of reorganization. With the receipt of CDBG funds, and the agreement on insurance recovery with one of its excess insurers, Entergy New Orleans waived the conditions precedent in its plan of reorganization, and the plan became effective on May 8, 2007. Following are significant terms in Entergy New Orleans' plan of reorganization:

  • Entergy New Orleans paid in full, in cash, the allowed third-party prepetition accounts payable (approximately $29 million, including interest). Entergy New Orleans paid interest from September 23, 2005 at the Louisiana judicial rate of interest for 2005 (6%) and 2006 (8%), and at the Louisiana judicial rate of interest plus 1% for 2007 through the date of payment. The Louisiana judicial rate of interest for 2007 is 9.5%.
  • Entergy New Orleans issued notes due in three years in satisfaction of its affiliate prepetition accounts payable (approximately $74 million, including interest), including its indebtedness to the Entergy System money pool. Entergy New Orleans included in the principal amount of the notes accrued interest from September 23, 2005 at the Louisiana judicial rate of interest for 2005 (6%) and 2006 (8%), and at the Louisiana judicial rate of interest plus 1% for 2007 through the date of issuance of the notes. The Louisiana judicial rate of interest is 9.5% for 2007. Entergy New Orleans will pay interest on the notes from their date of issuance at the Louisiana judicial rate of interest plus 1%.

 

115

 

  • Entergy New Orleans repaid to Entergy Corporation, in full, in cash, the outstanding borrowings under the debtor-in-possession (DIP) credit agreement (approximately $67 million).
  • Entergy New Orleans' first mortgage bonds will remain outstanding with their current maturity dates and interest terms. Pursuant to an agreement with its first mortgage bondholders, Entergy New Orleans paid the first mortgage bondholders an amount equal to the one year of interest from the bankruptcy petition date that the bondholders had waived previously in the bankruptcy proceeding (approximately $12 million).
  • Entergy New Orleans' preferred stock will remain outstanding on its current dividend terms, and Entergy New Orleans paid its unpaid preferred dividends in arrears (approximately $1 million).
  • Litigation claims will generally be unaltered, and will generally proceed as if Entergy New Orleans had not filed for bankruptcy protection, with exceptions for certain claims.

Results of Operations

Net Income

Third Quarter 2007 Compared to Third Quarter 2006

Net income increased $2.2 million in the third quarter 2007 compared to the third quarter 2006 primarily due to higher net revenue and a lower effective income tax rate, substantially offset by higher other operation and maintenance expenses and higher interest charges.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Net income increased slightly by $1.0 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 primarily due to higher net revenue and a lower effective income tax rate, almost entirely offset by higher other operation and maintenance expenses and higher interest charges.

Net Revenue

Third Quarter 2007 Compared to Third Quarter 2006

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges. Following is an analysis of the changes in net revenue comparing the third quarter 2007 to the third quarter 2006.

   

Amount

   

(In Millions)

     

2006 net revenue

 

$58.0 

Volume/weather

 

7.4 

Storm reserve rider

 

2.9 

Net gas revenue

 

2.0 

Other

 

1.2 

2007 net revenue

 

$71.5 

The volume/weather variance is due to an increase in electricity usage primarily in the residential and governmental sectors in 2007 compared to the same period in 2006. Billed retail electricity usage increased a total of 146 GWh compared to the third quarter 2006, an increase of 12%.

The storm reserve rider variance is due to a storm rider effective March 2007 as a result of the City Council's approval of a settlement agreement in October 2006. The approved storm reserve will be created over a ten-year period through the rider and the funds will be held in a restricted escrow account. The settlement agreement is discussed in Note 2 to the financial statements in the Form 10-K.

116

The net gas revenue variance is due to an increase of 6% in volume compared to the same period in 2006.

Gross operating revenues and fuel and purchased power expenses

Gross operating revenues increased primarily due to:

  • an increase in fuel cost recovery revenues of $8.5 million as a result of higher usage;
  • the increase in volume/weather of $7.4 million, discussed above; and
  • an increase in wholesale revenues of $6 million due to increased sales to affiliated companies.

Fuel and purchased power expenses increased primarily due to an increase in volume as a result of increased demand and an increase in the average price of purchased power.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges. Following is an analysis of the changes in net revenue comparing the nine months ended September 30, 2007 to the nine months ended September 30, 2006.

   

Amount

   

(In Millions)

     

2006 net revenue

 

$149.6 

Fuel recovery

 

42.6 

Volume/weather

 

21.3 

Storm reserve rider

 

6.2 

Net wholesale revenue

 

(41.3)

Other

 

5.2 

2007 net revenue

 

$183.6 

The fuel recovery variance is due to the inclusion of Grand Gulf costs in fuel recoveries effective July 1, 2006. In June 2006, the City Council approved the recovery of Grand Gulf costs through the fuel adjustment clause, without a corresponding change in base rates (a significant portion of Grand Gulf costs was previously recovered through base rates).

The volume/weather variance is due to an increase in electricity usage in the service territory in 2007 compared to the same period in 2006. The first quarter 2006 was affected by customer losses following Hurricane Katrina. Billed retail electricity usage increased a total of 446 GWh compared to the same period in 2006, an increase of 16%.

The storm reserve rider variance is due to a storm rider effective March 2007 as a result of the City Council's approval of a settlement agreement in October 2006. The approved storm reserve will be created over a ten-year period through the rider and the funds will be held in a restricted escrow account. The settlement agreement is discussed in Note 2 to the financial statements in the Form 10-K.

The net wholesale revenue variance is due to more energy available for resale in 2006 due to the decrease in retail usage caused by customer losses following Hurricane Katrina. In addition, 2006 revenue includes the sales into the wholesale market of Entergy New Orleans' share of the output of Grand Gulf, pursuant to City Council approval of measures proposed by Entergy New Orleans to address the reduction in Entergy New Orleans' retail customer usage caused by Hurricane Katrina and to provide revenue support for the costs of Entergy New Orleans' share of Grand Gulf.

117

Gross operating revenues and fuel and purchased power expenses

Gross operating revenues increased primarily due to:

  • an increase in fuel cost recovery revenues of $27.9 million as a result of higher electricity usage and higher fuel rates;
  • the volume/weather variance of $21.3 million, as discussed above; and
  • an increase in gross gas revenues of $20.5 million primarily due to increased gas usage.

Fuel and purchased power expenses increased primarily due to an increase in volume as a result of increased demand and an increase in the average price of purchased power.

Other Income Statement Variances

Third Quarter 2007 Compared to Third Quarter 2006

Other operation and maintenance expenses increased primarily due to:

  • an increase of $11 million due to a provision for storm-related bad debts; and
  • an increase of $3.5 million as a result of the return to normal operations work in 2007 versus storm restoration activities in 2006 as a result of Hurricane Katrina.

Other income increased due to carrying costs related to the Hurricane Katrina storm costs regulatory asset and interest on temporary cash investments.

Interest and other charges increased primarily due to interest accruals on first mortgage bonds. On September 23, 2006, when the one-year interest moratorium agreed to by the bondholders expired, Entergy New Orleans resumed interest accruals on its outstanding first mortgage bonds. In addition, beginning May 8, 2007, Entergy New Orleans began accruing interest on third-party and affiliate accounts payable as a result of its plan of reorganization filed with the bankruptcy court, as discussed above.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Other operation and maintenance expenses increased primarily due to:

  • an increase of $12.7 million as a result of the return to normal operations work in 2007 versus storm restoration activities in 2006 as a result of Hurricane Katrina; and
  • an increase of $11 million due to a provision for storm-related bad debts.

Other income increased due to carrying costs related to the Hurricane Katrina storm costs regulatory asset and interest on temporary cash investments.

Interest and other charges increased primarily due to interest accruals on first mortgage bonds. On September 23, 2006, when the one-year interest moratorium agreed to by the bondholders expired, Entergy New Orleans resumed interest accruals on its outstanding first mortgage bonds. In addition, beginning May 8, 2007, Entergy New Orleans began accruing interest on third-party and affiliate accounts payable as a result of its plan of reorganization filed with the bankruptcy court, as discussed above.

Income Taxes

The effective income tax rate was 33.4% for the third quarter 2007 and 37.8% for the nine months ended September 30, 2007. The effective tax rate for the third quarter 2007 is lower than the statutory rate of 35% primarily due to an adjustment of prior year's federal tax reserve partially offset by state income taxes and book and tax differences related to utility plant items. The effective income tax rate for the nine months

 

118

 

ended September 30, 2007 was higher than the federal statutory rate of 35% primarily due to state income taxes and book and tax differences related to utility plant items, partially offset by the amortization of deferred income taxes, book and tax differences related to the allowance for equity funds used during construction, and an adjustment of prior year's federal tax reserve.

The effective income tax rate was 40.9% for the third quarter 2006 and 39.1% for the nine months ended September 30, 2006. The effective income tax rate for the third quarter 2006 and the nine months ended September 30, 2006 is higher than the statutory rate of 35% primarily due to state income taxes and book and tax differences related to utility plant items, partially offset by book and tax differences related to the allowance for equity funds used during construction.

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2007 and 2006 were as follows:

 

 

2007

 

2006

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$17,093 

 

$48,056 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

163,563 

 

96,197 

 

Investing activities

 

8,910 

 

(57,952)

 

Financing activities

 

(53,586)

 

(73,344)

Net increase (decrease) in cash and cash equivalents

 

118,887 

 

(35,099)

 

 

 

 

 

Cash and cash equivalents at end of period

 

$135,980 

 

$12,957 

Operating Activities

Net cash provided by operating activities increased $67.4 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 primarily due to the receipt of CDBG funds of $180.8 million. The increase was partially offset by:

  • the receipt of an income tax refund of $59 million in 2006;
  • pension contributions of $44 million in 2007;
  • Entergy New Orleans' use of cash for the payment of prepetition accounts payable (approximately $29 million, including interest); and
  • the resumption of interest payments on its first mortgage bonds, and other bankruptcy-related items.

Investing Activities

Entergy New Orleans investing activities used $58 million of cash for the nine months ended September 30, 2006 compared to providing $8.9 million of cash for the nine months ended September 30, 2007 primarily due to the receipt in the second quarter 2007 of insurance proceeds related to Hurricane Katrina. Entergy New Orleans also received proceeds of $10 million related to the sale in the first quarter 2007 of a power plant that had been out of service since 1984.

119

Financing Activities

Net cash used in financing activities decreased $19.8 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 primarily due to the repayment by setoff in 2006 of the $15 million credit facility.

Capital Structure

Entergy New Orleans' capitalization is shown in the following table. The decrease in the net debt to net capital ratio is primarily due to the increase in cash as a result of the receipt of CDBG funding and insurance proceeds.

 

 

September 30,
2007

 

December 31,
2006

 

 

 

 

 

Net debt to net capital

 

46.0%

 

60.4%

Effect of subtracting cash from debt

14.6%

1.5%

Debt to capital

 

60.6%

 

61.9%

Net debt consists of debt less cash and cash equivalents. Debt consists of notes payable and long-term debt, including the currently maturing portion. Capital consists of debt and shareholders' equity. Net capital consists of capital less cash and cash equivalents. Entergy New Orleans uses the net debt to net capital ratio in analyzing its financial condition and believes it provides useful information to its investors and creditors in evaluating Entergy New Orleans' financial condition.

Uses and Sources of Capital

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources" in the Form 10-K for a discussion of Entergy New Orleans' uses and sources of capital. The following are updates to the Form 10-K.

Entergy New Orleans' payables to the money pool were as follows:

September 30,
2007

 

December 31,
2006

 

September 30,
2006

 

December 31,
2005

(In Thousands)

 

 

 

 

 

 

 

$ -

 

($37,166)

 

($37,166)

 

($37,166)

See Note 4 to the financial statements in the Form 10-K for a description of the money pool. As discussed above in "Bankruptcy Proceedings", Entergy New Orleans issued notes due in three years in satisfaction of its affiliate prepetition accounts payable, including its indebtedness to the Entergy System money pool.

Significant Factors and Known Trends

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends" in the Form 10-K for a discussion of state and local rate regulation, federal regulation, the Energy Policy Act of 2005, environmental risks, and litigation risks.

Federal Regulation

See "System Agreement Proceedings", "Independent Coordinator of Transmission", and "Available Flowgate Capacity Proceeding" in the "Significant Factors and Known Trends" section of Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis for updates to the discussion in the Form 10-K.

 

120

Critical Accounting Estimates

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy New Orleans' accounting for unbilled revenue and qualified pension and other postretirement benefits.

New Accounting Pronouncements

See "New Accounting Pronouncements" section of Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis for a discussion of new accounting pronouncements.

121

 

ENTERGY NEW ORLEANS, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
                 
  Three Months Ended   Nine Months Ended
    2007   2006   2007   2006
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Electric   $172,528    $146,105    $431,815    $363,181 
Natural gas   18,335    15,538    91,178    70,678 
TOTAL   190,863    161,643    522,993    433,859 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   58,134    56,098    189,727    107,199 
  Purchased power   60,188    46,504    146,543    173,952 
  Other operation and maintenance   35,326    22,193    82,121    54,135 
Taxes other than income taxes   10,537    9,164    29,339    25,853 
Depreciation and amortization   8,117    8,775    24,227    24,747 
Reorganization items     4,853      6,793 
Other regulatory charges - net   1,031    1,040    3,096    3,120 
TOTAL   173,333    148,627    475,053    395,799 
                 
OPERATING INCOME   17,530    13,016    47,940    38,060 
                 
OTHER INCOME                
Allowance for equity funds used during construction   133    540    1,592    2,528 
Interest and dividend income   2,877    768    8,902    2,357 
Miscellaneous - net   (202)   (123)   (569)   (255)
TOTAL   2,808    1,185    9,925    4,630 
                 
INTEREST AND OTHER CHARGES          
Interest on long-term debt   3,246    455    9,736    824 
Other interest - net   2,663    1,603    9,398    4,741 
Allowance for borrowed funds used during construction   (98)   (428)   (1,195)   (2,034)
TOTAL   5,811    1,630    17,939    3,531 
                 
INCOME BEFORE INCOME TAXES   14,527    12,571    39,926    39,159 
                 
Income taxes   4,848    5,141    15,079    15,312 
                 
NET INCOME   9,679    7,430    24,847    23,847 
                 
Preferred dividend requirements and other   402    93    884    185 
                 
EARNINGS APPLICABLE TO                
COMMON STOCK   $9,277    $7,337    $23,963    $23,662 
                 
See Notes to Financial Statements.                
                 

122

 

ENTERGY NEW ORLEANS, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
     
    2007   2006
    (In Thousands)
OPERATING ACTIVITIES        
Net income   $24,847    $23,847 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Other regulatory charges - net   3,096    3,120 
  Depreciation and amortization   24,227    24,747 
  Deferred income taxes and investment tax credits   18,591    64,659 
  Changes in working capital:        
    Receivables   (673)   11,147 
    Fuel inventory   674    4,494 
    Accounts payable   (15,016)   (6,045)
    Taxes accrued   (2,086)   4,808 
    Interest accrued   (14,583)   1,098 
    Deferred fuel costs   (11,789)   2,202 
    Other working capital accounts   (4,763)   (3,867)
  Provision for estimated losses and reserves   3,811    98 
  Changes in pension liability   (45,759)   4,393 
  Changes in other regulatory assets   186,324    (45,320)
Other   (3,338)   6,816 
Net cash flow provided by operating activities   163,563    96,197 
         
INVESTING ACTIVITIES        
Construction expenditures   (55,526)   (60,480)
Allowance for equity funds used during construction   1,592    2,528 
Insurance proceeds   55,973   
Proceeds from the sale of assets   10,046   
Changes in other investments - net   (3,175)  
Net cash flow provided by (used in) investing activities   8,910    (57,952)
         
FINANCING ACTIVITIES        
Repayment on DIP credit facility   (51,934)   (58,159)
Changes in short-term borrowings     (15,000)
Dividends paid:        
  Preferred stock   (1,652)   (185)
Net cash flow used in financing activities   (53,586)   (73,344)
         
Net increase (decrease) in cash and cash equivalents   118,887    (35,099)
         
Cash and cash equivalents at beginning of period   17,093    48,056 
         
Cash and cash equivalents at end of period   $135,980    $12,957 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid/(received) during the period for:        
  Interest - net of amount capitalized   $15,153    $3,914 
  Income taxes   $381     ($59,062)
         
See Notes to Financial Statements.        

123

 

ENTERGY NEW ORLEANS, INC.
BALANCE SHEETS
ASSETS
September 30, 2007 and December 31, 2006
(Unaudited)
 
  2007   2006
  (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents        
  Cash   $1,173    $3,886 
  Temporary cash investments - at cost        
   which approximates market   134,807    13,207 
     Total cash and cash equivalents   135,980    17,093 
Accounts receivable:         
  Customer   56,246    58,999 
  Allowance for doubtful accounts   (6,018)   (10,563)
  Associated companies   5,686    17,797 
  Other   9,391    8,428 
  Accrued unbilled revenues   33,787    23,758 
     Total accounts receivable   99,092    98,419 
Deferred fuel costs   30,785    18,996 
Fuel inventory - at average cost   4,367    5,041 
Materials and supplies - at average cost   9,506    7,825 
Prepayments and other   8,903    5,641 
TOTAL   288,633    153,015 
         
OTHER PROPERTY AND INVESTMENTS        
Investment in affiliates - at equity   3,259    3,259 
Non-utility property at cost (less accumulated depreciation)   1,016    1,107 
Other property and investments   3,175   
TOTAL   7,450    4,366 
         
UTILITY PLANT        
Electric   740,730    698,081 
Natural gas   199,396    186,932 
Construction work in progress   15,768    21,824 
TOTAL UTILITY PLANT   955,894    906,837 
Less - accumulated depreciation and amortization   506,564    446,673 
UTILITY PLANT - NET   449,330    460,164 
         
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  Other regulatory assets   122,737    295,440 
Long term receivables   936    936 
Other   9,274    7,230 
TOTAL   132,947    303,606 
          
TOTAL ASSETS   $878,360    $921,151 
         
See Notes to Financial Statements.        
 
124
 
ENTERGY NEW ORLEANS, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2007 and December 31, 2006
(Unaudited)
 
  2007   2006
  (In Thousands)
 
CURRENT LIABILITIES        
Currently maturing long-term debt   $30,000    $ - 
DIP credit facility     51,934 
Accounts payable:        
  Associated companies   34,953    94,686 
  Other   27,281    76,831 
Customer deposits   17,010    14,808 
Taxes accrued     2,086 
Accumulated deferred income taxes   9,347    2,924 
Interest accrued   3,421    18,004 
Other   3,364    6,154 
TOTAL CURRENT LIABILITIES   125,376    267,427 
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   111,407    98,884 
Accumulated deferred investment tax credits   2,895    3,157 
SFAS 109 regulatory liability - net   71,673    71,870 
Other regulatory liabilities   9,522   
Retirement cost liability   2,726    2,591 
Accumulated provisions   12,196    8,385 
Pension and other postretirement liabilities   14,274    60,033 
Long-term debt   274,084    229,875 
Gas system rebuild insurance proceeds   41,412   
Other   15,064    5,161 
TOTAL NON-CURRENT LIABILITIES   555,253    479,956 
         
         
Commitments and Contingencies        
         
SHAREHOLDERS' EQUITY        
Preferred stock without sinking fund   19,780    19,780 
Common stock, $4 par value, authorized 10,000,000        
 shares; issued and outstanding 8,435,900 shares in 2007        
 and 2006   33,744    33,744 
Paid-in capital   36,294    36,294 
Retained earnings   107,913    83,950 
TOTAL   197,731    173,768 
         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $878,360    $921,151 
         
See Notes to Financial Statements.        
         

125

 

ENTERGY NEW ORLEANS, INC.
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2007   2006   (Decrease)   %
     (Dollars In Millions)        
Electric Operating Revenues:                
  Residential   $53   $41   $ 12    29 
  Commercial   54   51    
  Industrial   14   14    
  Governmental   21   16     31 
     Total retail   142   122   20    16 
  Sales for resale                
    Associated companies   25   19     32 
    Non-associated companies   -   -    
  Other   6   5     20 
     Total   $173   $146   $ 27    18 
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   442   349   93    27 
  Commercial   515   501   14   
  Industrial   156   162   (6)   (4)
  Governmental   211   166   45    27 
     Total retail   1,324   1,178   146    12 
  Sales for resale                
    Associated companies   224   205   19   
    Non-associated companies   5   2     150 
     Total   1,553   1,385   168    12 
                 
                 
    Nine Months Ended   Increase/    
Description   2007   2006   (Decrease)   %
     (Dollars In Millions)        
Electric Operating Revenues:                
  Residential   $108   $80   $28    35 
  Commercial   134   123   11   
  Industrial   34   33    
  Governmental   53   40   13    33 
     Total retail   329   276   53    19 
  Sales for resale                
    Associated companies   84   30   54    180 
    Non-associated companies   1   45   (44)   (98)
  Other   18   12     50 
     Total   $432   $363   $69    19 
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   933   693   240    35 
  Commercial   1,330   1,263   67   
  Industrial   426   405   21   
  Governmental   551   433   118    27 
     Total retail   3,240   2,794   446    16 
  Sales for resale                
    Associated companies   799   331   468    141 
    Non-associated companies   12   778   (766)   (98)
     Total   4,051   3,903   148   
                 

126

 

SYSTEM ENERGY RESOURCES, INC.

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

Results of Operations

System Energy's principal asset consists of a 90% ownership and leasehold interest in Grand Gulf. The capacity and energy from its 90% interest is sold under the Unit Power Sales Agreement to its only four customers, Entergy Arkansas, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans. System Energy's operating revenues are derived from the allocation of the capacity, energy, and related costs associated with its 90% interest in Grand Gulf pursuant to the Unit Power Sales Agreement. Payments under the Unit Power Sales Agreement are System Energy's only source of operating revenues.

Net income increased by $0.7 million for the third quarter 2007 compared to the third quarter 2006 primarily due to higher interest income offset by a decrease in rate base in the third quarter 2007 resulting in lower operating income. Net income decreased by $5.4 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 primarily due to a decrease in rate base in 2007 resulting in lower operating income partially offset by higher interest income. The higher interest income for the third quarter 2007 and nine months ended September 30, 2007 compared to the same periods in 2006 resulted from interest income of $2.5 million recorded on an IRS audit settlement and higher interest income earned on decommissioning trust funds and money pool investments.

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2007 and 2006 were as follows:

 

 

2007

 

2006

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$135,012 

 

$75,704 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

174,409 

 

14,387 

 

Investing activities

 

(97,414)

 

91,895 

 

Financing activities

 

(29,155)

 

(129,889)

Net increase (decrease) in cash and cash equivalents

 

47,840 

 

(23,607)

 

 

 

 

 

Cash and cash equivalents at end of period

 

$182,852 

 

$52,097 

Operating Activities

Net cash flow provided by operating activities increased $160 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 primarily due to a decrease of $180.2 million in income tax payments.

 

127

 

Investing Activities

Investing activities used $97.4 million in cash for the nine months ended September 30, 2007 compared to providing $91.9 million for the nine months ended September 30, 2006 primarily due to money pool activity as well as initial development spending on potential new nuclear development at the Grand Gulf and River Bend sites, as discussed in the Form 10-K and in "Uses and Sources of Capital" below.

Financing Activities

Net cash flow used in financing activities decreased $100.7 million for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006 primarily due to the issuance of $70 million of First Mortgage Bonds in September 2007, as discussed below, and a decrease of $31.6 million in common stock dividends.

Capital Structure

System Energy's capitalization is balanced between equity and debt, as shown in the following table. The increase in the debt to capital percentage as of September 30, 2007 is primarily due to the issuance of $70 million of First Mortgage Bonds in September 2007.

 

 

September 30,
2007

 

December 31,
2006

 

 

 

 

 

Net debt to net capital

 

47.4%

 

46.4%

Effect of subtracting cash from debt

 

5.3%

 

4.2%

Debt to capital

 

52.7%

 

50.6%

Net debt consists of debt less cash and cash equivalents. Debt consists of notes payable, capital lease obligations, and long-term debt, including the currently maturing portion. Capital consists of debt and common shareholder's equity. Net capital consists of capital less cash and cash equivalents. System Energy uses the net debt to net capital ratio in analyzing its financial condition and believes it provides useful information to its investors and creditors in evaluating System Energy's financial condition.

Uses and Sources of Capital

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources" in the Form 10-K for a discussion of System Energy's uses and sources of capital. The following are updates to the Form 10-K.

See the table in the Form 10-K under "Uses of Capital" which sets forth the amounts of System Energy's planned construction and other capital investments for 2007 through 2009, and the accompanying discussion. System Energy now expects to spend $73 million more through 2008 than the amount included in the Form 10-K planned capital investment estimate for initial development costs for potential new nuclear development at the Grand Gulf and River Bend sites, including licensing and design activities.

System Energy's receivables from the money pool were as follows:

September 30,
2007

 

December 31,
2006

 

September 30,
2006

 

December 31,
2005

(In Thousands)

 

 

 

 

 

 

 

$83,418

 

$88,231

 

$147,349

 

$277,287

See Note 4 to the financial statements in the Form 10-K for a description of the money pool.

 

128

 

In September 2007, System Energy issued $70 million of 6.20% Series First Mortgage Bonds due October 2012. System Energy used the proceeds to redeem, at maturity, $70 million of 4.875% Series First Mortgage Bonds in October 2007.

Significant Factors and Known Trends

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends" in the Form 10-K for a discussion of the Energy Policy Act of 2005, nuclear matters, litigation risks, and environmental risks.

Critical Accounting Estimates

See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" in the Form 10-K for a discussion of the estimates and judgments necessary in System Energy's accounting for nuclear decommissioning costs and qualified pension and other postretirement benefits.

New Accounting Pronouncements

See "New Accounting Pronouncements" section of Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis for a discussion of new accounting pronouncements.

129

 

SYSTEM ENERGY RESOURCES, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2007 and 2006
(Unaudited)
 
  Three Months Ended   Nine Months Ended
    2007   2006   2007   2006
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Electric   $144,383    $146,577    $400,011    $407,407 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   10,560    11,400    29,281    32,781 
  Nuclear refueling outage expenses   4,177    4,548    12,403    12,083 
  Other operation and maintenance   30,831    29,535    83,372    79,350 
Decommissioning   6,486    6,032    19,110    17,776 
Taxes other than income taxes   6,520    5,938    19,525    17,944 
Depreciation and amortization   35,244    33,561    85,232    83,049 
Other regulatory credits - net   (2,500)   (3,073)   (7,110)   (8,819)
TOTAL   91,318    87,941    241,813    234,164 
                 
OPERATING INCOME   53,065    58,636    158,198    173,243 
                 
OTHER INCOME                
Allowance for equity funds used during construction   1,437    462    2,217    1,920 
Interest and dividend income   7,869    3,533    18,454    13,433 
Miscellaneous - net   (87)   (98)   491    (296)
TOTAL   9,219    3,897    21,162    15,057 
                 
INTEREST AND OTHER CHARGES          
Interest on long-term debt   16,444    17,144    40,133    41,673 
Other interest - net   51    22    103    76 
Allowance for borrowed funds used during construction   (475)   (146)   (730)   (605)
TOTAL   16,020    17,020    39,506    41,144 
                 
INCOME BEFORE INCOME TAXES   46,264    45,513    139,854    147,156 
                 
Income taxes   18,832    18,816    58,161    60,103 
                 
NET INCOME   $27,432    $26,697    $81,693    $87,053 
                 
See Notes to Financial Statements.                
                 

130

 

SYSTEM ENERGY RESOURCES, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited)
     
    2007   2006
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $81,693    $87,053 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Other regulatory credits - net   (7,110)   (8,819)
  Depreciation, amortization, and decommissioning   104,342    100,825 
  Deferred income taxes, investment tax credits, and non-current taxes accrued   68,879    55,981 
  Changes in working capital:        
    Receivables   437    (378)
    Accounts payable   3,134    4,232 
    Taxes accrued   (29,265)   (218,150)
    Interest accrued   (15,762)   (15,414)
    Other working capital accounts   (19,861)   3,027 
  Provision for estimated losses and reserves   81    10 
  Changes in other regulatory assets   17,868    (1,607)
  Other   (30,027)   7,627 
Net cash flow provided by operating activities   174,409    14,387 
         
INVESTING ACTIVITIES        
Construction expenditures   (61,562)   (20,994)
Allowance for equity funds used during construction   2,217    1,920 
Nuclear fuel purchases   (56,260)   (370)
Proceeds from sale/leaseback of nuclear fuel   56,580    370 
Proceeds from nuclear decommissioning trust fund sales   53,810    59,342 
Investment in nuclear decommissioning trust funds   (74,484)   (78,311)
Changes in money pool receivable - net   (17,715)   129,938 
Net cash flow provided by (used in) investing activities   (97,414)   91,895 
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt   69,480    - 
Retirement of long-term debt   (23,335)   (22,989)
Dividends paid:        
  Common stock   (75,300)   (106,900)
Net cash flow used in financing activities   (29,155)   (129,889)
         
Net increase (decrease) in cash and cash equivalents   47,840    (23,607)
         
Cash and cash equivalents at beginning of period   135,012    75,704 
         
Cash and cash equivalents at end of period   $182,852    $52,097 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
  Interest - net of amount capitalized   $51,861    $52,804 
  Income taxes   $35,897    $216,134 
         
See Notes to Financial Statements.        
         

131

 

SYSTEM ENERGY RESOURCES, INC.
BALANCE SHEETS
ASSETS
September 30, 2007 and December 31, 2006
(Unaudited)
             
    2007   2006
  (In Thousands)
             
CURRENT ASSETS            
Cash and cash equivalents:            
  Cash       $328    $56 
  Temporary cash investments - at cost,            
   which approximates market       182,524    134,956 
     Total cash and cash equivalents       182,852    135,012 
Accounts receivable:            
  Associated companies       133,699    142,121 
  Other       3,441    3,301 
     Total accounts receivable       137,140    145,422 
Materials and supplies - at average cost       65,911    61,097 
Deferred nuclear refueling outage costs       18,178    5,060 
Prepayments and other       3,409    1,480 
TOTAL       407,490    348,071 
              
OTHER PROPERTY AND INVESTMENTS        
Decommissioning trust funds       314,243    281,430 
Note receivable - Entergy New Orleans       25,560   
TOTAL       339,803    281,430 
             
UTILITY PLANT        
Electric       3,261,365    3,248,582 
Property under capital lease       471,933    471,933 
Construction work in progress       75,791    38,088 
Nuclear fuel under capital lease       90,971    55,280 
Nuclear fuel       8,495    10,222 
TOTAL UTILITY PLANT       3,908,555    3,824,105 
Less - accumulated depreciation and amortization       2,068,673    2,000,320 
UTILITY PLANT - NET       1,839,882    1,823,785 
             
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:            
  SFAS 109 regulatory asset - net       79,627    92,600 
  Other regulatory assets       285,875    293,292 
Other       12,789    14,062 
TOTAL       378,291    399,954 
             
TOTAL ASSETS       $2,965,466    $2,853,240 
             
See Notes to Financial Statements.            
 
132
 
SYSTEM ENERGY RESOURCES, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
September 30, 2007 and December 31, 2006
(Unaudited)
             
    2007   2006
  (In Thousands)
 
CURRENT LIABILITIES        
Currently maturing long-term debt       $96,701    $93,335 
Accounts payable:            
  Associated companies       5,782    1,634 
  Other       25,622    26,636 
Taxes accrued       18,723    47,988 
Accumulated deferred income taxes       7,003    1,828 
Interest accrued       30,373    46,135 
Obligations under capital leases       33,142    33,142 
TOTAL       217,346    250,698 
              
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued       328,268    304,691 
Accumulated deferred investment tax credits       66,053    68,660 
Obligations under capital leases       57,829    22,138 
Other regulatory liabilities       265,878    242,029 
Decommissioning       361,956    342,846 
Accumulated provisions       2,503    2,422 
Pension and other postretirement liabilities       28,606    32,060 
Long-term debt       773,248    729,914 
Other         396 
TOTAL       1,884,341    1,745,156 
             
Commitments and Contingencies            
             
SHAREHOLDER'S EQUITY        
Common stock, no par value, authorized 1,000,000 shares;            
 issued and outstanding 789,350 shares in 2007 and 2006       789,350    789,350 
Retained earnings       74,429    68,036 
TOTAL       863,779    857,386 
              
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY       $2,965,466    $2,853,240 
             
See Notes to Financial Statements.            

 

133

 

ENTERGY CORPORATION AND SUBSIDIARIES

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See "PART I, Item 1, Litigation" in the Form 10-K for a discussion of legal, administrative, and other regulatory proceedings affecting Entergy. Following is an update to that discussion.

Ratepayer Lawsuits

Texas Power Price Lawsuit

See the Form 10-K for a discussion of the lawsuit that was filed in the district court of Chambers County, Texas by Texas residents on behalf of a purported class apparently of the Texas retail customers of Entergy Gulf States who were billed and paid for electric power since January 1, 1994. In August 2007 the Texas Supreme Court denied Entergy's request for reconsideration of the court's order denying Entergy's petition for review. Entergy expects to file a petition for a writ of certiorari with the United States Supreme Court for review of the decision.

Item 1A. Risk Factors

There have been no material changes to the risk factors discussed in "PART I, Item 1A, Risk Factors" in the Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities (1)

Period

 

Total Number of
Shares Purchased

 

Average Price Paid
per Share

 

Total Number of
Shares Purchased
as Part of a
Publicly
Announced Plan

 

Maximum $
Amount
of Shares that May
Yet be Purchased
Under a Plan (2)

 

 

 

 

 

 

 

 

 

7/01/2007-7/31/2007

 

400,000

 

$107.49

 

400,000

 

$779,787,895

8/01/2007-8/31/2007

 

1,550,000

 

$100.47

 

1,550,000

 

$631,387,624

9/01/2007-9/30/2007

 

-

 

-

 

-

 

$631,387,624

Total

 

1,950,000

 

$101.91

 

1,950,000

 

 

(1)

In accordance with Entergy's stock-based compensation plans, Entergy periodically grants stock options to key employees, which may be exercised to obtain shares of Entergy's common stock. According to the plans, these shares can be newly issued shares, treasury stock, or shares purchased on the open market. Entergy's management has been authorized by the Board to repurchase on the open market shares up to an amount sufficient to fund the exercise of grants under the plans. In addition to this authority, on January 29, 2007, the Board approved a repurchase program under which Entergy is authorized to repurchase up to $1.5 billion of its common stock. The program does not have an expiration date, but Entergy expects to complete it over two years. See Note 12 to the financial statements in the Form 10-K for additional discussion of the stock-based compensation plans.

(2)

Maximum amount of shares that may yet be repurchased relates only to the $1.5 billion plan and does not include an estimate of the amount of shares that may be purchased to fund the exercise of grants under the stock-based compensation plans.

134

 

Item 5. Other Information

Other Generation Resources

On April 5, 2007 the FERC issued an Opinion and Order on Rehearing and Clarification (Opinion) in the proceeding involving Entergy Louisiana and Entergy New Orleans' three long-term contracts to procure power from affiliates that are discussed in Part 1, Item 1 of the Form 10-K.  In its Opinion, the FERC rejects the Utility operating companies and the LPSC's request to allow Entergy New Orleans and Entergy Louisiana to purchase the Independence plant capacity and energy for a term extending for the life-of-the-unit, as originally proposed, as opposed to the ten-year term ordered by the FERC in its initial opinion.  The Opinion also clarifies that while the Utility operating companies' use of bid information obtained from the 2002 request for proposal to develop the Entergy Arkansas base load purchase power agreements was improper, the record does not establish that the communications constituted a violation of the Utility operating companies' code of conduct.  The Opinion further clarified that the retained share of Grand Gulf that is purchased by Entergy Louisiana and Entergy New Orleans from Entergy Arkansas should be priced at cost, and not at the below-cost price of $46/MWh specified in the original opinion.  Additionally, the Opinion rejects: (1) the LPSC's argument that one-month capacity sales by Entergy Arkansas to third parties triggered a right-of-first refusal on behalf of the other Utility operating companies related to Entergy Arkansas' base load capacity; and (2) the LPSC's argument that Entergy Gulf States was entitled to a portion of the River Bend purchased power agreement (rather than just Entergy Louisiana and Entergy New Orleans) and the LPSC's jurisdictional arguments related thereto.

The LPSC has appealed this decision to the D.C. Circuit Court of Appeals. The Utility operating companies, the City Council, and the APSC have intervened in the appeal.

Environmental Regulation and Proceedings

Clean Air Act and Subsequent Amendments

New Source Review (NSR)

In April 2007 the U.S. Supreme Court ruled that the applicability of Clean Air Act NSR requirements are not limited only to modifications that create an increase in hourly emission rates, but also can apply to modifications that create an increase in annual emission rates (Environmental Defense v. Duke Energy). This holding reversed a Fourth Circuit Court of Appeals decision limiting the applicability of NSR. This Supreme Court decision may result in a renewed effort by the EPA to bring enforcement actions against electric generating units for major non-permitted facility modifications. As discussed in the Form 10-K, Entergy has an established process for identifying modifications requiring additional Clean Air Act permitting approval and has not been the subject of EPA or state enforcement action regarding NSR.

Future Legislative and Regulatory Developments

In April 2007 the U.S. Supreme Court held that the EPA is authorized by the current provisions of the Clean Air Act to regulate emissions of CO2 and other "greenhouse gases" as "pollutants" (Massachusetts v. EPA) and that the EPA is required to regulate these emissions from motor vehicles if the emissions are anticipated to endanger public health or welfare. The Supreme Court directed the EPA to make further findings in this regard. The decision is expected to affect a similar case pending in the U.S. Court of Appeals for the D.C. Circuit (Coke Oven Environmental Task Force v. EPA) considering the same question under a similar Clean Air Act provision in the context of CO2 emissions from electric generating units. Although Entergy cannot predict how the D.C. Circuit or the EPA will react to the Supreme Court decision, one outcome could be a decision to regulate, under the Clean Air Act, emissions of CO2 and other "greenhouse gases" from motor vehicles or from power plants. Entergy is participating as a friend of the court in both of these cases in support of reasonable market-based regulation of CO2 as a pollutant under the Clean Air Act.

 

135

Regional Haze

In June 2005, the EPA issued final Best Available Retrofit Control Technology (BART) regulations, which could potentially result in a requirement to install SO2 pollution control technology on certain of Entergy's coal and oil generation units. The rule leaves certain BART determinations to the states. The Arkansas Department of Environmental Quality (ADEQ) has completed its State Implementation Plan for Arkansas facilities to implement its obligations under the Clean Air Visibility Rule. The ADEQ has determined that Entergy Arkansas' White Bluff power plant affects Class I Area visibility and will be subject to the EPA's presumptive BART requirements to install scrubbers and low NOx burners by 2013. Entergy Arkansas owns 57% of White Bluff Units 1 and 2 and estimates that its share of the cost of this project will be approximately $350 million. The installation of scrubbers at an existing facility is a major construction project, and Entergy Arkansas expects selection of the primary architect-engineer by the end of 2008. The scrubbers must be online by the end of 2012.

Other Environmental Matters

Entergy New Orleans

As discussed in the Form 10-K, in March 2004 agents of the United States Fish and Wildlife Service conducted an inspection of Entergy New Orleans' Michoud power plant and found a number of dead brown pelicans near the facility's water intake structure and fish-return trough. Brown pelicans are an endangered species in Louisiana. Pursuant to its plan of reorganization that became effective in May 2007, Entergy New Orleans made donations of $150,000 to the Louisiana Wildlife and Fisheries Foundation and $100,000 to the United States Fish and Wildlife Service as part of a settlement of the matter. The donations are to be used to protect the eastern brown pelican species and other species of migratory birds. Also as part of the settlement, Entergy New Orleans shall maintain the water intake cell cover that it constructed in order to protect the pelicans.  The United States has agreed to take no further action in the matter after Entergy New Orleans has maintained the cover for one additional year or has otherwise successfully petitioned for this probationary period to end.

Entergy Mississippi, Entergy Gulf States, Entergy New Orleans, and Entergy Louisiana

EPA has notified Entergy Mississippi, Entergy Gulf States, and Entergy New Orleans that the EPA believes those entities are PRPs concerning contamination of an area known as "Devil's Swamp Lake" near the Port of Baton Rouge, Louisiana.  The area allegedly was contaminated by the operations of Rollins Environmental (LA), Inc, which operated a disposal facility to which many companies contributed waste.  Documents provided by the EPA indicate that Entergy Louisiana may also be a PRP.  Entergy is in the process of gathering information regarding its use of the facility and any share of liability for remediation that the Entergy companies may bear.

Indian Point Emergency Notification System

Pursuant to federal law and an NRC order, Non-Utility Nuclear's Indian Point Energy Center located in Buchanan, New York is required to install a new siren emergency notification system with certain back up power capabilities.  Due to the complexity of the technology employed in this system, among other things, Entergy Nuclear Operations, Inc., the operator of Non-Utility Nuclear's power plants, was unable to meet the April 15, 2007 operability date previously approved by the NRC.  Based on this delay, the NRC fined Entergy Nuclear Operations $130,000; but, nonetheless, the NRC acknowledged in its notice of violation that the current siren emergency notification system is capable of notifying the public in the event of an emergency.  Entergy Nuclear Operations was also unable to meet a subsequent committed operability date of August 24, 2007 due to certain testing, review, and operability requirements of the Federal Emergency Management Agency, which has been authorized by the NRC to assess the new system and its readiness for full implementation.  Although the NRC has not issued any additional fines to date, the delay in implementation of the new siren system beyond August 24, 2007 may result in Entergy Nuclear Operations being subject to additional fines in the future.  The Indian Point Energy Center will continue to operate and maintain its existing siren emergency notification system until the new system is placed into service.

136

Nuclear Waste Policy Act of 1982

See Part I of the Form 10-K for a discussion of the Nuclear Waste Policy Act of 1982, under which the DOE is required, for a specified fee, to construct storage facilities for, and to dispose of, all spent nuclear fuel and other high-level radioactive waste generated by domestic nuclear power reactors. As a result of the DOE's failure to begin disposal of spent nuclear fuel in 1998 pursuant to the Nuclear Waste Policy Act of 1982 and contracts with Entergy's nuclear operating companies, Entergy's nuclear owner/licensee subsidiaries have incurred and will continue to incur damages. These subsidiaries in November 2003 began litigation to recover the damages caused by the DOE's delay in performance. In two separate decisions in October 2007, the U.S. Court of Federal Claims awarded System Fuels, System Energy, and SMEPA $10.0 million, and awarded System Fuels and Entergy Arkansas $48.7 million, in damages related to the DOE's breach of its obligations. Both decisions are subject to appeal by the DOE. Management cannot predict the timing or amount of any potential, additional recoveries on Entergy's other claims, and cannot predict the timing of any eventual receipt from the DOE of the U.S. Court of Federal Claims damage awards.

Earnings Ratios (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)

The Registrant Subsidiaries have calculated ratios of earnings to fixed charges and ratios of earnings to combined fixed charges and preferred dividends/distributions pursuant to Item 503 of Regulation S-K of the SEC as follows:

 

Ratios of Earnings to Fixed Charges

 

Twelve Months Ended

 

December 31,

 

September 30,

 

2002

 

2003

 

2004

 

2005

 

2006

 

2007

                       

Entergy Arkansas

2.79

 

3.17

 

3.37

 

3.75

 

3.37

 

3.28

Entergy Gulf States

2.49

 

1.51

 

3.04

 

3.34

 

3.01

 

2.89

Entergy Louisiana

3.14

 

3.93

 

3.60

 

3.50

 

3.23

 

3.07

Entergy Mississippi

2.48

 

3.06

 

3.41

 

3.16

 

2.54

 

2.71

Entergy New Orleans

(a)

 

1.73

 

3.60

 

1.22

 

1.52

 

1.34

System Energy

3.25

 

3.66

 

3.95

 

3.85

 

4.05

 

3.99

 

Ratios of Earnings to Combined Fixed Charges
and Preferred Dividends/Distributions

 

Twelve Months Ended

 

December 31,

 

September 30,

 

2002

 

2003

 

2004

 

2005

 

2006

 

2007

                       

Entergy Arkansas

2.53

 

2.79

 

2.98

 

3.34

 

3.06

 

2.97

Entergy Gulf States

2.40

 

1.45

 

2.90

 

3.18

 

2.90

 

2.79

Entergy Louisiana

-

 

-

 

-

 

-

 

2.90

 

2.78

Entergy Mississippi

2.27

 

2.77

 

3.07

 

2.83

 

2.34

 

2.51

Entergy New Orleans

(a)

 

1.59

 

3.31

 

1.12

 

1.35

 

1.20

(a)

Earnings for the twelve months ended December 31, 2002, for Entergy New Orleans were not adequate to cover fixed charges and combined fixed charges and preferred dividends by $0.7 million and $3.4 million, respectively.

137

 

Item 6. Exhibits *

 

4(a) -

Agreement of Resignation, Appointment and Acceptance dated as of October 3, 2007, among Entergy Gulf States, Inc., JPMorgan Chase Bank, National Association, as resigning trustee, and The Bank of New York, as successor trustee, under the Entergy Gulf States, Inc. Indenture of Mortgage, as supplemented and modified.

     
 

4(b) -

Twenty-third Supplemental Indenture, dated as of September 1, 2007, to Mortgage and Deed of Trust, dated as of June 15, 1977, by and among System Energy Resources, Inc., The Bank of New York (Successor to United States Trust Company Of New York) and Douglas J. Macinnes (Successor to Gerard F. Ganey and Malcolm J. Hood), Trustees.

     
 

12(a) -

Entergy Arkansas' Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Dividends, as defined.

     
 

12(b) -

Entergy Gulf States' Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Dividends, as defined.

     
 

12(c) -

Entergy Louisiana's Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Distributions, as defined.

     
 

12(d) -

Entergy Mississippi's Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Dividends, as defined.

     
 

12(e) -

Entergy New Orleans' Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Dividends, as defined.

     
 

12(f) -

System Energy's Computation of Ratios of Earnings to Fixed Charges, as defined.

     
 

31(a) -

Rule 13a-14(a)/15d-14(a) Certification for Entergy Corporation.

     
 

31(b) -

Rule 13a-14(a)/15d-14(a) Certification for Entergy Corporation.

     
 

31(c) -

Rule 13a-14(a)/15d-14(a) Certification for Entergy Arkansas.

     
 

31(d) -

Rule 13a-14(a)/15d-14(a) Certification for Entergy Arkansas.

     
 

31(e) -

Rule 13a-14(a)/15d-14(a) Certification for Entergy Gulf States.

     
 

31(f) -

Rule 13a-14(a)/15d-14(a) Certification for Entergy Gulf States.

     
 

31(g) -

Rule 13a-14(a)/15d-14(a) Certification for Entergy Gulf States.

     
 

31(h) -

Rule 13a-14(a)/15d-14(a) Certification for Entergy Louisiana.

     
 

31(i) -

Rule 13a-14(a)/15d-14(a) Certification for Entergy Louisiana.

     
 

31(j) -

Rule 13a-14(a)/15d-14(a) Certification for Entergy Mississippi.

     
 

31(k) -

Rule 13a-14(a)/15d-14(a) Certification for Entergy Mississippi.

     
 

31(l) -

Rule 13a-14(a)/15d-14(a) Certification for Entergy New Orleans.

     
 

31(m) -

Rule 13a-14(a)/15d-14(a) Certification for Entergy New Orleans.

     
 

31(n) -

Rule 13a-14(a)/15d-14(a) Certification for System Energy.

     
138
     
 

31(o) -

Rule 13a-14(a)/15d-14(a) Certification for System Energy.

     
 

32(a) -

Section 1350 Certification for Entergy Corporation.

     
 

32(b) -

Section 1350 Certification for Entergy Corporation.

     
 

32(c) -

Section 1350 Certification for Entergy Arkansas.

     
 

32(d) -

Section 1350 Certification for Entergy Arkansas.

     
 

32(e) -

Section 1350 Certification for Entergy Gulf States.

     
 

32(f) -

Section 1350 Certification for Entergy Gulf States.

     
 

32(g) -

Section 1350 Certification for Entergy Gulf States.

     
 

32(h) -

Section 1350 Certification for Entergy Louisiana.

     
 

32(i) -

Section 1350 Certification for Entergy Louisiana.

     
 

32(j) -

Section 1350 Certification for Entergy Mississippi.

     
 

32(k) -

Section 1350 Certification for Entergy Mississippi.

     
 

32(l) -

Section 1350 Certification for Entergy New Orleans.

     
 

32(m) -

Section 1350 Certification for Entergy New Orleans.

     
 

32(n) -

Section 1350 Certification for System Energy.

     
 

32(o) -

Section 1350 Certification for System Energy.

+Management contracts or compensatory plans or arrangements.

___________________________

Pursuant to Item 601(b)(4)(iii) of Regulation S-K, Entergy Corporation agrees to furnish to the Commission upon request any instrument with respect to long-term debt that is not registered or listed herein as an Exhibit because the total amount of securities authorized under such agreement does not exceed ten percent of the total assets of Entergy Corporation and its subsidiaries on a consolidated basis.

*

Reference is made to a duplicate list of exhibits being filed as a part of this report on Form 10-Q for the quarter ended September 30, 2007, which list, prepared in accordance with Item 102 of Regulation S-T of the SEC, immediately precedes the exhibits being filed with this report on Form 10-Q for the quarter ended September 30, 2007.

**

Incorporated herein by reference as indicated.

139

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiaries.

ENTERGY CORPORATION
ENTERGY ARKANSAS, INC.
ENTERGY GULF STATES, INC.
ENTERGY LOUISIANA, LLC
ENTERGY MISSISSIPPI, INC.
ENTERGY NEW ORLEANS, INC.
SYSTEM ENERGY RESOURCES, INC.

 

/s/ Theodore H. Bunting, Jr.
Theodore H. Bunting, Jr.
Senior Vice President and Chief Accounting Officer
(For each Registrant and for each as
Principal Accounting Officer)

 

Date: November 8, 2007

 

 

 

140