Annual Statements Open main menu

ENTERGY NEW ORLEANS, LLC - Quarter Report: 2006 June (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 June 30, 2006

 

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, Address of
Principal Executive Offices, Telephone Number, and
IRS Employer Identification No.

 


Commission
File Number

Registrant, State of Incorporation, 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) 670-3620
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

X

No

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

No

X

Common Stock Outstanding

 

Outstanding at July 31, 2006

Entergy Corporation

($0.01 par value)

208,357,426

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, 2005, and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, 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
June 30, 2006

 

Page Number

   

Definitions

1

Entergy Corporation and Subsidiaries

 
 

Management's Financial Discussion and Analysis

 
   

Hurricane Katrina and Hurricane Rita

4

   

Results of Operations

7

   

Liquidity and Capital Resources

12

   

Significant Factors and Known Trends

15

   

Critical Accounting Estimates

22

 

Consolidated Statements of Income

23

 

Consolidated Statements of Cash Flows

24

 

Consolidated Balance Sheets

26

 

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

28

 

Selected Operating Results

29

 

Notes to Consolidated Financial Statements

30

Entergy Arkansas, Inc.

 
 

Management's Financial Discussion and Analysis

 
   

Results of Operations

43

   

Liquidity and Capital Resources

45

   

Significant Factors and Known Trends

47

   

Critical Accounting Estimates

48

 

Income Statements

50

 

Statements of Cash Flows

51

 

Balance Sheets

52

 

Selected Operating Results

54

Entergy Gulf States, Inc.

 
 

Management's Financial Discussion and Analysis

 
   

Hurricane Rita and Hurricane Katrina

55

   

Results of Operations

56

   

Liquidity and Capital Resources

60

   

Significant Factors and Known Trends

61

   

Critical Accounting Estimates

63

 

Income Statements

64

 

Statements of Cash Flows

65

 

Balance Sheets

66

 

Statements of Retained Earnings and Comprehensive Income

68

 

Selected Operating Results

69

Entergy Louisiana, LLC

 
 

Management's Financial Discussion and Analysis

 
   

Hurricane Rita and Hurricane Katrina

70

   

Results of Operations

71

   

Liquidity and Capital Resources

74

   

Significant Factors and Known Trends

75

   

Critical Accounting Estimates

76

 

Income Statements

77

 

Statements of Cash Flows

79

 

Balance Sheets

80

 

Statements of Members' Equity

82

 

Selected Operating Results

83

ENTERGY CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2006

 

Page Number

Entergy Mississippi, Inc.

 
 

Management's Financial Discussion and Analysis

 
   

Hurricane Katrina

84

   

Results of Operations

85

 

 

Liquidity and Capital Resources

87

   

Significant Factors and Known Trends

89

Critical Accounting Estimates

90

 

Income Statements

91

 

Statements of Cash Flows

93

 

Balance Sheets

94

 

Selected Operating Results

96

Entergy New Orleans, Inc.

 
 

Management's Financial Discussion and Analysis

 
   

Hurricane Katrina

97

   

Bankruptcy Proceedings

97

   

Results of Operations

98

   

Liquidity and Capital Resources

100

   

Significant Factors and Known Trends

102

   

Critical Accounting Estimates

103

 

Income Statements

104

 

Statements of Cash Flows

105

 

Balance Sheets

106

 

Selected Operating Results

108

System Energy Resources, Inc.

 
 

Management's Financial Discussion and Analysis

 
   

Results of Operations

109

   

Liquidity and Capital Resources

109

   

Significant Factors and Known Trends

110

   

Critical Accounting Estimates

110

 

Income Statements

112

 

Statements of Cash Flows

113

 

Balance Sheets

114

Notes to Respective Financial Statements

116

Part I, Item 4. Controls and Procedures

130

Part II. Other Information

 
 

Item 1. Legal Proceedings

131

 

Item 1A. Risk Factors

132

 

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

132

 

Item 4. Submission of Matters to a Vote of Security Holders

132

 

Item 5. Other Information

134

 

Item 6. Exhibits

136

Signature

139

 

 

FORWARD-LOOKING INFORMATION

In this filing and from time to time, Entergy makes statements 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. Although Entergy believes that these forward-looking statements and the underlying assumptions are reasonable, it cannot provide assurance that they will prove correct. Except to the extent required by the federal securities laws, Entergy undertakes 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, and there are factors that could cause actual results to differ materially from those expressed or implied in the statements. Some of those factors (in addition to the risk factors in the Form 10-K as well as others described elsewhere in this report and in subsequent securities filings) include:

  • resolution of pending and future rate cases and negotiations, including various performance-based rate discussions and implementation of new Texas legislation, and other regulatory proceedings, including those related to Entergy's System Agreement and Entergy's utility supply plan
  • Entergy's ability to manage its operation and maintenance costs
  • the performance of Entergy's generating plants, and particularly the capacity factors at its nuclear generating facilities
  • 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, the ability to meet credit support requirements, and the prices and availability of power and fuel Entergy must purchase for its utility customers and operations
  • Entergy's ability to develop and execute on a point of view regarding prices of electricity, natural gas, and other energy-related commodities
  • 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, interest rates, and foreign currency exchange rates
  • Entergy's ability to purchase and sell assets at attractive prices and on other attractive terms
  • volatility and changes in markets for electricity, natural gas, uranium, and other energy-related commodities
  • changes in utility regulation, including the beginning or end of retail and wholesale competition, the ability to recover net utility assets and other potential stranded costs, the establishment of a regional transmission organization that includes Entergy's utility service territory, and the application of market power criteria by the FERC
  • changes in regulation of nuclear generating facilities and nuclear materials and fuel, including possible shutdown of nuclear generating facilities, particularly those in the northeastern United States
  • uncertainty regarding the establishment of interim or permanent sites for spent nuclear fuel storage and disposal
  • 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
  • changes in environmental, tax, and other laws, including requirements for reduced emissions of sulfur, nitrogen, carbon, mercury, and other substances
  • 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 outcome of the Chapter 11 bankruptcy proceeding of Entergy New Orleans, and the impact of this proceeding on other Entergy companies
  • 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, corporate governance, and securities law requirements
  • Entergy's ability to attract and retain talented management and directors

 

 

 

 

 

 

 

 

(Page left blank intentionally)

DEFINITIONS

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

Abbreviation or Acronym

Term

AFUDC

Allowance for Funds Used During Construction

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 or

per kW per month

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

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

Board

Board of Directors of Entergy Corporation

bundled capacity and energy contract

A contract for the sale of installed capacity and related energy, priced per megawatt-hour sold

capacity contract

For Non-Utility Nuclear, a contract for the sale of the installed capacity product in regional markets managed by ISO New England and the New York Independent System Operator; For Energy Commodity Services, a contract for the sale of capacity and related energy, in which capacity and energy are priced separately

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

DOE

United States Department of Energy

domestic utility companies

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

EITF

FASB's Emerging Issues Task Force

Energy Commodity Services

Entergy's business segment that includes Entergy-Koch, LP and Entergy's non-nuclear wholesale assets business

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.

EPA

United States Environmental Protection Agency

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) or settles financially on notional quantities; if a party fails to deliver or receive energy, the defaulting party must compensate the other party as specified in the contract

1

DEFINITIONS (Continued)

Abbreviation or Acronym

Term

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

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 or 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 five 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

percent of planned generation

sold forward

Percent of planned generation output sold forward under contracts, forward physical contracts, forward financial contracts, or options that may or may not require regulatory approval

planned net MW in operation

Amount of capacity to be available to generate power considering uprates planned to be completed within the calendar year

planned TWh of generation

Amount of output expected to be generated by Non-Utility Nuclear for nuclear units, or by non-nuclear wholesale assets for fossil and wind units, considering plant operating characteristics, outage schedules, and expected market conditions that impact dispatch

PPA

Purchased power agreement

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

2

DEFINITIONS (Concluded)

Abbreviation or Acronym

Term

PURPA

Public Utility Regulatory Policies Act of 1978

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

System Agreement

Agreement, effective January 1, 1983, as modified, among the domestic utility 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-contingent with
availability guarantees

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 unless the actual availability over a specified period of time is below an availability threshold specified in the contract

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

Utility

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

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 five nuclear power plants located in the northeastern 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 Energy Commodity Services segment and the Competitive Retail Services business. Energy Commodity Services includes Entergy-Koch, LP and Entergy's non-nuclear wholesale assets business. Entergy-Koch sold its businesses in the fourth quarter of 2004 and is no longer an operating entity. In April 2006, Entergy sold the retail electric portion of the Competitive Retail Services business operating in the ERCOT region of Texas, and now reports this portion of the business as a discontinued operation. Entergy reports Energy Commodity Services and Competitive Retail Services as part of All Other in its segment disclosures.

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. Following are updates to the discussion in the Form 10-K.

Community Development Block Grants (CDBG)

As discussed in the Form 10-K, a federal hurricane aid package became law that includes funding for Community Development Block Grants (CDBG) that allows state and local leaders to fund individual recovery priorities. The law permits funding for infrastructure restoration. It is uncertain how much funding, if any, will be designated for utility reconstruction and the timing of such decisions is also uncertain. The U.S. Department of Housing and Urban Development has allocated approximately $10.4 billion for Louisiana, $5.1 billion for Mississippi, and $74 million for Texas, with an additional $1 billion approved by Congress but not yet allocated to the states. The states, in turn, will administer the grants. Entergy is currently preparing applications to seek CDBG funding. In March 2006, Entergy New Orleans, Entergy Louisiana, and Entergy Gulf States-Louisiana provided justification statements to state and local officials. The statements, which will be reviewed by the Louisiana Recovery Authority, include the estimated costs of Hurricanes Katrina and Rita damage, as well as for Entergy New Orleans a lost customer base component intended to help offset the need for storm-related rate increases. The statements include justification for requests for CDBG funding of $718 million by Entergy New Orleans, $472 million by Entergy Louisiana, and $164 million by Entergy Gulf States-Louisiana. As discussed further below, in June 2006 Entergy Mississippi filed a request with the Mississippi Development Authority for $89 million of CDBG funding for reimbursement of its Hurricane Katrina infrastructure restoration costs.

Storm Costs Recovery Filings with Retail Regulators

On July 31, 2006, Entergy Louisiana and Entergy Gulf States filed a supplemental and amending storm cost recovery application with the LPSC, in which Entergy Louisiana and Entergy Gulf States requested that the LPSC (1) review Entergy Louisiana's and Entergy Gulf States' testimony and exhibits relating to the costs associated with Hurricanes Katrina and Rita, and declare that those verified, actual storm-related costs through May 31, 2006 are $466.8 million for Entergy Louisiana and $200.3 million for Entergy Gulf States in the Louisiana jurisdiction and that

4

 

 

those costs were prudently incurred; (2) declare that the annual revenue requirements associated with the recovery of those costs, based on a ten-year levelized rate are $54.4 million for Entergy Louisiana and $26.2 million for Entergy Gulf States; (3) authorize Entergy Louisiana and Entergy Gulf States to recover the costs through Storm Cost Recovery Riders (SCRRs) proposed by Entergy Louisiana and Entergy Gulf States; (4) declare that the storm costs incurred subsequent to May 31, 2006 are to be filed by Entergy Louisiana and Entergy Gulf States with the LPSC on an annual basis in connection with their annual formula rate plan (FRP) filings, and that the SCRRs be adjusted annually to reflect such costs and any insurance proceeds or CDBG funds actually received, with the adjusted amounts to be collected through the SCRRs to take effect contemporaneous with the effective date of rate changes under the FRP; (5) declare that the storm-related costs incurred by Entergy Louisiana and Entergy Gulf States meet the conditions set forth in the FRP for exclusion from the sharing provisions in those FRPs and authorize the permanent recovery of storm costs outside of the FRPs adopted by the LPSC for Entergy Louisiana and Entergy Gulf States; and (6) authorize the funding of a storm reserve through securitization sufficient to fund a storm cost reserve of $132 million for Entergy Louisiana and $81 million for Entergy Gulf States. Hearings on the application are scheduled for the first quarter 2007.

In July 2006, Entergy Gulf States filed an application with the PUCT with respect to the $393.2 million of Hurricane Rita reconstruction costs incurred in its Texas retail jurisdiction through March 31, 2006. The filing asks the PUCT to determine that $393.2 million is the amount of reasonable and necessary hurricane reconstruction costs eligible for securitization and recovery, approve the recovery of carrying costs, and approve the manner in which Entergy Gulf States-Texas allocates those costs among its retail customer classes.  If approved, Entergy Gulf States' application will ultimately affect all its retail customers in Texas. Entergy Gulf States' filing does not request recovery of costs through a specific rider on customer bills or through any other means at this time. The hearing before the PUCT on the filing is scheduled for November 2006. This is the first of two filings authorized by a law passed earlier this year in a special session of the Texas Legislature. A second filing will request securitization and recovery of the eligible costs through retail rates and tariffs. Entergy Gulf States expects to make the second filing following the conclusion of the reconstruction cost case.

As discussed in the Form 10-K, in December 2005, Entergy Mississippi filed with the MPSC a Notice of Intent to change rates by implementing a Storm Damage Rider to recover storm damage restoration costs associated with Hurricanes Katrina and Rita totaling approximately $84 million as of November 30, 2005.  In February 2006, Entergy Mississippi filed an Application for an Accounting Order seeking certification by the MPSC of Entergy Mississippi's estimated $36 million of storm restoration costs not included in the December 2005 filing. In March 2006, the Governor signed a law that established a mechanism by which the MPSC may authorize and certify an electric utility financing order and the state may issue general obligation bonds to pay the costs of repairing damage caused by Hurricane Katrina to the systems of investor-owned electric utilities.  Because of the passage of this law and the possibility of Entergy Mississippi obtaining CDBG funds for Hurricane Katrina storm restoration costs, in March 2006, the MPSC issued an order approving a Joint Stipulation between Entergy Mississippi and the Mississippi Public Utilities Staff that provided for the review of Entergy Mississippi's total storm restoration costs in the Application for an Accounting Order proceeding.  The Stipulation stated that the procedural schedule of the December 2005 Notice of Intent filing should be suspended until the MPSC issues a final order in the Application for an Accounting Order proceeding. 

In June 2006, the MPSC issued an order certifying Entergy Mississippi's Hurricane Katrina restoration costs incurred through March 31, 2006 of $89 million, net of estimated insurance proceeds. Two days later Entergy Mississippi filed a request with the Mississippi Development Authority for $89 million of CDBG funding for reimbursement of its infrastructure restoration costs. Entergy Mississippi also filed a Petition for Financing Order with the MPSC for authorization of state general obligation bond financing of $169 million for Hurricane Katrina restoration costs and future storm costs. The $169 million amount includes Hurricane Katrina restoration costs plus $80 million to build Entergy Mississippi's storm damage reserve for the future. The amount financed through the bonds will be reduced dollar for dollar by any CDBG funds that Entergy Mississippi receives. Pursuant to the legislation, the MPSC must issue a financing order by the end of October 2006.

5

See State and Local Rate Regulation below for a discussion of Entergy New Orleans' filings with the City Council directed at recovery of its storm costs.

Insurance Recovery

As discussed more fully in the Form 10-K, Entergy estimates that its net insurance recoveries for the losses caused by Hurricanes Katrina and Rita will be approximately $382 million. Entergy has received $15 million thus far on its insurance claims, as it continues working towards insurance payment of its covered losses.

Entergy New Orleans Bankruptcy

See the Form 10-K for a discussion of the Entergy New Orleans bankruptcy proceeding. Following is an update to the discussion in the Form 10-K. In April 2006, the bankruptcy judge extended the exclusivity period for filing a plan of reorganization by Entergy New Orleans to August 21, 2006. Entergy New Orleans has filed another motion to extend the exclusivity period for filing its plan of reorganization, requesting that the deadline be extended an additional 120 days until December 19, 2006. The court entered an order extending the August 21, 2006 date for Entergy New Orleans' exclusive right to file a plan of reorganization until the court can hear and rule on Entergy New Orleans' motion to extend, which was set for hearing on September 18, 2006. In order to file a plan of reorganization no later than December 2006, Entergy New Orleans believes that it needs resolution of its June 2006 formula rate plan and storm rider filings and commitment on timing and amount of CDBG funds. If the motion to extend is granted, Entergy New Orleans will have the exclusive right to file its plan of reorganization until December 19, 2006, and will have until February 15, 2007 to obtain acceptances of its plan by each class of impaired creditors.

In addition, the bankruptcy judge had set a date of April 19, 2006 by which creditors with prepetition claims against Entergy New Orleans must, with certain exceptions, file their proofs of claim in the bankruptcy case. Approximately 500 claims have been filed thus far in Entergy New Orleans' bankruptcy proceeding. Entergy New Orleans is currently analyzing the accuracy and validity of the claims filed, and has begun seeking withdrawal or modification of claims or objecting to claims with which it disagrees.

Since the filing of the bankruptcy proceedings, Entergy New Orleans has not been able to declare and pay dividends on its 4.75% preferred stock for three quarters. As discussed further in the Form 10-K, if dividends with respect to the 4.75% preferred stock are not paid for four quarters, the holders of these shares would have the right to elect a majority of the Entergy New Orleans board of directors.  Entergy New Orleans filed a motion in the bankruptcy court seeking authority to recommence paying dividends to the holders of the 4.75% preferred shares. After a hearing on the motion on May 3, 2006, the court granted Entergy New Orleans the authority to pay dividends to the holders of the 4.75% preferred shares, beginning with the dividend due on July 1, 2006, and thereafter, unless objections are filed by creditors forty-five days in advance of a dividend payment date. If any objections are filed, the matter would be heard by the bankruptcy court. Entergy New Orleans declared and paid the dividend due on July 1, 2006, and intends to declare and pay the dividends on the 4.75% preferred shares each quarter pending resolution of its plan of reorganization.

Municipalization is one potential outcome of Entergy New Orleans' recovery effort. In June 2006 Louisiana passed a law that establishes a governance structure for a public power authority, if municipalization of Entergy New Orleans' utility business is pursued.

As discussed in the Form 10-K, as a result of the Entergy New Orleans bankruptcy proceeding, Entergy deconsolidated Entergy New Orleans for financial reporting purposes retroactive to January 1, 2005. Because Entergy owns all of the common stock of Entergy New Orleans, this change will not affect the amount of net income Entergy records resulting from Entergy New Orleans' operations for any current or prior period, but will result in Entergy New Orleans' net income or loss being presented as "Equity in earnings of unconsolidated equity affiliates" rather than its results being included in each individual income statement line item, as is the case for periods prior to 2005.

6

Results of Operations

Second Quarter 2006 Compared to Second Quarter 2005

Following are income statement variances for Utility, Non-Utility Nuclear, Parent & Other business segments, and Entergy comparing the second quarter 2006 to the second quarter 2005 showing how much the line item increased or (decreased) in comparison to the prior period:

 


Utility

 

Non-Utility
Nuclear

 

Parent & Other


Entergy

(In Thousands)

2nd Quarter 2005 Consolidated Net Income

 

$217,260  

 

$58,277  

 

$17,011  

$292,548 

Net revenue (operating revenue less fuel
  expense, purchased power, and other
  regulatory credits - net)

 



(38,406)



17,693 



19,697 



(1,016)

Other operation and maintenance expenses

 

(1,957)

10,196 

6,260 

14,499 

Taxes other than income taxes

 

(2,164)

(741)

(981)

(3,886)

Depreciation

 

11,754 

1,958 

(189)

13,523 

Other income

 

7,721 

4,822 

(12,672)

(129)

Interest charges

 

10,107 

(2,857)

12,190 

19,440 

Other expenses

 

610 

2,504 

17 

3,131 

Discontinued operations (net-of-tax)

 

15,932 

15,932 

Income taxes

 

(38,317)

6,353 

3,016 

(28,948)

2nd Quarter 2006 Consolidated Net Income

 

$206,542  

 

$63,379  

 

$19,655  

$289,576  

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

Net Revenue

Utility

Following is an analysis of the change in net revenue, which is Entergy's measure of gross margin, comparing the second quarter of 2006 to the second quarter of 2005.

  

 

Amount

  

 

(In Millions)

 

 

 

2nd Quarter 2005 net revenue

 

$1,114.2 

Price applied to unbilled electric sales

 

(100.4)

Volume/weather

 

26.5 

Base revenues/Attala cost deferral

 

18.9 

Fuel recovery

 

15.8 

Other

 

0.8 

2nd Quarter 2006 net revenue

 

$1,075.8 

The price applied to unbilled sales variance is due to the exclusion in 2006 of the fuel cost component in the calculation of the price applied to unbilled sales. Effective January 1, 2006, the fuel cost component is no longer included in the unbilled revenue calculation at Entergy Louisiana and the Louisiana jurisdiction at Entergy Gulf States, which is in accordance with regulatory treatment. Entergy expects that the effect of this factor will be less for its annual results for 2006. See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" herein.

 

7

 

The volume/weather variance resulted primarily from more favorable weather in the second quarter of 2006 compared to the second quarter of 2005 in addition to an increase in weather-adjusted usage. Billed usage increased a total of 801 GWh in the residential and commercial sectors and decreased 87 GWh in the industrial sector. The increase was partially offset by decreased usage during the unbilled period.

The base revenues variance resulted primarily from increases at Entergy Gulf States in the Louisiana jurisdiction effective October 2005 for the 2004 formula rate plan filing and the annual revenue requirement related to the purchase of power from the Perryville generating station, and increases at Entergy Gulf States in the Texas jurisdiction related to an incremental purchased capacity recovery rider that began in December 2005 and a transition to competition rider that began in March 2006. The Attala cost deferral variance resulted from deferred under-recovered Attala power plant costs at Entergy Mississippi that will be recovered through the power management rider. The net income effect of the Attala cost deferral is partially offset by Attala costs in other operation and maintenance expenses, depreciation expense, and taxes other than income taxes.

The fuel recovery variance resulted primarily from the under-recovery in 2005 of fuel costs from retail customers in addition to increased fuel cost recovery in 2006 as a result of special rate contracts.

Non-Utility Nuclear

Net revenue increased for Non-Utility Nuclear primarily due to higher pricing in its contracts to sell power. Also contributing to the increase in revenues was increased generation in 2006 due to a power uprate completed since the second quarter of 2005, partially offset by the effect of refueling outages on available generation output. The total number of refueling days was essentially the same in the second quarter of 2006 compared to the second quarter of 2005. However, the outage in the second quarter of 2006 was at a larger unit, Indian Point 2, while most of the outage days in the second quarter of 2005 were at a smaller unit, Pilgrim. Following are key performance measures for Non-Utility Nuclear for the second quarters of 2006 and 2005:

 

 

2006

 

2005

 

 

 

 

 

Net MW in operation at June 30

 

4,200

 

4,105

Average realized price per MWh

 

$43.93

 

$42.63

Generation in GWh for the quarter

 

8,249

 

8,156

Capacity factor for the quarter

 

90%

 

91%

Parent & Other

Net revenue increased for Parent & Other 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.

Other Operation and Maintenance Expenses

Other operation and maintenance expenses increased for Non-Utility Nuclear from $145 million for the second quarter of 2005 to $155 million for the second quarter of 2006 primarily due to higher refueling outage expenses.

Interest Charges

Interest charges increased for the Utility and Parent & Other primarily due to additional borrowing to fund the significant storm restoration costs associated with Hurricanes Katrina and Rita.

8

Discontinued Operations

Income from discontinued operations increased primarily due to the $17.1 million gain (net-of-tax) on the sale of the retail electric portion of the Competitive Retail Services business operating in the ERCOT region of Texas.

Income Taxes

The effective income tax rates for the second quarters of 2006 and 2005 were 31.0% and 33.9%, respectively. The difference in the effective income tax rate for the second quarter of 2006 versus the federal statutory rate of 35.0% is primarily due to the recognition of an income tax benefit related to ANO 1 steam generator removal cost and the favorable resolution of a tax audit issue, partially offset by state income taxes. The difference in the effective income tax rate for the second quarter of 2005 versus the federal statutory rate of 35.0% is primarily due to tax benefits from the American Jobs Creation Act of 2004 and investment tax credit amortization, partially offset by state income taxes and book and tax differences on utility plant items.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Following are income statement variances for Utility, Non-Utility Nuclear, Parent & Other business segments, and Entergy comparing the six months ended June 30, 2006 to the six months ended June 30, 2005 showing how much the line item increased or (decreased) in comparison to the prior period:

 


Utility

 

Non-Utility
Nuclear

 

Parent & Other


Entergy

(In Thousands) 

2005 Consolidated Net Income

 

$313,286 

 

$136,242 

 

$21,399 

$470,927 

Net revenue (operating revenue less fuel
  expense, purchased power, and other
  regulatory credits - net)

 



27,066 



54,883 



29,951 



111,900 

Other operation and maintenance expenses

 

11,147 

17,995 

11,147 

40,289 

Taxes other than income taxes

 

4,643 

4,079 

114 

8,836 

Depreciation

 

1,866 

2,176 

(651)

3,391 

Other income

 

20,475 

(14,898)

(21,492)

(15,915)

Interest charges

 

15,001 

(3,349)

25,008 

36,660 

Other expenses

 

1,562 

2,316 

31 

3,909 

Discontinued operations (net-of-tax)

 

15,056 

15,056 

Income taxes

 

(6,869)

8,102 

(3,593)

(2,360)

2006 Consolidated Net Income

 

$333,477 

 

$144,908 

 

$12,858 

$491,243 

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

 

9

 

 

Net Revenue

Utility

Following is an analysis of the change in net revenue, which is Entergy's measure of gross margin, comparing the six months ended June 30, 2006 to the six months ended June 30, 2005.

  

 

Amount

  

 

(In Millions)

 

 

 

2005 net revenue

 

$1,972.9 

Base revenues/Attala cost deferral

 

46.5 

Fuel recovery

 

32.7 

Volume/weather

 

18.0 

Transmission revenue

 

11.9 

Storm cost recovery

 

 7.3 

Price applied to unbilled electric sales

 

 (95.8)

Other

 

 6.5 

2006 net revenue

 

$2,000.0 

The base revenues variance resulted primarily from increases at Entergy Gulf States in the Louisiana jurisdiction effective October 2005 for the 2004 formula rate plan filing and the annual revenue requirement related to the purchase of power from the Perryville generating station, and increases at Entergy Gulf States in the Texas jurisdiction related to an incremental purchased capacity recovery rider that began in December 2005 and a transition to competition rider that began in March 2006. The Attala cost deferral variance resulted from deferred under-recovered Attala power plant costs at Entergy Mississippi that will be recovered through the power management rider. The net income effect of the Attala cost deferral is partially offset by Attala costs in other operation and maintenance expenses, depreciation expense, and taxes other than income taxes.

The fuel recovery variance resulted primarily from adjustments of fuel clause recoveries in Entergy Gulf States' Louisiana jurisdiction, the under-recovery in 2005 of fuel costs from retail customers, and increased recovery in 2006 of fuel costs as a result of special rate contracts. The increase was partially offset by the Entergy Arkansas energy cost recovery true-up made in the first quarter of 2005.

The volume/weather variance resulted primarily from increased usage, including the effect of weather on billed sales, compared to the same period in 2006. Billed usage increased a total of 657 GWh in the residential and commercial sectors and decreased 486 GWh in the industrial sector. The increase was partially offset by decreased usage during the unbilled period.

The transmission revenue variance is primarily due to new transmission customers in 2006. Also contributing to the increase was an increase in rates effective June 2006.

The storm cost recovery variance is due to the return earned on the interim recovery of storm-related costs at Entergy Louisiana and the Louisiana jurisdiction of Entergy Gulf States as allowed by the LPSC effective March 2006.

The price applied to unbilled sales variance is due to the exclusion in 2006 of the fuel cost component in the calculation of the price applied to unbilled sales. Effective January 1, 2006, the fuel cost component is no longer included in the unbilled revenue calculation at Entergy Louisiana and the Louisiana jurisdiction at Entergy Gulf States, which is in accordance with regulatory treatment. Entergy expects that the effect of this factor will be less for its annual results for 2006. See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" herein.

10

Non-Utility Nuclear

Net revenue increased for Non-Utility Nuclear primarily due to higher pricing in its contracts to sell power. Also contributing to the increase in revenues was increased generation in 2006 due to power uprates at certain plants completed in 2005 and 2006 and fewer refueling outages in 2006. Following are key performance measures for Non-Utility Nuclear for the six months ended June 30, 2006 and 2005:

 

 

2006

 

2005

 

 

 

 

 

Net MW in operation at June 30

 

4,200

 

4,105

Average realized price per MWh

 

$44.16

 

$42.09

Generation in GWh for the period

 

16,990

 

16,422

Capacity factor for the period

 

94%

 

92%

Parent & Other

Net revenue increased for Parent & Other 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.

Other Operation and Maintenance Expenses

Other operation and maintenance expenses increased for the Utility from $750 million in 2005 to $761 million in 2006 primarily due to the following:

  • an increase of $11 million related to storm reserves. This increase does not include costs associated with Hurricanes Katrina and Rita;
  • an increase of $9 million in customer service support costs, including an increase in customer write-offs; and
  • an increase of $8 million in nuclear costs as a result of higher payroll costs and a non-refueling plant outage at Entergy Gulf States in February 2006.

The increase was partially offset by a decrease of $10 million in benefits and payroll costs and a decrease of $10 million in distribution costs, including lower planned spending for vegetation maintenance.

Other operation and maintenance expenses increased for Non-Utility Nuclear from $288 million in 2005 to $306 million in 2006 primarily due to higher refueling outage expenses.

Other Income

Other income increased for the Utility from $59 million in 2005 to $79 million in 2006 primarily due to an increase in interest income recorded on the deferred fuel costs balance. Other income decreased for Non-Utility Nuclear from $48 million in 2005 to $33 million in 2006 primarily due to miscellaneous income of $26 million in 2005 resulting from a reduction in the decommissioning liability for a plant in conjunction with a new decommissioning cost study. The decrease for Non-Utility Nuclear was partially offset by an increase of $5 million in interest income. The decrease in other income for Parent & Other was primarily due to a decrease in interest income and the proceeds in 2005 from the sale of SO2 allowances.

Interest Charges

Interest charges increased for the Utility and Parent & Other primarily due to additional borrowing to fund the significant storm restoration costs associated with Hurricanes Katrina and Rita.

11

Discontinued Operations

Income from discontinued operations increased primarily due to the $17.1 million gain (net-of-tax) on the sale of the retail electric portion of the Competitive Retail Services business operating in the ERCOT region of Texas.

Income Taxes

The effective income tax rates for the six months ended June 30, 2006 and 2005 were 33.5% and 33.9%, respectively. The difference in the effective income tax rate for the six months ended June 30, 2006 versus the federal statutory rate of 35.0% is primarily due to the recognition of an income tax benefit related to ANO 1 steam generator removal cost and the favorable resolution of a tax audit issue, partially offset by state income taxes. The difference in the effective income tax rate for the six months ended June 30, 2005 versus the federal statutory rate of 35.0% is primarily due to tax benefits from the American Jobs Creation Act of 2004, investment tax credit amortization, and a downward revision in the estimate of federal income tax expense related to tax depreciation. These factors were partially offset by state income taxes and book and tax differences on utility plant items.

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.

Debtor-in-Possession Credit Facility

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. Following is an update to that discussion.

As discussed in the Form 10-K, the bankruptcy court issued its order in December 2005 giving final approval for the $200 million DIP credit facility, and the indenture trustee for Entergy New Orleans' first mortgage bonds appealed the order. On March 29, 2006 the bankruptcy court approved a settlement among Entergy New Orleans, Entergy Corporation, and the indenture trustee, and the indenture trustee dismissed its appeal. As of June 30, 2006, Entergy New Orleans had approximately $40 million of outstanding borrowings under the DIP credit facility.

As discussed in the Form 10-K, borrowings under the DIP credit facility are due in full, and the agreement will terminate, at the earliest of several times or events, including August 23, 2006. Entergy and Entergy New Orleans have agreed to an amendment to the DIP credit agreement that extends the August 23, 2006 maturity date to August 23, 2007, and this amendment is subject to bankruptcy court approval. Entergy New Orleans has filed a motion with the bankruptcy court to authorize Entergy New Orleans to enter into the amendment, which is set for hearing August 16, 2006.

Capital Structure

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

 

 

June 30,
2006

 

December 31,
2005

 

 

 

 

 

Net debt to net capital

 

50.3%

 

51.5%

Effect of subtracting cash from debt

 

2.1%

 

1.6%

Debt to capital

 

52.4%

 

53.1%

12

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 has in place two separate revolving credit facilities, a five-year credit facility and a three-year credit facility. The five-year credit facility expires in May 2010 and the three-year facility expires in December 2008. Entergy can issue letters of credit against the total borrowing capacity of both credit facilities. Following is a summary of the borrowings outstanding and capacity available under these facilities as of June 30, 2006:


Facility

 


Capacity

 


Borrowings

 

Letters
of Credit

 

Capacity
Available

   

(In Millions)

                 

5-Year Facility

 

$2,000 

 

$805 

 

$144 

 

$1,051

3-Year Facility

 

$1,500 

 

$- 

 

$-  

 

$1,500

Entergy Arkansas, Entergy Gulf States, and Entergy Mississippi each have credit facilities available as of June 30, 2006 as follows:


Company

 


Expiration Date

 

Amount of
Facility

 

Amount Drawn as of
June 30, 2006

 

 

 

 

 

 

 

Entergy Arkansas

 

April 2007

 

$85 million

 

-

Entergy Gulf States

 

February 2011

 

$25 million (a)

 

-

Entergy Mississippi

 

May 2007

 

$30 million (b)

 

-

Entergy Mississippi

 

May 2007

 

$20 million (b)

 

-

(a)

The credit facility allows Entergy Gulf States to issue letters of credit against the borrowing capacity of the facility. As of June 30, 2006, $1.4 million in letters of credit had been issued.

(b)

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

See Note 4 to the consolidated 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 2006 through 2008. Following is an update to that discussion:

In July 2006, Entergy's Non-Utility Nuclear business reached an agreement to purchase Consumers Energy Company's 798 MW Palisades nuclear energy plant located near South Haven, Michigan for $380 million. Entergy's Non-Utility Nuclear business will acquire the plant, nuclear fuel, and other assets. In the near-term, Entergy intends to finance the acquisition through borrowings from Entergy Corporation's revolving credit facilities. As part of the purchase, Entergy's Non-Utility Nuclear business also executed a 15-year purchased power agreement with Consumers Energy for 100% of the plant's output. Entergy's Non-Utility Nuclear business will assume responsibility for eventual decommissioning of the plant. Consumers Energy will retain $200 million of the current $566 million Palisades decommissioning trust fund balance, and Entergy may return an additional approximately $100 million of the trust fund to Consumers Energy depending upon a pending tax ruling. Also as part of the transaction, Consumers Energy will pay Entergy's Non-Utility Nuclear business $30 million to accept responsibility for spent fuel at the

 

13

 

 

decommissioned Big Rock nuclear plant, which is located near Charlevoix, Michigan. Management expects to close the transaction in the first quarter 2007, pending the approvals of the NRC, the FERC, the Michigan Public Service Commission, and other regulatory agencies.

Cash Flow Activity

As shown in Entergy's Statements of Cash Flows, cash flows for the six months ended June 30, 2006 and 2005 were as follows:

 

 

2006

 

2005

 

 

(In Millions)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$583 

 

$620 

 

 

 

 

 

Effect of deconsolidating Entergy New Orleans in 2005

(8)

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

 1,480 

 

773 

 

Investing activities

 

(1,054)

 

(674)

 

Financing activities

 

(279)

 

(104)

Effect of exchange rates on cash and cash equivalents

(1)

Net increase (decrease) in cash and cash equivalents

 

146 

 

(5)

 

 

 

 

 

Cash and cash equivalents at end of period

 

$729 

 

$607 

Operating Activities

Entergy's cash flow provided by operating activities increased by $707 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to the following activity:

  • Utility provided $1,088 million in cash from operating activities in 2006 compared to providing $539 million in 2005 primarily due to the receipt of an income tax refund (discussed below), increased collection of deferred fuel costs, and the effect in 2005 of a $90 million refund paid to customers in Louisiana, partially offset by storm restoration spending.
  • Non-Utility Nuclear provided $473 million in cash from operating activities in 2006 compared to providing $235 million in 2005 primarily due to an increase of $130 million in income tax refunds received and an increase in net revenue.
  • Parent & Other used $81 million in cash from operating activities in 2006 compared to using $1 million in 2005 primarily due to an increase in cash used of $72 million in the non-nuclear wholesale assets business primarily due to an increase in taxes paid and interest payments.

Entergy Corporation received a $344 million income tax refund (including $71 million attributable to Entergy New Orleans) as a result of net operating loss carryback provisions contained in the Gulf Opportunity Zone Act of 2005, as discussed in the Form 10-K. In accordance with Entergy's intercompany tax allocation agreement, $273 million of the refund was distributed to the Utility (including Entergy New Orleans) in April 2006, with the remainder distributed primarily to Non-Utility Nuclear.

Investing Activities

Net cash used in investing activities increased by $380 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to the following activity:

  • Construction expenditures were $326 million higher in 2006 than in 2005, primarily due to an increase of $261 million in the Utility business because of storm restoration expenditures.

 

14

 

 

  • Entergy Mississippi purchased the 480 MW Attala power plant in January 2006 for $88 million.

The increase was partially offset by:

  • Entergy's investment in other temporary investments increased by $188 million during the six months ended June 30, 2005. Entergy had no activity in other temporary investments during the six months ended June 30, 2006.
  • Entergy Louisiana purchased the 718 MW Perryville power plant in June 2005 for $162 million.
  • The 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

Net cash used in financing activities increased by $175 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005. Following is a description of the significant financing activity occurring during the first six months of 2006 and 2005:

  • Entergy Louisiana Holdings, Inc. redeemed all $100.5 million of its outstanding preferred stock in June 2006.
  • Entergy Corporation increased the net borrowings on its credit facilities by $20 million during the six months ended June 30, 2006 compared to $585 million during the six months ended June 30, 2005. See Note 4 to the consolidated financial statements for a description of the Entergy Corporation credit facilities.
  • Entergy Corporation repurchased $640 million of its common stock during the six months ended June 30, 2005.

See Note 4 to the consolidated financial statements for the details of long-term debt activity in the six months ended June 30, 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, market and credit risks, utility restructuring, and nuclear matters. Following are updates to the information provided in the Form 10-K.

State and Local Rate Regulation

See the Form 10-K for the chart summarizing material rate proceedings. Following are updates to that chart. See also Hurricanes Katrina and Rita above for updates regarding storm cost recovery proceedings.

Entergy Arkansas

In March 2006, Entergy Arkansas filed with the APSC its annual redetermination of the energy cost rate for application to the period April 2006 through March 2007. The filed energy cost rate of $0.02827 per kWh was proposed to replace the interim rate of $0.01900 per kWh that had been in place since October 2005. The interim energy cost rate is discussed in the Form 10-K, along with the investigation that the APSC commenced concerning Entergy Arkansas' interim energy cost rate. The increase in the energy cost rate is due to increases in the cost of purchased power primarily due to the natural gas cost increase and the effect that Hurricanes Katrina and Rita had on market conditions, increased demand for purchased power during the ANO 1 refueling and steam generator replacement outage in the fall of 2005, and coal plant generation curtailments during off-peak periods due to coal delivery problems.

15

On March 31, 2006, the APSC suspended implementation of the $0.02827 per kWh energy cost rate, and ordered that the $0.01900 per kWh interim rate remain in effect pending the APSC proceedings on the energy cost recovery filings. The APSC also extended its investigation into Entergy Arkansas' interim energy cost rate to cover the costs included in Entergy Arkansas' March 2006 filing. The extended investigation does not identify new issues in addition to the four issues listed in the Form 10-K and covers the same time period. On April 7, 2006, the APSC issued a show cause order in the investigation proceeding that ordered Entergy Arkansas to file a cost of service study by June 8, 2006. The order also directed Entergy Arkansas to file testimony to support the cost of service study, to support the $0.02827 per kWh cost rate, and to address the general topic of elimination of the energy cost recovery rider.

Entergy Arkansas filed for rehearing of the APSC's orders, asking that the energy cost rate filed in March 2006 be implemented in May 2006 subject to refund, asserting that the APSC did not follow appropriate procedures in suspending the operation of the energy cost recovery rider, and asking the APSC to rescind its show cause order. On May 8, 2006 the APSC denied Entergy Arkansas' requests for rehearing. Entergy Arkansas appealed the APSC's decision, but later filed a motion to dismiss the appeal following the APSC's decision described below.

In June 2006, Entergy Arkansas once again filed a motion with the APSC seeking to implement the redetermined energy cost rate of $0.02827 per kWh. After a hearing the APSC approved Entergy Arkansas' request and the redetermined rate was implemented in July 2006, subject to refund pending the outcome of the APSC energy cost recovery investigation. Because of the delay in implementing the redetermined energy cost rate, Entergy Arkansas estimated in its motion that $46 million of energy costs would remain under-recovered at December 31, 2006.

A hearing in the APSC energy cost recovery investigation is scheduled for October 2006.

On June 7, 2006, Entergy Arkansas filed the cost of service study ordered by the APSC. On that date Entergy Arkansas also filed notice with the APSC that it intends to file for a change in base rates within 60 to 90 days of its notice. Entergy Arkansas expects to make that filing in August 2006.

See "System Agreement Litigation" herein for a discussion of Entergy's compliance filing in that proceeding. If the FERC approves the compliance tariff as filed, then payments under that tariff will be classified as energy costs, which would then be included in setting the retail energy cost rate as part of the normal working of the energy cost recovery rider.  As noted above the APSC has given notice that it is considering the prospective elimination of the energy cost recovery rider.  Therefore, Entergy Arkansas plans to propose an alternative to the energy cost recovery rider for recovery of the costs allocated to it as a result of the System Agreement litigation should the energy cost recovery rider be lawfully terminated by the APSC.  A separate exact recovery rider, similar to the energy cost recovery rider or a production cost allocation rider, would ensure that Entergy Arkansas' customers pay only the amount allocated by the FERC. 

Entergy Gulf States-Louisiana

In January 2006, Entergy Gulf States filed with the LPSC its gas rate stabilization plan. The filing showed a revenue deficiency of $4.1 million based on an ROE mid-point of 10.5%. On May 1, 2006, Entergy Gulf States implemented a $3.5 million rate increase pursuant to an uncontested agreement with the LPSC Staff.

In March 2006, the LPSC approved an uncontested stipulated settlement in Entergy Gulf States' formula rate plan filing for the 2004 test year. The settlement includes a revenue requirement increase of $36.8 million and calls for Entergy Gulf States to apply a refund liability of $744 thousand to capacity deferrals. The refund liability pertained to the periods 2004-2005 as well as the interim period in which a $37.8 million revenue increase was in place.

In May 2006, Entergy Gulf States made its formula rate plan filing with the LPSC for the 2005 test year. The filing shows that Entergy Gulf States' return on equity was within the allowed bandwidth. The filing also indicates that under the formula rate plan rider for approved capacity additions, a $7.1 million rate increase is required to recover LPSC-approved incremental

 

16

 

 

deferred and ongoing capacity requirements. The filing is subject to a period of LPSC Staff review, and rate changes associated with the formula rate plan are scheduled to take effect with the first billing cycle of September 2006.

Entergy Gulf States -Texas

As discussed in Note 2 to the consolidated financial statements in the Form 10-K, in August 2005, Entergy Gulf States filed with the PUCT an application for recovery of its transition to competition costs. Entergy Gulf States requested recovery of $189 million in transition to competition costs through implementation of a 15-year rider to be effective no later than March 1, 2006. The $189 million represents transition to competition costs Entergy Gulf States incurred from June 1, 1999 through June 17, 2005 in preparing for competition in its service area, including attendant AFUDC, and all carrying costs projected to be incurred on the transition to competition costs through February 28, 2006. The $189 million is before any gross-up for taxes or carrying costs over the 15-year recovery period. Entergy Gulf States reached a unanimous settlement agreement on all issues with the active parties in the transition to competition cost recovery case. The agreement allows Entergy Gulf States to recover $14.5 million per year in transition to competition costs over a 15-year period. Entergy Gulf States implemented interim rates based on this revenue level on March 1, 2006. The PUCT approved the settlement agreement in June 2006.

Entergy Louisiana

In May 2006, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2005 test year. The filing shows that Entergy Louisiana's return on equity was within the allowed bandwidth. The filing also indicates that under the formula rate plan rider for approved capacity additions, a $121 million rate increase is required to recover LPSC-approved incremental deferred and ongoing capacity requirements. Entergy Louisiana requested recovery of the capacity deferrals over a three-year period, including carrying charges. $51 million of the rate increase is associated with these deferrals. The remaining $70 million of the rate increase is associated with ongoing capacity costs. The filing is subject to a period of LPSC Staff review, and rate changes associated with the formula rate plan are scheduled to take effect with the first billing cycle of September 2006.

Entergy Mississippi

In March 2006, Entergy Mississippi made its annual scheduled formula rate plan filing with the MPSC.  The filing was amended by an April 2006 filing.  The amended filing showed that an increase of $3.1 million in electric revenues is warranted.  The MPSC has approved a settlement providing for a $1.8 million rate increase, which will be implemented in August 2006.

Entergy New Orleans

In June 2006, Entergy New Orleans made its annual formula rate plan filings with the City Council.  The filings show various alternatives to reflect the effect of Entergy New Orleans' lost customers and decreased revenue. Entergy New Orleans' recommended alternative adjusts for lost customers and assumes that the City Council's June 2006 decision to allow recovery of all Grand Gulf costs through the fuel adjustment clause stays in place (a portion of Grand Gulf costs was previously recovered through base rates). Under that alternative, annual increases of $6.4 million in electric base rate revenues (an increase of 4.4%) and $22.8 million in gas base rate revenues (an increase of 160.9%) are warranted. The filings triggered the prescribed four-month period for review by the City Council's Advisors and other parties, and rate adjustments, if any, could be implemented as soon as the first billing cycle of November 2006.

At the same time as it made its formula rate plan filings, Entergy New Orleans also filed with the City Council a request to implement two storm-related riders. With the first rider, Entergy New Orleans seeks to recover over a ten-year period the $114 million in electric restoration costs and the $25 million in gas restoration costs that it has actually spent through March 31, 2006. Entergy New Orleans also proposed semiannual filings to update the rider for additional restoration spending and also to consider the receipt of CDBG funds or insurance proceeds that it may

 

17

 

receive. With the second rider, Entergy New Orleans seeks to establish over a ten-year period a $150 million storm reserve to provide for the risk of another storm. Entergy New Orleans requested that the City Council consider the proposed riders within the same time frame as the formula rate plans, which would allow implementation as soon as the first billing cycle of November 2006.

Federal Regulation

System Agreement Litigation

See the Form 10-K for a discussion of the System Agreement litigation proceedings at the FERC. In April 2006, Entergy filed with the FERC its compliance filing to implement the provisions of the FERC's decision. The filing amends the System Agreement to provide for the calculation of production costs, average production costs, and payments/receipts among the domestic utility companies to the extent required to maintain rough production cost equalization pursuant to the FERC's decision, and makes clear that all payments/receipts will be classified as energy costs. The payments/receipts would be based on calendar year 2006 production costs, with any payments/receipts among the domestic utility companies to be made in twelve equal monthly installments, commencing in June 2007.

Motions to intervene without protest were filed by the City of New Orleans, the MPSC, the Louisiana Energy Users Group, and Occidental Chemical Corporation. Protests to the compliance filing were filed by the APSC, the LPSC, Arkansas Electric Energy Consumers, Inc. (AEEC), and the Arkansas Attorney General (Arkansas AG). Among other things, the LPSC urged the FERC: (1) to require any payments/receipts to commence in January 2007, rather than June 2007, and to require such payments to be made in a single lump sum payment, rather than in twelve equal monthly installments, or in the alternative to require a paying utility company to complete all payments within the calendar year following the year in which the disparity occurred; (2) to find that the bandwidth remedy is analogous to a "cost-of-service tariff with deferred billing," as opposed to a prospective remedy, so that a utility company could be required to make a payment based on a previous year's production costs even if such utility company has exited the System Agreement and so that interest would be due on the amount of any payment; and (3) to order interest on any payments to the extent they are not made in a single lump sum amount. In addition to the above issues, the LPSC and the other parties filing protests urged the FERC to require the bandwidth calculation to be set forth in a separate service schedule within the System Agreement, rather than the existing Service Schedule MSS-3 as proposed by Entergy. The APSC's protest urged the FERC to require that the bandwidth formula include all bandwidth payments as a production cost of the paying utility company for the year in which the payment is made, instead of excluding such costs as proposed in the compliance filing. The AEEC, among other things, urges the FERC to segregate the capacity and energy cost components of any bandwidth payments/receipts. The domestic utility companies responded to the issues raised in the protests and urged the FERC to approve the compliance filing as submitted by Entergy. The LPSC filed a reply to Entergy's response reasserting its previous positions and alleging, among other things, that Entergy was trying to delay the bandwidth payment in an effort to protect purported excess profits at Entergy Arkansas.

Separately, in July 2006 the LPSC filed with the FERC a Motion for Summary Disposition on the same issues that the LPSC had raised in its protests to the compliance filing. The domestic utility companies filed an answer urging the FERC to reject the LPSC's Motion for Summary Disposition and asking the FERC for summary disposition of several issues in favor of the domestic utility companies' positions.

The FERC's decision in the System Agreement proceeding is currently pending before the United States Court of Appeals for the D.C. Circuit. The parties to the proceeding reached agreement on a proposed briefing schedule that would result in the various parties submitting initial and reply briefs between August and November 2006. The proposed briefing schedule has been submitted to the Court of Appeals.

The FERC's decision would reallocate total production costs of the domestic utility companies whose relative total production costs expressed as a percentage of Entergy System average production costs are outside an upper or lower bandwidth. This would be accomplished by payments from domestic utility companies whose production costs are more than 11% below Entergy System average production costs to domestic utility companies whose production costs are more than the Entergy System average production cost, with payments going first to those

 

18

 

domestic operating utilities whose total production costs are farthest above the Entergy System average. For purposes of the Entergy Arkansas rate filings discussed above in "State and Local Rate Regulation" that are expected to be made in mid-August 2006, an assessment of the potential effects of the FERC's June 2005 order, as amended by its December 2005 order on rehearing, has been calculated on the basis of a 2006 test year, using a 2006 gas price that consists of a non-weighted average of twelve months of gas prices calculated as follows: January through May 2006 are actual, volume-weighted monthly averages of day-ahead cash prices as reported by Energy Intelligence Natural Gas Week; the June 2006 price is the First of the Month Index price as reported by Platts Inside FERC's Gas Market Report; the July 2006 price is the 5/31/06 NYMEX Henry Hub settlement price; and August through December 2006 are 30 calendar-day rolling averages as of May 31, 2006 of forward NYMEX Henry Hub gas contracts.  For example the August 2006 price is an average of all the daily NYMEX settlement prices for the August 2006 contract for each trading day from the period 5/2/06 - 5/31/06 inclusive.  A similar calculation is made using the daily settlements of the September 2006 through December 2006 NYMEX contracts to arrive at those monthly prices. This resulted in an average annual gas price of $7.49/mmBtu. If the FERC's June 2005 order, as amended by its December 2005 order on rehearing, becomes final and if an annual average gas price of $7.49/ mmBtu occurs for 2006 as assumed, the following potential annual production cost reallocation among the domestic utility companies could result:

 

Annual Payments
or (Receipts) (in millions)

   

Entergy Arkansas

$284

Entergy Gulf States

($197)

Entergy Louisiana

($59)

Entergy Mississippi

($28)

Entergy New Orleans

$0

In calculating the production costs for this purpose under the FERC's order, output from the Vidalia hydroelectric power plant does not reflect the actual Vidalia price for the year but is priced at that year's average price paid by Entergy Louisiana for the exchange of electric energy under Service Schedule MSS-3 of the System Agreement, thereby reducing the amount of Vidalia costs reflected in the comparison of the domestic utility companies' total production costs.

APSC Complaint at the FERC

In June 2006, the APSC filed a complaint with the FERC against Entergy Services as the representative of Entergy Corporation and the domestic utility companies, pursuant to Sections 205, 206 and 207 of the Federal Power Act. The APSC states that "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." The complaint requests, among other things, that the FERC disallow any costs found to be imprudent, with a refund effective date to be set at the earliest possible time. Specific areas of requested investigation include:

  • The domestic utility companies' transmission expansion and planning process, including the construction, or lack thereof, of economic transmission upgrades;
  • The domestic utility companies' wholesale purchasing practices, including the potential savings due to integration of independent power producers into their economic dispatch;
  • The domestic utility companies' alleged failure to retire their aging, inefficient gas- and oil-fired generation; and
  • The alleged failure to construct or acquire coal capacity for the generation portfolio of Entergy Louisiana.

The complaint also requests that the FERC exercise its authority under Section 207 of the FPA to investigate the adequacy of Entergy's transmission system and direct it to make all necessary upgrades to ensure that its transmission facilities provide reliable, adequate and economic service.

19

On July 31, 2006, the domestic utility companies submitted their answer to the APSC complaint. In their answer, the domestic utility companies acknowledge that while the FERC is the appropriate forum to consider the issues raised in the APSC's complaint, the APSC has provided no probative evidence supporting its allegations and has not met the standards under the Federal Power Act (FPA) to have a matter set for hearing. Under the FPA standards, the APSC must create "serious doubt" as to the propriety of the challenged actions. As indicated in the domestic utility companies' answer, the APSC complaint does not raise a "serious doubt" but instead largely relies on unsupported assertions, many of which have been investigated in other proceedings. In those limited instances when the APSC complaint references "evidence" in an attempt to support its request for a hearing, the "evidence" to which it refers in fact does nothing to support its position but, rather, shows that Entergy has acted prudently. As further indicated in the domestic utility companies' answer, following the issuance of the FERC's System Agreement decision, all of the production costs of the domestic utility companies are now inputs to a formula rate that will result in bandwidth payments among the domestic utility companies in order to roughly equalize production costs. Based on well-established Supreme Court precedent, the FERC has exclusive jurisdiction over all inputs that will be included in the System Agreement bandwidth formula rates filed in compliance with the FERC's System Agreement decision and retail regulators are preempted from taking any action that disturbs the FERC's findings with respect to these production cost inputs and the FERC-determined allocation of production costs among the domestic utility companies. The domestic utility companies believe that their conduct with respect to these issues has been prudent and will vigorously defend such conduct.

Several parties have intervened in the proceeding, including the MPSC, the LPSC, and the City Council. The LPSC's answer and comments in response to the APSC Complaint ask the FERC to investigate whether Entergy Arkansas' withdrawal from the System Agreement is fair, just, and reasonable.

APSC System Agreement Investigation

In 2004, the APSC commenced an investigation into whether Entergy Arkansas' continued participation in the System Agreement is in the best interests of its customers. Citing its concerns that the benefits of its continued participation in the current form of the System Agreement have been seriously eroded, in December 2005, Entergy Arkansas submitted its notice that it will terminate its participation in the current System Agreement effective 96 months from December 19, 2005 or such earlier date as authorized by the FERC. Entergy Arkansas indicated, however, that a properly structured replacement agreement could be a viable alternative. In June 2006 the APSC issued an order in its investigation requiring Entergy Arkansas President Hugh McDonald to file testimony in response to several questions involving details of what action Entergy Arkansas or Entergy has taken to insure that Entergy Arkansas' customers are protected from additional costs including those related to the following areas: construction of new generating plants located outside of Arkansas, costs of the Entergy New Orleans bankruptcy, and costs associated with restoration of facilities damaged by Hurricanes Katrina and Rita. Mr. McDonald was also directed to describe actions taken since December 19, 2005 to encourage or persuade the FERC to authorize Entergy Arkansas to exit the Entergy System Agreement sooner than 96 months, and to describe current and future actions related to development of a replacement system agreement. Responsive testimony was filed with the APSC in July 2006. A public hearing for the purpose of cross-examination of Mr. McDonald on his testimony and for questioning by the APSC was also conducted in July 2006.

Independent Coordinator of Transmission (ICT)

In April 2006 the FERC issued an order approving with modification Entergy's ICT proposal filed in May 2005. In its order, the FERC: (1) approved the establishment of the ICT, with modifications; (2) approved Entergy's proposed pricing policy, with modifications; (3) approved the implementation of a weekly procurement process (WPP); and (4) ordered Entergy to submit a compliance filing and an executed contract with the Southwest Power Pool (SPP), the approved ICT, within 60 days of the order. Several parties have filed requests for rehearing of the FERC order, and those requests are still pending.

The proposed modifications include, among other things: (1) Entergy must file with the FERC the criteria used to grant and deny transmission service, including calculating available flowgate capacity; (2) the FERC extended the initial term of the ICT from two years to four years; and Entergy is precluded from terminating the ICT prior to the end of the four year period; (3) the

 

20

 

 

 establishment of a transmission users group that will provide input directly to the ICT on the effectiveness of the ICT Proposal and also will propose to the FERC an appropriate means by which they could be given access to inputs in the process and models under the direction of the ICT; (4) with regard to any dispute between the ICT and Entergy concerning transmission service requests, transmission planning, and interconnection requests, the ICT's position will prevail during the pendency of the dispute resolution; and (5) the WPP must be operational within approximately 14 months of the FERC order or the FERC may reevaluate all approvals to proceed with the ICT.

Entergy made its compliance filing with the FERC on May 24, 2006, including the executed ICT agreement with SPP. Entergy informed the FERC that, assuming it has received all required approvals, Entergy intends to install SPP as the ICT within 30 days of FERC approval of the ICT agreement. Several parties have filed protests regarding Entergy's compliance filing, and consideration of Entergy's compliance filing is pending at the FERC.

The LPSC voted to approve the ICT proposal in July 2006.

Market and Credit Risks

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 and Energy Commodity Services business, unless otherwise contracted, is subject to the fluctuation of market power prices. Following is an updated summary of the amount of the Non-Utility Nuclear business' output that is sold forward under physical or financial contracts (2006 represents the remaining two quarters of the year):

   

2006

 

2007

 

2008

 

2009

 

2010

Non-Utility Nuclear:

                   

Percent of planned generation sold forward:

                   
 

Unit-contingent

 

34%

 

39%

 

34%

 

25%

 

12%

 

Unit-contingent with guarantee of availability (1)

 

53%

 

47%

 

32%

 

13%

 

5%

 

Firm liquidated damages

 

4%

 

8%

 

0%

 

0%

 

0%

 

Total

 

91%

 

94%

 

66%

 

38%

 

17%

Planned generation (TWh)

 

17

 

34

 

34

 

35

 

34

Average contracted price per MWh

 

$41

 

$49

 

$53

 

$58

 

$46

  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.

See the Form 10-K for a discussion of Non-Utility Nuclear's value sharing agreements with NYPA involving energy sales from the Fitzpatrick and Indian Point 3 power plants and a discussion of the Vermont Yankee PPA price adjustment clause.

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 will be 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 would be an Entergy Corporation guaranty.  Cash and letters of credit are also acceptable

 

21

 

 forms of collateral.  At June 30, 2006, based on power prices at that time, Entergy had in place as collateral $1,275 million of Entergy Corporation guarantees for wholesale transactions, including $100 million of guarantees that support letters of credit. The assurance requirement associated with Non-Utility Nuclear is estimated to increase by an amount up to $445 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 (2006 represents the remaining two quarters of the year):

   

2006

 

2007

 

2008

 

2009

 

2010

Non-Utility Nuclear:

                   

Percent of capacity sold forward:

                   
 

Bundled capacity and energy contracts

 

13%

 

12%

 

12%

 

12%

 

12%

 

Capacity contracts

 

77%

 

48%

 

36%

 

24%

 

3%

 

Total

 

90%

 

60%

 

48%

 

36%

 

15%

Planned net MW in operation

 

4,200

 

4,200

 

4,200

 

4,200

 

4,200

Average capacity contract price per kW per month

 

$1.1

 

$1.1

 

$1.1

 

$1.0

 

$0.9

Blended Capacity and Energy (based on revenues)

                   

% of planned generation and capacity sold forward

 

86%

 

88%

 

57%

 

33%

 

11%

Average contract revenue per MWh

 

$42

 

$50

 

$53

 

$59

 

$46

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. Following is an update to that discussion.

Unbilled Revenue

As discussed in Note 10 to the consolidated financial statements, effective January 1, 2006, Entergy Louisiana and the Louisiana portion of Entergy Gulf States reclassified the fuel component of unbilled accounts receivable to deferred fuel and will no longer include the fuel component in their unbilled revenue calculations, which is in accordance with regulatory treatment.

Recently Issued Accounting Pronouncements

FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48) was issued in July 2006 and is effective for Entergy in the first quarter of 2007. The FASB's objective in issuing this interpretation is to increase comparability among companies in financial reporting of income taxes. 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 does not expect that the adoption of FIN 48 will materially affect its financial position, results of operations, or cash flows.

22

ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
                 
    Three Months Ended   Six Months Ended
    2006   2005   2006   2005
    (In Thousands, Except Share Data)
                 
OPERATING REVENUES                
Domestic electric   $2,177,710    $2,044,666    $4,270,646    $3,746,683 
Natural gas   13,612    12,532    51,027    39,387 
Competitive businesses   437,180    388,193    874,864    769,502 
TOTAL   2,628,502    2,445,391    5,196,537    4,555,572 
                 
OPERATING EXPENSES                
Operating and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   661,619    419,360    1,501,791    918,345 
  Purchased power   577,408    608,562    1,038,778    1,040,184 
  Nuclear refueling outage expenses   42,546    39,150    84,540    78,960 
  Other operation and maintenance   573,234    558,735    1,102,664    1,062,375 
Decommissioning   36,258    36,525    71,854    73,524 
Taxes other than income taxes   91,130    95,016    194,468    185,632 
Depreciation and amortization   217,943    204,420    423,332    419,941 
Other regulatory credits - net   (58,929)   (31,951)   (102,946)   (49,971)
TOTAL   2,141,209    1,929,817    4,314,481    3,728,990 
                 
OPERATING INCOME   487,293    515,574    882,056    826,582 
                 
OTHER INCOME                
Allowance for equity funds used during construction   8,908    10,918    24,367    23,521 
Interest and dividend income   35,139    34,441    78,968    65,059 
Equity in earnings of unconsolidated equity affiliates   8,483    10,291    12,070    13,593 
Miscellaneous - net   (7,965)   (10,956)   (14,170)   14,977 
TOTAL   44,565    44,694    101,235    117,150 
                 
INTEREST AND OTHER CHARGES                
Interest on long-term debt   122,670    105,781    243,151    213,048 
Other interest - net   15,235    13,275    32,495    24,761 
Allowance for borrowed funds used during construction   (5,405)   (5,996)   (14,450)   (13,273)
TOTAL   132,500    113,060    261,196    224,536 
                 
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES   399,358    447,208    722,095    719,196 
                 
Income taxes   122,901    151,849    241,732    244,092 
                 
INCOME FROM CONTINUING OPERATIONS   276,457    295,359    480,363    475,104 
                 
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (net of income tax                
expense (benefit) of $7,190, ($1,502), $5,986 and ($2,234) , respectively)   13,119    (2,811)   10,880    (4,177)
                 
                 
CONSOLIDATED NET INCOME   289,576    292,548    491,243    470,927 
                 
Preferred dividend requirements and other   7,774    6,398    15,812    12,781 
                 
EARNINGS APPLICABLE TO                
COMMON STOCK   $281,802    $286,150    $475,431    $458,146 
                 
Basic earnings (loss) per average common share:                
  Continuing operations   $1.29    $1.37    $2.24    $2.17 
  Discontinued operations   $0.06    ($0.01)   $0.05    ($0.02)
  Basic earnings per average common share   $1.35    $1.36    $2.29    $2.15 
Diluted earnings (loss) per average common share:                
  Continuing operations   $1.27    $1.34    $2.20    $2.13 
  Discontinued operations   $0.06    ($0.01)   $0.05    ($0.02)
  Diluted earnings per average common share   $1.33    $1.33    $2.25    $2.11 
Dividends declared per common share   $0.54    $0.54    $1.08    $1.08 
                 
Basic average number of common shares outstanding   207,982,485    211,134,467    207,858,104    212,622,976 
Diluted average number of common shares outstanding   211,557,985    215,568,534    211,467,674    217,091,580 
                 
See Notes to Consolidated Financial Statements.                
                 

23

ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
    2006   2005
    (In Thousands)
   
OPERATING ACTIVITIES        
Consolidated net income   $491,243    $470,927 
Adjustments to reconcile consolidated net income to net cash flow        
 provided by operating activities:        
  Reserve for regulatory adjustments   41,683    (73,922)
  Other regulatory credits - net   (102,946)   (49,971)
  Depreciation, amortization, and decommissioning   496,632    494,458 
  Deferred income taxes and investment tax credits   (84,441)   92,579 
  Equity in earnings of unconsolidated equity affiliates - net of dividends   (9,896)   (11,993)
  Changes in working capital:        
    Receivables   318,480    (124,234)
    Fuel inventory   (13,650)   9,065 
    Accounts payable   (285,750)   (14,685)
    Taxes accrued   535,654    68,495 
    Interest accrued   (21,754)   (17,715)
    Deferred fuel   272,835    (76,262)
    Other working capital accounts   103,790    (48,972)
  Provision for estimated losses and reserves   25,037    11,536 
  Changes in other regulatory assets   (165,527)   21,298 
  Other   (120,847)   22,548 
Net cash flow provided by operating activities   1,480,543    773,152 
         
INVESTING ACTIVITIES        
Construction/capital expenditures   (942,102)   (616,004)
Allowance for equity funds used during construction   24,367    23,521 
Nuclear fuel purchases   (124,250)   (184,445)
Proceeds from sale/leaseback of nuclear fuel   41,109    125,680 
Proceeds from sale of assets and businesses   77,159   
Payment for purchase of plant   (88,199)   (162,075)
Decrease in other investments   50,070    63,193 
Purchases of other temporary investments     (1,591,025)
Liquidation of other temporary investments     1,778,975 
Proceeds from nuclear decommissioning trust fund sales   523,806    430,226 
Investment in nuclear decommissioning trust funds   (573,921)   (478,753)
Other regulatory investments   (42,479)   (63,800)
Net cash flow used in investing activities   (1,054,440)   (674,507)
         
See Notes to Consolidated Financial Statements.        
         
         
         
24
         
         
ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
    2006   2005
    (In Thousands)
     
FINANCING ACTIVITIES        
Proceeds from the issuance of:        
  Long-term debt   1,237,865    1,362,424 
  Preferred stock   73,354    30,000 
  Common stock and treasury stock   15,372    89,868 
Retirement of long-term debt   (1,143,746)   (701,914)
Repurchase of common stock     (639,820)
Redemption of preferred stock   (181,060)   (2,250)
Changes in credit line borrowings - net   (40,000)   (150)
Dividends paid:        
  Common stock   (224,458)   (229,353)
  Preferred stock   (16,760)   (12,779)
Net cash flow used in financing activities   (279,433)   (103,974)
         
Effect of exchange rates on cash and cash equivalents   (556)   129 
         
Net increase (decrease) in cash and cash equivalents   146,114    (5,200)
         
Cash and cash equivalents at beginning of period   582,820    619,786 
         
Effect of the deconsolidation of Entergy New Orleans on cash and cash equivalents     (7,954)
         
Cash and cash equivalents at end of period   $728,934    $606,632 
         
         
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid (received) during the period for:        
  Interest - net of amount capitalized   $282,454    $242,420 
  Income taxes   ($231,325)   $80,781 
Noncash financing activities:        
  Proceeds from long-term debt issued for the purpose        
   of refunding other long-term debt   $54,700   
         
See Notes to Consolidated Financial Statements.        
         
         

25

ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, 2006 and December 31, 2005
(Unaudited)
    2006   2005
    (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents:        
  Cash   $120,273    $221,773 
  Temporary cash investments - at cost,        
   which approximates market   608,661    361,047 
     Total cash and cash equivalents   728,934    582,820 
Note receivable - Entergy New Orleans DIP loan   39,749    90,000 
Notes receivable   1,135    3,227 
Accounts receivable:         
  Customer   435,254    629,717 
  Allowance for doubtful accounts   (24,591)   (30,805)
  Other   531,553    459,152 
  Accrued unbilled revenues   279,696    477,570 
     Total receivables   1,221,912    1,535,634 
Deferred fuel costs   246,969    543,927 
Fuel inventory - at average cost   219,845    206,195 
Materials and supplies - at average cost   578,557    610,932 
Deferred nuclear refueling outage costs   131,484    157,764 
Prepayments and other   133,389    325,795 
TOTAL   3,301,974    4,056,294 
         
OTHER PROPERTY AND INVESTMENTS        
Investment in affiliates - at equity   307,817    296,784 
Decommissioning trust funds   2,637,784    2,606,765 
Non-utility property - at cost (less accumulated depreciation)   219,507    228,833 
Other   41,480    81,535 
TOTAL   3,206,588    3,213,917 
         
PROPERTY, PLANT AND EQUIPMENT        
Electric   30,225,525    29,161,027 
Property under capital lease   724,290    727,565 
Natural gas   88,029    86,794 
Construction work in progress   836,016    1,524,085 
Nuclear fuel under capital lease   273,878    271,615 
Nuclear fuel   383,817    436,646 
TOTAL PROPERTY, PLANT AND EQUIPMENT   32,531,555    32,207,732 
Less - accumulated depreciation and amortization   13,223,563    13,010,687 
PROPERTY, PLANT AND EQUIPMENT - NET   19,307,992    19,197,045 
         
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  SFAS 109 regulatory asset - net   730,503    735,221 
  Other regulatory assets   2,394,171    2,133,724 
  Deferred fuel costs   168,122    120,489 
Long-term receivables   23,640    25,572 
Goodwill   377,172    377,172 
Other   1,053,511    991,835 
TOTAL   4,747,119    4,384,013 
         
TOTAL ASSETS   $30,563,673    $30,851,269 
         
See Notes to Consolidated Financial Statements.        
 
26
 
ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 2006 and December 31, 2005
(Unaudited)
    2006   2005
    (In Thousands)
         
CURRENT LIABILITIES        
Currently maturing long-term debt   $108,191    $103,517 
Notes payable   41    40,041 
Accounts payable   984,941    1,655,787 
Customer deposits   232,607    222,206 
Taxes accrued   212,100    188,159 
Accumulated deferred income taxes   101,045    143,409 
Nuclear refueling outage costs   1,022    15,548 
Interest accrued   133,101    154,855 
Obligations under capital leases   136,943    130,882 
Other   323,413    473,510 
TOTAL   2,233,404    3,127,914 
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   5,625,264    5,279,228 
Accumulated deferred investment tax credits   367,618    376,550 
Obligations under capital leases   165,324    175,005 
Other regulatory liabilities   409,041    408,667 
Decommissioning and retirement cost liabilities   1,991,617    1,923,971 
Transition to competition   79,098    79,101 
Regulatory reserves   17,397    18,624 
Accumulated provisions   566,796    556,028 
Long-term debt   8,979,735    8,824,493 
Preferred stock with sinking fund   11,700    13,950 
Other   1,562,709    1,879,017 
TOTAL   19,776,299    19,534,634 
         
Commitments and Contingencies        
         
Preferred stock without sinking fund   344,893    445,974 
         
SHAREHOLDERS' EQUITY        
Common stock, $.01 par value, authorized 500,000,000        
 shares; issued 248,174,087 shares in 2006 and in 2005   2,482    2,482 
Paid-in capital   4,817,628    4,817,637 
Retained earnings   5,676,094    5,428,407 
Accumulated other comprehensive loss   (153,825)   (343,819)
Less - treasury stock, at cost (40,104,825 shares in 2006 and        
 40,644,602 shares in 2005)   2,133,302    2,161,960 
TOTAL   8,209,077    7,742,747 
         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $30,563,673    $30,851,269 
         
See Notes to Consolidated Financial Statements.        
         
27

ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME, AND PAID-IN CAPITAL
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
                     
        Three Months Ended
        2006   2005
        (In Thousands)
RETAINED EARNINGS                    
Retained Earnings - Beginning of period       $5,509,897        $5,040,655     
  Add: Earnings applicable to common stock       281,802    $281,802    286,150    $286,150 
  Deduct:                    
    Dividends declared on common stock       112,295        113,820     
    Capital stock and other expenses       3,310           
      Total       115,605        113,820     
Retained Earnings - End of period       $5,676,094        $5,212,985     
                     
ACCUMULATED OTHER COMPREHENSIVE LOSS                    
Balance at beginning of period                    
  Accumulated derivative instrument fair value changes       ($201,301)       ($161,446)    
  Other accumulated comprehensive income items       52,295        44,649     
     Total       (149,006)       (116,797)    
                     
Net derivative instrument fair value changes                    
 arising during the period (net of tax expense (benefit) of $11,151 and ($25,082))       6,672    6,672    (46,621)   (46,621)
                     
Foreign currency translation (net of tax expense (benefit) of $206 and ($46))       383    383    (85)   (85)
                     
Net unrealized investment gains (net of tax expense (benefit) of ($10,117) and $13,692)       (11,874)   (11,874)   16,496    16,496 
                     
Balance at end of period:                    
  Accumulated derivative instrument fair value changes       ($194,629)       ($208,067)    
  Other accumulated comprehensive income items       40,804        61,060     
     Total       ($153,825)       ($147,007)    
Comprehensive Income           $276,983        $255,940 
                     
PAID-IN CAPITAL                    
Paid-in Capital - Beginning of period       $4,816,037        $4,826,797     
  Add: Common stock issuances related to stock plans       1,591        18,240     
Paid-in Capital - End of period       $4,817,628        $4,845,037     
                     
        Six Months Ended
        2006   2005
        (In Thousands)
RETAINED EARNINGS                    
Retained Earnings - Beginning of period       $5,428,407        $4,984,302     
  Add: Earnings applicable to common stock       475,431    $475,431    458,146    $458,146 
  Deduct:                    
    Dividends declared on common stock       224,434        229,448     
    Capital stock and other expenses       3,310        15     
     Total       227,744        229,463     
Retained Earnings - End of period       $5,676,094        $5,212,985     
                     
ACCUMULATED OTHER COMPREHENSIVE LOSS                    
Balance at beginning of period                    
  Accumulated derivative instrument fair value changes       ($392,614)       ($141,411)    
  Other accumulated comprehensive income items       48,795        47,958     
     Total       (343,819)       (93,453)    
                     
Net derivative instrument fair value changes                    
 arising during the period (net of tax expense (benefit) of $131,543 and ($37,692))       197,985    197,985    (66,655)   (66,655)
                     
Foreign currency translation (net of tax expense (benefit) of $299 and ($69))       556    556    (129)   (129)
                     
Minimum pension liability (net of tax benefit of ($1,344))           (2,054)   (2,054)
                     
Net unrealized investment gains (net of tax expense (benefit) of ($7,802) and $9,445)       (8,547)   (8,547)   15,284    15,284 
                     
Balance at end of period:                    
  Accumulated derivative instrument fair value changes       ($194,629)       ($208,066)    
  Other accumulated comprehensive income items       40,804        61,059     
     Total       ($153,825)       ($147,007)    
Comprehensive Income           $665,425       $404,592 
                     
PAID-IN CAPITAL                    
Paid-in Capital - Beginning of period       $4,817,637        $4,835,375     
  Add: Common stock issuances related to stock plans       (9)       9,662     
Paid-in Capital - End of period       $4,817,628        $4,845,037     
                     
                     
See Notes to Consolidated Financial Statements.                    
                     
 28

ENTERGY CORPORATION AND SUBSIDIARIES
SELECTED OPERATING RESULTS
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2006   2005   (Decrease)   %
    (Dollars in Millions)    
Utility Electric Operating Revenues:                
  Residential   $697   $569   $128    23 
  Commercial   546   440   106    24 
  Industrial   620   551   69    13 
  Governmental   36   32     13 
     Total retail   1,899   1,592   307    19 
  Sales for resale   161   148   13   
  Other   118   305   (187)   (61)
     Total   $2,178   $2,045   $133   
                 
Utility Billed Electric Energy                
 Sales (GWh):                
  Residential   7,034   6,558   476   
  Commercial   6,060   5,735   325   
  Industrial   9,561   9,648   (87)   (1)
  Governmental   378   377    
     Total retail   23,033   22,318   715   
  Sales for resale   2,816   2,944   (128)   (4)
     Total   25,849   25,262   587   
                 
 
                 
    Six Months Ended   Increase/    
Description   2006   2005   (Decrease)   %
    (Dollars in Millions)    
Utility Electric Operating Revenues:                
  Residential   $1,394   $1,162   $232    20 
  Commercial   1,087   868   219    25 
  Industrial   1,287   1,100   187    17 
  Governmental   76   64   12    19 
     Total retail   3,844   3,194   650    20 
  Sales for resale   336   287   49    17 
  Other   91   266   (175)   (66)
     Total   $4,271   $3,747   $524    14 
                 
Utility Billed Electric Energy                
 Sales (GWh):                
  Residential   13,997   13,728   269   
  Commercial   11,594   11,206   388   
  Industrial   18,613   19,100   (487)   (3)
  Governmental   760   761   (1)  
     Total retail   44,964   44,795   169   
  Sales for resale   5,577   5,627   (50)   (1)
     Total   50,541   50,422   119   
                 

29

 

ENTERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. COMMITMENTS AND CONTINGENCIES

Entergy New Orleans Bankruptcy

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

Nuclear Insurance

See Note 8 to the consolidated financial statements in the Form 10-K for information on nuclear liability and property insurance associated with Entergy's nuclear power plants

Non-Nuclear Property Insurance

See Note 8 to the consolidated financial statements in the Form 10-K for information on Entergy's non-nuclear property insurance program. Beginning in June 2006, the aggregation limit for all parties insured by Oil Insurance Limited (OIL) for any one occurrence was reduced to $500 million. Most of Entergy's non-nuclear excess property insurance coverage includes a $75 million drop-down feature in the event of an OIL aggregation loss to which an Entergy loss contributes.

Nuclear Decommissioning and Other Asset Retirement Costs

See Note 8 to the consolidated financial statements in the Form 10-K for information on nuclear decommissioning and other retirement costs.

Employment Litigation

Entergy Corporation and certain subsidiaries are defendants in numerous lawsuits filed by former employees asserting that they were wrongfully terminated and/or discriminated against on the basis of age, race, sex, or other protected characteristics. The defendant companies deny any liability to the plaintiffs.

 

NOTE 2. RATE AND REGULATORY MATTERS

Storm Costs Recovery Filings with Retail Regulators

On July 31, 2006, Entergy Louisiana and Entergy Gulf States filed a supplemental and amending storm cost recovery application with the LPSC, in which Entergy Louisiana and Entergy Gulf States requested that the LPSC (1) review Entergy Louisiana's and Entergy Gulf States' testimony and exhibits relating to the costs associated with Hurricanes Katrina and Rita, and declare that those verified, actual storm-related costs through May 31, 2006 are $466.8 million for Entergy Louisiana and $200.3 million for Entergy Gulf States in the Louisiana jurisdiction and that those costs were prudently incurred; (2) declare that the annual revenue requirements associated with the recovery of those costs, based on a ten-year levelized rate are $54.4 million for Entergy Louisiana and $26.2 million for Entergy Gulf States; (3) authorize Entergy Louisiana and Entergy Gulf States to recover the costs through Storm Cost Recovery Riders (SCRRs) proposed by Entergy Louisiana and Entergy Gulf States; (4) declare that the storm costs incurred subsequent to May 31, 2006 are to be filed by Entergy Louisiana and Entergy Gulf States with the LPSC on an annual basis in connection with their annual formula rate plan (FRP) filings, and that the SCRRs be adjusted annually to reflect such costs and any insurance proceeds or CDBG funds actually received, with the adjusted amounts to be collected through the SCRRs to take effect contemporaneous with the effective date of rate changes under the FRP; (5)

30

 

declare that the storm-related costs incurred by Entergy Louisiana and Entergy Gulf States meet the conditions set forth in the FRP for exclusion from the sharing provisions in those FRPs and authorize the permanent recovery of storm costs outside of the FRPs adopted by the LPSC for Entergy Louisiana and Entergy Gulf States; and (6) authorize the funding of a storm reserve through securitization sufficient to fund a storm cost reserve of $132 million for Entergy Louisiana and $81 million for Entergy Gulf States. Hearings on the application are scheduled for the first quarter 2007.

In July 2006, Entergy Gulf States filed an application with the PUCT with respect to the $393.2 million of Hurricane Rita reconstruction costs incurred in its Texas retail jurisdiction through March 31, 2006. The filing asks the PUCT to determine that $393.2 million is the amount of reasonable and necessary hurricane reconstruction costs eligible for securitization and recovery, approve the recovery of carrying costs, and approve the manner in which Entergy Gulf States-Texas allocates those costs among its retail customer classes.  If approved, Entergy Gulf States' application will ultimately affect all its retail customers in Texas. Entergy Gulf States' filing does not request recovery of costs through a specific rider on customer bills or through any other means at this time. The hearing before the PUCT on the filing is scheduled for November 2006. This is the first of two filings authorized by a law passed earlier this year in a special session of the Texas Legislature. A second filing will request securitization and recovery of the eligible costs through retail rates and tariffs. Entergy Gulf States expects to make the second filing following the conclusion of the reconstruction cost case.

As discussed in the Form 10-K, in December 2005, Entergy Mississippi filed with the MPSC a Notice of Intent to change rates by implementing a Storm Damage Rider to recover storm damage restoration costs associated with Hurricanes Katrina and Rita totaling approximately $84 million as of November 30, 2005.   In February 2006, Entergy Mississippi filed an Application for an Accounting Order seeking certification by the MPSC of Entergy Mississippi's estimated $36 million of storm restoration costs not included in the December 2005 filing. In March 2006, the Governor signed a law that established a mechanism by which the MPSC may authorize and certify an electric utility financing order and the state may issue general obligation bonds to pay the costs of repairing damage caused by Hurricane Katrina to the systems of investor-owned electric utilities.  Because of the passage of this law and the possibility of Entergy Mississippi obtaining CDBG funds for Hurricane Katrina storm restoration costs, in March 2006, the MPSC issued an order approving a Joint Stipulation between Entergy Mississippi and the Mississippi Public Utilities Staff that provided for the review of Entergy Mississippi's total storm restoration costs in the Application for an Accounting Order proceeding.  The Stipulation stated that the procedural schedule of the December 2005 Notice of Intent filing should be suspended until the MPSC issues a final order in the Application for an Accounting Order proceeding. 

In June 2006, the MPSC issued an order certifying Entergy Mississippi's Hurricane Katrina restoration costs incurred through March 31, 2006 of $89 million, net of estimated insurance proceeds. Two days later Entergy Mississippi filed a request with the Mississippi Development Authority for $89 million of CDBG funding for reimbursement of its infrastructure restoration costs. Entergy Mississippi also filed a Petition for Financing Order with the MPSC for authorization of state general obligation bond financing of $169 million for Hurricane Katrina restoration costs and future storm costs. The $169 million amount includes Hurricane Katrina restoration costs plus $80 million to build Entergy Mississippi's storm damage reserve for the future. The amount financed through the bonds will be reduced dollar for dollar by any CDBG funds that Entergy Mississippi receives. Pursuant to the legislation, the MPSC must issue a financing order by the end of October 2006.

Deferred Fuel Costs

See Note 2 to the consolidated financial statements in the Form 10-K for information regarding fuel proceedings involving the domestic utility companies.

Entergy Arkansas

In March 2006, Entergy Arkansas filed with the APSC its annual redetermination of the energy cost rate for application to the period April 2006 through March 2007. The filed energy cost rate of $0.02827 per kWh was proposed to replace the interim rate of $0.01900 per kWh that had been in place since October 2005. The interim energy cost rate is discussed in the Form

 

31

 

10-K, along with the investigation that the APSC commenced concerning Entergy Arkansas' interim energy cost rate. The increase in the energy cost rate is due to increases in the cost of purchased power primarily due to the natural gas cost increase and the effect that Hurricanes Katrina and Rita had on market conditions, increased demand for purchased power during the ANO 1 refueling and steam generator replacement outage in the fall of 2005, and coal plant generation curtailments during off-peak periods due to coal delivery problems.

On March 31, 2006, the APSC suspended implementation of the $0.02827 per kWh energy cost rate, and ordered that the $0.01900 per kWh interim rate remain in effect pending the APSC proceedings on the energy cost recovery filings. The APSC also extended its investigation into Entergy Arkansas' interim energy cost rate to cover the costs included in Entergy Arkansas' March 2006 filing. The extended investigation does not identify new issues in addition to the four issues listed in the Form 10-K and covers the same time period. On April 7, 2006, the APSC issued a show cause order in the investigation proceeding that ordered Entergy Arkansas to file a cost of service study by June 8, 2006. The order also directed Entergy Arkansas to file testimony to support the cost of service study, to support the $0.02827 per kWh cost rate, and to address the general topic of elimination of the energy cost recovery rider.

Entergy Arkansas filed for rehearing of the APSC's orders, asking that the energy cost rate filed in March 2006 be implemented in May 2006 subject to refund, asserting that the APSC did not follow appropriate procedures in suspending the operation of the energy cost recovery rider, and asking the APSC to rescind its show cause order. On May 8, 2006 the APSC denied Entergy Arkansas' requests for rehearing. Entergy Arkansas appealed the APSC's decision, but later filed a motion to dismiss the appeal following the APSC's decision described below.

In June 2006, Entergy Arkansas once again filed a motion with the APSC seeking to implement the redetermined energy cost rate of $0.02827 per kWh. After a hearing the APSC approved Entergy Arkansas' request and the redetermined rate was implemented in July 2006, subject to refund pending the outcome of the APSC energy cost recovery investigation. Because of the delay in implementing the redetermined energy cost rate, Entergy Arkansas estimated in its motion that $46 million of energy costs would remain under-recovered at December 31, 2006.

A hearing in the APSC energy cost recovery investigation is scheduled for October 2006.

On June 7, 2006, Entergy Arkansas filed the cost of service study ordered by the APSC. On that date Entergy Arkansas also filed notice with the APSC that it intends to file for a change in base rates within 60 to 90 days of its notice. Entergy Arkansas expects to make that filing in August 2006.

Entergy Gulf States

On March 1, 2006, Entergy Gulf States filed with the PUCT an application to implement an interim fuel surcharge in connection with the under-recovery of $97 million including interest of eligible fuel costs for the period August 2005 through January 2006. This surcharge is in addition to an interim surcharge that went into effect in January 2006. Entergy Gulf States entered into a unanimous settlement that reduced the requested surcharge for actual over-collections from the months of February and March 2006, resulting in a surcharge of $78.8 million to be implemented over a twelve-month period beginning in June 2006. The PUCT approved the surcharge in June 2006. Amounts collected through the interim fuel surcharges 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 is reconciling $1.6 billion of fuel and purchased power costs on a Texas retail basis. Hearings are scheduled for February 2007 and a PUCT decision is expected in July 2007.

32

Entergy Gulf States and Entergy Louisiana

In November 2005, the LPSC authorized its staff to initiate an expedited proceeding to audit the fuel and power procurement activities of Entergy Louisiana and Entergy Gulf States for the period January 1, 2005 through October 31, 2005. In April 2006, the LPSC accepted the LPSC Staff's audit report finding that the prices paid for natural gas and purchased power were reasonable and that given the market conditions surrounding Hurricanes Katrina and Rita, Entergy Louisiana and Entergy Gulf States acted reasonably and prudently in response to an extremely difficult environment.

Retail Rate Proceedings

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

Filings with the PUCT and Texas Cities

As discussed in the Form 10-K, in August 2005, Entergy Gulf States filed with the PUCT an application for recovery of its transition to competition costs. Entergy Gulf States requested recovery of $189 million in transition to competition costs through implementation of a 15-year rider to be effective no later than March 1, 2006. The $189 million represents transition to competition costs Entergy Gulf States incurred from June 1, 1999 through June 17, 2005 in preparing for competition in its service area, including attendant AFUDC, and all carrying costs projected to be incurred on the transition to competition costs through February 28, 2006. The $189 million is before any gross-up for taxes or carrying costs over the 15-year recovery period. Entergy Gulf States reached a unanimous settlement agreement on all issues with the active parties in the transition to competition cost recovery case. The agreement allows Entergy Gulf States to recover $14.5 million per year in transition to competition costs over a 15-year period. Entergy Gulf States implemented interim rates based on this revenue level on March 1, 2006. The PUCT approved the settlement agreement in June 2006.

Filings with the LPSC

Retail Rates - Electric

(Entergy Gulf States)

In March 2006, the LPSC approved an uncontested stipulated settlement in Entergy Gulf States' formula rate plan filing for the 2004 test year. The settlement includes a revenue requirement increase of $36.8 million and calls for Entergy Gulf States to apply a refund liability of $744 thousand to capacity deferrals. The refund liability pertained to the periods 2004-2005 as well as the interim period in which a $37.8 million revenue increase was in place.

In May 2006, Entergy Gulf States made its formula rate plan filing with the LPSC for the 2005 test year. The filing shows that Entergy Gulf States' return on equity was within the allowed bandwidth. The filing also indicates that under the formula rate plan rider for approved capacity additions, a $7.1 million rate increase is required to recover LPSC-approved incremental deferred and ongoing capacity requirements. The filing is subject to a period of LPSC Staff review, and rate changes associated with the formula rate plan are scheduled to take effect with the first billing cycle of September 2006.

(Entergy Louisiana)

In May 2006, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2005 test year. The filing shows that Entergy Louisiana's return on equity was within the allowed bandwidth. The filing also indicates that under the formula rate plan rider for approved capacity additions, a $121 million rate increase is required to recover LPSC-approved incremental deferred and ongoing capacity requirements. Entergy Louisiana requested recovery of the capacity deferrals over a three-year period, including carrying charges. $51 million of the rate

 

33

 

 

 increase is associated with these deferrals. The remaining $70 million of the rate increase is associated with ongoing capacity costs. The filing is subject to a period of LPSC Staff review, and rate changes associated with the formula rate plan are scheduled to take effect with the first billing cycle of September 2006.

Retail Rates - Gas (Entergy Gulf States)

In January 2006, Entergy Gulf States filed with the LPSC its gas rate stabilization plan. The filing showed a revenue deficiency of $4.1 million based on an ROE mid-point of 10.5%. On May 1, 2006, Entergy Gulf States implemented a $3.5 million rate increase pursuant to an uncontested agreement with the LPSC Staff.

Filings with the MPSC

In March 2006, Entergy Mississippi made its annual scheduled formula rate plan filing with the MPSC.  The filing was amended by an April 2006 filing.  The amended filing showed that an increase of $3.1 million in electric revenues is warranted.  The MPSC has approved a settlement providing for a $1.8 million rate increase, which will be implemented in August 2006.

Filings with the City Council

In June 2006, Entergy New Orleans made its annual formula rate plan filings with the City Council.  The filings show various alternatives to reflect the effect of Entergy New Orleans' lost customers and decreased revenue. Entergy New Orleans' recommended alternative adjusts for lost customers and assumes that the City Council's June 2006 decision to allow recovery of all Grand Gulf costs through the fuel adjustment clause stays in place (a portion of Grand Gulf costs was previously recovered through base rates). Under that alternative, annual increases of $6.4 million in electric base rate revenues (an increase of 4.4%) and $22.8 million in gas base rate revenues (an increase of 160.9%) are warranted. The filings triggered the prescribed four-month period for review by the City Council's Advisors and other parties, and rate adjustments, if any, could be implemented as soon as the first billing cycle of November 2006.

At the same time as it made its formula rate plan filings, Entergy New Orleans also filed with the City Council a request to implement two storm-related riders. With the first rider, Entergy New Orleans seeks to recover over a ten-year period the $114 million in electric restoration costs and the $25 million in gas restoration costs that it has actually spent through March 31, 2006. Entergy New Orleans also proposed semiannual filings to update the rider for additional restoration spending and also to consider the receipt of CDBG funds or insurance proceeds that it may receive. With the second rider, Entergy New Orleans seeks to establish over a ten-year period a $150 million storm reserve to provide for the risk of another storm. Entergy New Orleans requested that the City Council consider the proposed riders within the same time frame as the formula rate plans, which would allow implementation as soon as the first billing cycle of November 2006.

 

NOTE 3. COMMON EQUITY

Common Stock

Earnings per Share

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

34

 

 

For the Three Months Ended June 30,

 

 

2006

 

2005

 

 

(In Millions, Except Per Share Data)

 

 

 

 

$/share

 

 

 

$/share

Earnings applicable to common stock

 

$281.8

 

 

 

$286.2

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares
  outstanding - basic

 


208.0

 


$1.35 

 


211.1

 


$1.36 

Average dilutive effect of:

 

 

 

 

 

 

 

 

 

Stock Options

 

3.4

 

(0.022)

 

4.2

 

(0.027)

 

Deferred Units

 

0.2

 

(0.001)

 

0.2

 

(0.001)

Average number of common shares
  outstanding - diluted

 


211.6

 


$1.33 

 


215.5

 


$1.33 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

2006

 

2005

 

 

(In Millions, Except Per Share Data)

 

 

 

 

$/share

 

 

 

$/share

Earnings applicable to common stock

 

$475.4

 

 

 

$458.1

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares
  outstanding - basic

 


207.9

 


$2.29 

 


212.6

 


$2.15 

Average dilutive effect of:

 

 

 

 

 

 

 

 

 

Stock Options

 

3.4

 

(0.037)

 

4.3

 

(0.042)

 

Deferred Units

 

0.2

 

(0.002)

 

0.2

 

(0.002)

Average number of common shares
  outstanding - diluted

 


211.5

 


$2.25 

 


217.1

 


$2.11 

 

 

 

 

 

 

 

 

 

Entergy's stock option and other equity compensation plans are discussed in Note 7 to the consolidated financial statements in the Form 10-K.

Treasury Stock

During the six months ended June 30, 2006, Entergy Corporation issued 539,777 shares of its previously repurchased common stock to satisfy stock option exercises and other stock-based awards.

Retained Earnings

On August 4, 2006, Entergy Corporation's Board of Directors declared a common stock dividend of $0.54 per share, payable on September 1, 2006 to holders of record as of August 15, 2006.

Accumulated Other Comprehensive Income

Cash flow hedges with net unrealized losses of approximately $126 million net-of-tax at June 30, 2006 are scheduled to mature during the next twelve months.

 

35

 

 

 

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

Entergy Corporation has in place two separate revolving credit facilities, a five-year credit facility and a three-year credit facility. The five-year credit facility, which expires in May 2010, has a borrowing capacity of $2 billion, of which $805 million was outstanding as of June 30, 2006. The three-year facility, which expires in December 2008, has a borrowing capacity of $1.5 billion, none of which was outstanding as of June 30, 2006. Entergy can issue letters of credit against the total borrowing capacity of both credit facilities, and letters of credit totaling $144 million had been issued against the five-year facility at June 30, 2006. The total unused capacity for these facilities as of June 30, 2006 was approximately $2.6 billion. The commitment fee for this facility is currently 0.13% per annum of the unused amount. Commitment fees and interest rates on loans under the credit facility can fluctuate depending on the senior debt ratings of the domestic utility companies.

Entergy Arkansas, Entergy Gulf States, and Entergy Mississippi, each have credit facilities available as of June 30, 2006 as follows:


Company

 


Expiration Date

 

Amount of
Facility

 

Amount Drawn as of
June 30, 2006

 

 

 

 

 

 

 

Entergy Arkansas

 

April 2007

 

$85 million

 

-

Entergy Gulf States

 

February 2011

 

$25 million (a)

 

-

Entergy Mississippi

 

May 2007

 

$30 million (b)

 

-

Entergy Mississippi

 

May 2007

 

$20 million (b)

 

-

(a)

The credit facility allows Entergy Gulf States to issue letters of credit against the borrowing capacity of the facility. As of June 30, 2006, $1.4 million in letters of credit had been issued.

(b)

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

In May 2006, Entergy Mississippi increased its $25 million credit facility to $30 million and renewed it through May 2007. Entergy Mississippi also entered into a new $20 million credit facility through May 2007.

In August 2006, Entergy Gulf States increased the capacity of its credit facility to $50 million.

The credit facilities have variable interest rates and the average commitment fee is 0.13%. The $85 million Entergy Arkansas credit facility requires that it maintain total shareholders' equity of at least 25% of its total assets.

The FERC has issued an order ("FERC Short-Term Order") approving the short-term borrowing limits of the domestic utility companies (except Entergy New Orleans) and System Energy through March 31, 2008. Entergy New Orleans may rely on existing SEC PUHCA 1935 orders for its financing authority, subject to bankruptcy court approval. In addition to borrowings from commercial banks, the FERC Short-Term Order authorized the domestic utility companies (except Entergy New Orleans which is authorized by an SEC PUHCA 1935 order) and System Energy to continue as participants in 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 short-term borrowings combined may not exceed the authorized limits. As of June 30, 2006, Entergy's subsidiaries' aggregate authorized limit was $2.0 billion and the aggregate outstanding borrowing from the money pool was $200.6 million.

36

Long-term Debt

The following long-term debt has been issued by Entergy in 2006:

 

Issue Date

 

Amount

 

 

 

(In Thousands)

U.S. Utility

 

 

 

Mortgage Bonds:

 

 

 

5.92% Series due February 2016 - Entergy Mississippi

January 2006

 

$100,000

Other Long-term Debt:

 

 

 

4.60% Series due October 2017, Jefferson County - Arkansas
  (Entergy Arkansas) (secured by a series of collateral first
  mortgage bonds)



June 2006



$54,700

The following long-term debt was retired by Entergy in 2006:

 

Retirement Date

 

Amount

 

 

 

(In Thousands)

U.S. Utility

 

 

 

Other Long-term Debt:

 

 

 

5.95% Series due December 2023, St. Charles Parish -
  (Entergy Louisiana)

June 2006 

$25,000

Grand Gulf Lease Obligation payment

N/A

$22,989

Retirements after the balance sheet date:

5.6% Series due October 2017, Jefferson County - Arkansas
  (Entergy Arkansas)

July 2006

$45,500

6.3% Series due June 2018, Jefferson County -
  Arkansas (Entergy Arkansas)

July 2006

$9,200

Entergy Mississippi used the proceeds from the January 2006 issuance to purchase the Attala power plant from Central Mississippi Generating Company, LLC and to repay short-term indebtedness.

Entergy Arkansas used the proceeds from the June 2006 issuance to redeem, prior to maturity, $45.5 million of 5.6% Series of Jefferson County bonds and $9.2 million of 6.3% Series of Jefferson County bonds in July 2006. The issuance is shown as a non-cash transaction on the cash flow statement since the proceeds were placed in a trust and never held as cash by Entergy Arkansas.

 

NOTE 5. PREFERRED STOCK

In March 2006, Entergy Arkansas issued 3,000,000 shares of $25 par value 6.45% Series Preferred Stock, all of which were outstanding as of June 30, 2006. The dividends are cumulative and payable quarterly beginning July 1, 2006. The preferred stock is redeemable on or after April 1, 2011, at Entergy Arkansas' option, at the call price of $25 per share. In April 2006, Entergy Arkansas used the proceeds from this issuance to redeem the following preferred stock:

Series of Entergy Arkansas Preferred Stock

 

Redemption Price Per Share

     

7.32% Preferred Stock, Cumulative, $100.00 par value

 

$103.17

7.80% Preferred Stock, Cumulative, $100.00 par value

 

$103.25

7.40% Preferred Stock, Cumulative, $100.00 par value

 

$102.80

7.88% Preferred Stock, Cumulative, $100.00 par value

 

$103.00

$1.96 Preferred Stock, Cumulative, $0.01 par value

 

$ 25.00

37

In June 2006, Entergy Louisiana Holdings redeemed all of its preferred stock and amended its charter to eliminate authority to issue any future series of preferred stock. The redemption was made at the following respective redemption prices as provided in the Entergy Louisiana Holdings amended and restated articles of incorporation:

Series of Entergy Louisiana Holdings Preferred Stock

 

Redemption Price Per Share

4.96% Preferred Stock, Cumulative, $100.00 par value

 

$104.25

4.16% Preferred Stock, Cumulative, $100.00 par value

 

$104.21

4.44% Preferred Stock, Cumulative, $100.00 par value

 

$104.06

5.16% Preferred Stock, Cumulative, $100.00 par value

 

$104.18

5.40% Preferred Stock, Cumulative, $100.00 par value

 

$103.00

6.44% Preferred Stock, Cumulative, $100.00 par value

 

$102.92

7.84% Preferred Stock, Cumulative, $100.00 par value

 

$103.78

7.36% Preferred Stock, Cumulative, $100.00 par value

 

$103.36

8% Preferred Stock, Cumulative, $25.00 par value

 

$ 25.00

 

NOTE 6. STOCK-BASED COMPENSATION PLANS

Entergy grants stock options, which are described more fully in Note 7 to the consolidated financial statements in the Form 10-K. Entergy adopted SFAS 123R, "Share-Based Payment" on January 1, 2006. The impact of 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. Stock-based compensation expense included in earnings applicable to common stock, net of related tax effects, for the second quarter 2006 and six months ended June 30, 2006 is $2.0 million and $3.7 million, respectively. Stock-based compensation expense included in earnings applicable to common stock, net of related tax effects, for the second quarter 2005 and six months ended June 30, 2005 is $2.0 million and $3.8 million, respectively.

 

NOTE 7. RETIREMENT AND OTHER POSTRETIREMENT BENEFITS

Components of Net Pension Cost

Entergy's qualified pension cost, including amounts capitalized, for the second quarters of 2006 and 2005, included the following components:

 

 

2006

 

2005

 

 

(In Thousands)

 

 

 

 

 

Service cost - benefits earned during the period

 

$23,176 

 

$21,010 

Interest cost on projected benefit obligation

 

41,814 

 

37,484 

Expected return on assets

 

(44,482)

 

(38,781)

Amortization of transition asset

 

 

(166)

Amortization of prior service cost

 

1,365 

 

1,306 

Amortization of loss

 

10,931 

 

7,305 

Net pension costs

 

$32,804 

 

$28,158 

38

Entergy's qualified pension cost, including amounts capitalized, for the six months ended June 30, 2006 and 2005, included the following components:

 

 

2006

 

2005

 

 

(In Thousands)

 

 

 

 

 

Service cost - benefits earned during the period

 

$46,352 

 

$42,020 

Interest cost on projected benefit obligation

 

83,628 

 

74,968 

Expected return on assets

 

(88,964)

 

(77,563)

Amortization of transition asset

 

 

(332)

Amortization of prior service cost

 

2,730 

 

2,611 

Amortization of loss

 

21,862 

 

14,612 

Net pension costs

 

$65,608 

 

$56,316 

Entergy recognized $3.9 million and $4.0 million in pension cost for its non-qualified pension plans in the second quarters of 2006 and 2005, respectively. Entergy recognized $7.8 million and $8.1 million in pension cost for its non-qualified pension plans for the six months ended June 30, 2006 and 2005, respectively.

Components of Net Other Postretirement Benefit Cost

Entergy's other postretirement benefit cost, including amounts capitalized, for the second quarters of 2006 and 2005, included the following components:

 

 

2006

 

2005

 

 

(In Thousands)

 

 

 

 

 

Service cost - benefits earned during the period

 

$10,370 

 

$9,208 

Interest cost on APBO

 

14,316 

 

13,501 

Expected return on assets

 

(4,756)

 

(4,363)

Amortization of transition obligation

 

542 

 

1,340 

Amortization of prior service cost

 

(3,688)

 

(1,989)

Amortization of loss

 

5,698 

 

5,271 

Net other postretirement benefit cost

 

$22,482 

 

$22,968 

Entergy's other postretirement benefit cost, including amounts capitalized, for the six months ended June 30, 2006 and 2005, included the following components:

 

 

2006

 

2005

 

 

(In Thousands)

 

 

 

 

 

Service cost - benefits earned during the period

 

$20,740 

 

$18,416 

Interest cost on APBO

 

28,632 

 

27,002 

Expected return on assets

 

(9,512)

 

(8,726)

Amortization of transition obligation

 

1,084 

 

2,680 

Amortization of prior service cost

 

(7,376)

 

(3,978)

Amortization of loss

 

11,396 

 

10,542 

Net other postretirement benefit cost

 

$44,964 

 

$45,936 

Employer Contributions

Entergy expects to contribute $349 million to its qualified pension plans in 2006 (including $107 million delayed from 2005 as a result of the Katrina Emergency Tax Relief Act). As of the end of July 2006, Entergy contributed $189 million to its pension plans. Therefore, Entergy presently anticipates contributing an additional $160 million to fund its pension plans in 2006.

39

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, 2005 Accumulated Postretirement Benefit Obligation by $176 million, and reduced the second quarter 2006 and 2005 other postretirement benefit cost by $6.9 million and $6.4 million, respectively. It reduced the six months ended June 30, 2006 and 2005 other postretirement benefit cost by $13.9 million and $12.9 million, respectively. Refer to Note 10 to the consolidated financial statements in the Form 10-K for further discussion.

 

NOTE 8. BUSINESS SEGMENT INFORMATION

Entergy's reportable segments as of June 30, 2006 are Utility and Non-Utility Nuclear. "All Other" includes the parent company, Entergy Corporation, and other business activity, including the Energy Commodity Services segment, the Competitive Retail Services business, and earnings on the proceeds of sales of previously-owned businesses. As a result of the Entergy New Orleans bankruptcy filing, Entergy has discontinued the consolidation of Entergy New Orleans retroactive to January 1, 2005, and is reporting Entergy New Orleans results under the equity method of accounting in the Utility segment.

Entergy's segment financial information for the second quarters of 2006 and 2005 is as follows:

 



Utility

 


Non-Utility
Nuclear*

 



All Other*

 



Eliminations

 



Consolidated

(In Thousands)

2006

 

 

 

 

 

 

 

 

 

Operating revenues

$2,191,891

 

$362,363

 

$82,785 

 

($8,537)

 

$2,628,502 

Equity in earnings (loss) of
  unconsolidated equity affiliates


10,682

 


-

 


(2,199)

 


 


8,483 

Income taxes (benefit)

93,776

 

41,331

 

(12,206)

 

 

122,901 

Income from continuing operations

206,542

63,379

6,619 

(83)

276,457 

Income from discontinued
  operations (net of income taxes)


-

-

13,119 

-

13,119 

Net income

206,542

 

63,379

 

19,738 

 

(83)

 

289,576 

 

 

 

 

 

 

 

2005

 

 

 

 

 

 

 

 

 

Operating revenues

$2,057,526

 

$347,706

 

$59,092 

 

($18,933)

 

$2,445,391 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of
  unconsolidated equity affiliates


8,133

 


-

 


2,158 

 


 


10,291 

Income taxes (benefit)

132,093

 

34,978

 

(15,222)

 

 

151,849 

Income from continuing operations

217,260

58,277

19,795 

27 

295,359 

Loss from discontinued operations
  (net of income tax benefit)


-


-


(2,811)



(2,811)

Net income

217,260

 

58,277

 

16,984 

 

27 

 

292,548 

40

Entergy's segment financial information for the six months ended June 30, 2006 and 2005 is as follows:

 



Utility

 


Non-Utility
Nuclear*

 



All Other*

 



Eliminations

 



Consolidated

(In Thousands)

2006

 

 

 

 

 

 

 

 

 

Operating revenues

$4,322,913 

 

$750,372 

 

$149,476 

 

($26,224)

 

$5,196,537 

Equity in earnings (loss) of
  unconsolidated equity affiliates


16,325 

 


 


(4,255)

 


 


12,070 

Income taxes (benefit)

170,749 

 

94,248 

 

(23,265)

 

 

241,732 

Income from continuing operations

333,477 

144,908 

2,093 

(115)

480,363 

Income from discontinued
  operations (net of income taxes)




10,880 



10,880 

Net income

333,477 

 

144,908 

 

12,973 

 

(115)

 

491,243 

Total assets

24,763,451 

 

5,138,175 

 

3,127,773 

 

(2,465,726)

 

30,563,673 

 

 

 

 

 

 

 

 

 

 

2005

 

 

 

 

 

 

 

 

 

Operating revenues

$3,786,866 

 

$691,281 

 

$113,418 

 

($35,993)

 

$4,555,572 

Equity in earnings (loss) of
  unconsolidated equity affiliates


13,628 

 


 


(35)

 


 


13,593 

Income taxes (benefit)

177,618 

 

86,146 

 

(19,672)

 

 

244,092 

Income from continuing operations

313,287 

136,242 

25,621 

(46)

475,104 

Loss from discontinued operations
  (net of income tax benefit)




(4,177)



(4,177)

Net income

313,287 

 

136,242 

 

21,444 

 

(46)

 

470,927 

Total assets

22,674,291 

 

4,733,230 

 

3,260,502 

 

(2,512,415)

 

28,155,608 

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.

In April 2006, Entergy sold the retail electric portion of the Competitive Retail Services business operating in the ERCOT region of Texas, and now reports this portion of the business as a discontinued operation. Entergy realized a $26.3 million gain ($17.1 million net-of-tax) on the sale.

 

NOTE 9. ENTERGY NEW ORLEANS BANKRUPTCY PROCEEDING

See Note 16 to the consolidated financial statements in the Form 10-K for a discussion of the Entergy New Orleans bankruptcy proceeding, and a discussion of Entergy's decision to deconsolidate its investment in Entergy New Orleans and report it under the equity method of accounting. Entergy's income statement for the three and six months ended June 30, 2006 includes $67 million and $128 million, respectively, in operating revenues and $4 million and $11 million, respectively, in purchased power expenses from transactions with Entergy New Orleans. Entergy's income statement for the three and six months ended June 30, 2005 includes $44 million and $87 million, respectively, in operating revenues and $35 million and $81 million, respectively, in purchased power from transactions with Entergy New Orleans. Entergy's balance sheet as of June 30, 2006 includes $111.4 million of accounts receivable that are payable to Entergy or its subsidiaries by Entergy New Orleans, including $64.9 million of pre-petition accounts.

As discussed in the Form 10-K, because Entergy owns all of the common stock of Entergy New Orleans, Entergy's deconsolidation of Entergy New Orleans does not affect the amount of net income Entergy records resulting from Entergy New Orleans' operations.

41

NOTE 10. ACCOUNTING POLICY UPDATE

Revenue and Fuel Costs

Entergy recognizes revenue from electric power and gas sales when it delivers power or gas to its customers. To the extent that deliveries have occurred but a bill has not been issued, the domestic utility companies accrue an estimate of the revenues for energy delivered since the latest billings. Entergy calculates the estimate based upon several factors including billings through the last billing cycle in a month, actual generation in the month, historical line loss factors, and prices in effect in the domestic utility companies' various jurisdictions. Each month the estimated unbilled revenue amounts are recorded as revenue and unbilled accounts receivable, and the prior month's estimate is reversed. Therefore, changes in price and volume differences resulting from factors such as weather affect the calculation of unbilled revenues from one period to the next, and may result in variability in reported revenues from one period to the next as prior estimates are so recorded and reversed.

Prior to 2006, Entergy Louisiana and the Louisiana portion of Entergy Gulf States included a component of fuel cost recovery in their unbilled revenue calculations. Effective January 1, 2006, this fuel component of unbilled accounts receivable was reclassified to deferred fuel and is no longer included in the unbilled revenue calculations for Entergy Louisiana and the Louisiana portion of Entergy Gulf States, which is in accordance with regulatory treatment.

__________________________________

 

In the opinion of the management of Entergy Corporation, 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 Utility segment, however, is subject to seasonal fluctuations 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.

 

 

42

 

 

ENTERGY ARKANSAS, INC.

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

Results of Operations

Net Income

Second Quarter 2006 Compared to Second Quarter 2005

Net income increased $7.4 million primarily due to a lower effective income tax rate, partially offset by lower net revenue, higher depreciation and amortization expenses, and lower other income.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net income increased $4.4 million primarily due to a lower effective income tax rate, partially offset by higher depreciation and amortization expenses and higher other operation and maintenance expenses.

Net Revenue

Second Quarter 2006 Compared to Second Quarter 2005

Net revenue, which is Entergy Arkansas' measure of gross margin, 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 second quarter of 2006 to the second quarter of 2005.

 

 

Amount

 

 

(In Millions)

 

 

 

2005 net revenue

 

$266.2 

Capacity costs

 

(6.3)

Volume/weather

 

4.3 

Other

 

(4.4)

2006 net revenue

 

$259.8 

The capacity costs variance is primarily due to higher capacity-related costs including the revision of reserve equalization payments among Entergy companies due to a FERC ruling regarding the inclusion of interruptible loads in reserve equalization calculations.

The volume/weather variance is primarily due to an increase in billed electricity usage, including the effect of more favorable weather during the second quarter of 2006 compared to the second quarter of 2005, partially offset by a decrease in usage during the unbilled sales period. Billed electricity usage increased a total of 309 GWh in all sectors.

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

Gross operating revenues increased primarily due to an increase of $30.3 million in fuel cost recovery revenues due to an increase in the energy cost recovery rider effective October 2005 and an increase of $25.3 million in gross wholesale revenue resulting from higher wholesale prices and volume.

Fuel and purchased power expenses increased primarily due to increased deferred fuel expense resulting primarily from higher purchased energy costs as a result of higher natural gas prices and increased power purchases. Also contributing to the increase was a slight increase in demand.

43

Other regulatory credits increased primarily due to an increase of $3.6 million resulting from the under-recovery of Grand Gulf costs due to a decrease in the Grand Gulf rider effective January 2006.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net revenue, which is Entergy Arkansas' measure of gross margin, 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 six months ended June 30, 2006 to the six months ended June 30, 2005.

 

 

Amount

 

 

(In Millions)

 

 

 

2005 net revenue

 

$489.9 

Net wholesale revenue

 

10.1 

Volume/weather

 

9.9 

Deferred fuel cost revisions

 

(6.1)

Capacity costs

 

(11.3)

Other

 

(1.0)

2006 net revenue

 

$491.5 

The net wholesale revenue variance is primarily due to higher wholesale prices and improved results related to co-owner contracts.

The volume/weather variance is primarily due to an increase in electricity usage, including the effect of more favorable weather during the six months ended June 30, 2006 compared to the six months ended June 30, 2005. Billed electricity usage increased a total of 471 GWh in all sectors.

The deferred fuel cost revisions variance is primarily due to the 2004 energy cost recovery true-up, made in the first quarter of 2005, which increased net revenue by $4 million.

The capacity costs variance is primarily due to higher capacity-related costs including the revision of reserve equalization payments among Entergy companies due to a FERC ruling regarding the inclusion of interruptible loads in reserve equalization calculations.

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

Gross operating revenues increased primarily due to an increase of $75.2 million in fuel cost recovery revenues due to increases in the energy cost recovery rider effective April 2005 and October 2005 and an increase of $62.2 million in gross wholesale revenue resulting from higher wholesale prices and volume.

Fuel and purchased power expenses increased primarily due to increased deferred fuel expense resulting primarily from higher purchased energy costs as a result of higher natural gas prices and increased power purchases. Also contributing to the increase was a slight increase in demand.

Other regulatory credits increased primarily due to an increase of $8.7 million resulting from the under-recovery of Grand Gulf costs due to a decrease in the Grand Gulf rider effective January 2006.

Other Income Statement Variances

Second Quarter 2006 Compared to Second Quarter 2005

Depreciation and amortization expenses increased primarily due to an increase in plant in service and a revision in 2005 of estimated depreciable lives involving certain intangible assets.

44

Other income decreased primarily due to:

  • a decrease in allowance for equity funds used during construction primarily due to increased construction expenditures in the second quarter of 2005 resulting from the steam generator and reactor vessel head replacement at ANO 1 completed in the fourth quarter 2005 and additional transmission work performed in 2005; and
  • a decrease of $1.6 million in interest earned on decommissioning trust funds.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Other operation and maintenance expenses increased primarily due to $4.1 million applied as a credit against bad debt expense in the first quarter of 2005 in accordance with a settlement agreement with the APSC.

Depreciation and amortization expenses increased primarily due to an increase in plant in service and a revision in 2005 of estimated depreciable lives involving certain intangible assets.

Income Taxes

The effective income tax rates for the second quarters of 2006 and 2005 were 8.9% and 37.0%, respectively. The difference in the effective income tax rate for the second quarter of 2006 versus the federal statutory rate of 35.0% is primarily due to the recognition of an income tax benefit related to the steam generator removal cost and the flow through of a pension item. The difference in the effective income tax rate for the second quarter of 2005 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 amortization of investment tax credits and book and tax differences related to the allowance for funds used during construction.

The effective income tax rates for the six months ended June 30, 2006 and 2005 were 25.0% and 36.3%, respectively. The difference in the effective income tax rate for the six months ended June 30, 2006 versus the federal statutory rate of 35.0% is primarily due to the recognition of an income tax benefit related to the steam generator removal cost and the flow through of a pension item. The difference in the effective income tax rate for the six months ended June 30, 2005 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 a downward revision in the estimate of federal income tax expense related to tax depreciation, the amortization of investment tax credits, and book and tax differences related to the allowance for funds used during construction.

Liquidity and Capital Resources

Cash Flow

Cash flows for the six months ended June 30, 2006 and 2005 were as follows:

 

 

2006

 

2005

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$9,393 

 

$89,744 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

225,953 

 

210,270 

 

Investing activities

 

(147,364)

 

(246,232)

 

Financing activities

 

(68,931)

 

57,634 

Net increase in cash and cash equivalents

 

9,658 

 

21,672 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$19,051 

 

$111,416 

45

Operating Activities

Cash flow from operations increased $15.7 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to increased recovery of deferred fuel costs and income tax refunds of $23.5 million in 2006 compared to income tax payments of $19.5 million in 2005. These increases were partially offset by the timing of the collection of receivables from customers and the timing of payments to vendors.

In the first quarter of 2006, Entergy Corporation received an income tax refund as a result of net operating loss carryback provisions contained in the Gulf Opportunity Zone Act of 2005, as discussed in Note 3 to the domestic utilities companies and System Energy financial statements in the Form 10-K. In accordance with Entergy's intercompany tax allocation agreement, in April 2006 Entergy Corporation distributed $12 million of the refund to Entergy Arkansas.

Investing Activities

Net cash flow used in investing activities decreased $98.9 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to money pool activity.

Financing Activities

Financing activities used $68.9 million in cash flows for the six months ended June 30, 2006 compared to providing $57.6 million in cash flows for the six months ended June 30, 2005 primarily due to the net issuance of $92.9 million of long-term debt for the six months ended June 30, 2005 in addition to money pool activity.

See "Uses and Sources of Capital" below for the details of Entergy Arkansas' preferred stock activity in 2006.

Capital Structure

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

 

 

June 30,
2006

 

December 31,
2005

 

 

 

 

 

Net debt to net capital

 

47.9%

 

47.4%

Effect of subtracting cash from debt

 

0.3%

 

0.1%

Debt to capital

 

48.2%

 

47.5%

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.

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.

In March 2006, Entergy Arkansas issued 3,000,000 shares of $25 par value 6.45% Series Preferred Stock, all of which were outstanding as of June 30, 2006. The dividends are cumulative and payable quarterly beginning July 1, 2006. The preferred stock is redeemable on or after April 1, 2011, at Entergy Arkansas' option, at the call price of $25 per share. In April 2006, Entergy Arkansas used the proceeds from this issuance to redeem the following preferred stock:

46

Series of Entergy Arkansas Preferred Stock

 

Redemption Price Per Share

     

7.32% Preferred Stock, Cumulative, $100.00 par value

 

$103.17

7.80% Preferred Stock, Cumulative, $100.00 par value

 

$103.25

7.40% Preferred Stock, Cumulative, $100.00 par value

 

$102.80

7.88% Preferred Stock, Cumulative, $100.00 par value

 

$103.00

$1.96 Preferred Stock, Cumulative, $0.01 par value

 

$ 25.00

In April 2006, Entergy Arkansas renewed its $85 million credit facility through April 30, 2007. The facility is no longer subject to a combined borrowing limit with Entergy Louisiana's credit facility. There were no outstanding borrowings under the Entergy Arkansas credit facility as of June 30, 2006.

In June 2006, Entergy Arkansas issued $54.7 million of 4.60% Series of Jefferson County bonds due October 2017. The proceeds were used to redeem, prior to maturity, $45.5 million of 5.6% Series of Jefferson County bonds and $9.2 million of 6.3% Series of Jefferson County bonds in July 2006. The issuance is shown as a non-cash transaction on the cash flow statement since the proceeds were placed in a trust and never held as cash by Entergy Arkansas.

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

June 30,
2006

 

December 31,
2005

 

June 30,
2005

 

December 31,
2004

(In Thousands)

 

 

 

 

 

 

 

$15,567

 

($27,346)

 

$132,315

 

$23,561

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 utility restructuring, federal regulation and proceedings, market and credit risks, state and local rate regulatory risks, nuclear matters, and environmental risks.

In March 2006, Entergy Arkansas filed with the APSC its annual redetermination of the energy cost rate for application to the period April 2006 through March 2007. The filed energy cost rate of $0.02827 per kWh was proposed to replace the interim rate of $0.01900 per kWh that had been in place since October 2005. The interim energy cost rate is discussed in the Form 10-K, along with the investigation that the APSC commenced concerning Entergy Arkansas' interim energy cost rate. The increase in the energy cost rate is due to increases in the cost of purchased power primarily due to the natural gas cost increase and the effect that Hurricanes Katrina and Rita had on market conditions, increased demand for purchased power during the ANO 1 refueling and steam generator replacement outage in the fall of 2005, and coal plant generation curtailments during off-peak periods due to coal delivery problems.

On March 31, 2006, the APSC suspended implementation of the $0.02827 per kWh energy cost rate, and ordered that the $0.01900 per kWh interim rate remain in effect pending the APSC proceedings on the energy cost recovery filings. The APSC also extended its investigation into Entergy Arkansas' interim energy cost rate to cover the costs included in Entergy Arkansas' March 2006 filing. The extended investigation does not identify new issues in addition to the four issues listed in the Form 10-K and covers the same time period. On April 7, 2006, the APSC issued a show cause order in the investigation proceeding that ordered Entergy Arkansas to file a cost of service study by June 8, 2006. The order also directed Entergy Arkansas to file testimony to support the cost of service study, to support the $0.02827 per kWh cost rate, and to address the general topic of elimination of the energy cost recovery rider.

47

Entergy Arkansas filed for rehearing of the APSC's orders, asking that the energy cost rate filed in March 2006 be implemented in May 2006 subject to refund, asserting that the APSC did not follow appropriate procedures in suspending the operation of the energy cost recovery rider, and asking the APSC to rescind its show cause order. On May 8, 2006 the APSC denied Entergy Arkansas' requests for rehearing. Entergy Arkansas appealed the APSC's decision, but later filed a motion to dismiss the appeal following the APSC's decision described below.

In June 2006, Entergy Arkansas once again filed a motion with the APSC seeking to implement the redetermined energy cost rate of $0.02827 per kWh. After a hearing the APSC approved Entergy Arkansas' request and the redetermined rate was implemented in July 2006, subject to refund pending the outcome of the APSC energy cost recovery investigation. Because of the delay in implementing the redetermined energy cost rate, Entergy Arkansas estimated in its motion that $46 million of energy costs would remain under-recovered at December 31, 2006.

A hearing in the APSC energy cost recovery investigation is scheduled for October 2006.

On June 7, 2006, Entergy Arkansas filed the cost of service study ordered by the APSC. On that date Entergy Arkansas also filed notice with the APSC that it intends to file for a change in base rates within 60 to 90 days of its notice. Entergy Arkansas expects to make that filing in August 2006.

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. If the FERC approves the compliance tariff as filed, then payments under that tariff will be classified as energy costs, which would then be included in setting the retail energy cost rate as part of the normal working of the energy cost recovery rider.  As noted above the APSC has given notice that it is considering the prospective elimination of the energy cost recovery rider.  Therefore, Entergy Arkansas plans to propose an alternative to the energy cost recovery rider for recovery of the costs allocated to it as a result of the System Agreement litigation should the energy cost recovery rider be lawfully terminated by the APSC.  A separate exact recovery rider, similar to the energy cost recovery rider or a production cost allocation rider, would ensure that Entergy Arkansas' customers pay only the amount allocated by the FERC.

Federal Regulation

System Agreement Proceedings

See Entergy Corporation and Subsidiaries' "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Federal Regulation - System Agreement Litigation, APSC Complaint filed with the FERC, and APSC System Agreement Investigation" for updates regarding proceedings involving the System Agreement.

Independent Coordinator of Transmission (ICT)

See Entergy Corporation and Subsidiaries' "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Federal Regulation - Independent Coordinator of Transmission" for an update regarding Entergy's ICT proposal.

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.

48

Recently Issued Accounting Pronouncements

FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48) was issued in July 2006 and is effective for Entergy Arkansas in the first quarter of 2007. The FASB's objective in issuing this interpretation is to increase comparability among companies in financial reporting of income taxes. 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 Arkansas does not expect that the adoption of FIN 48 will materially affect its financial position, results of operations, or cash flows.

49

 

ENTERGY ARKANSAS, INC.
INCOME STATEMENTS
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
         
    Three Months Ended   Six Months Ended
    2006   2005   2006   2005
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Domestic electric   $504,223    $450,097    $951,845    $817,457 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   84,806    46,612    187,277    83,415 
  Purchased power   167,981    139,899    286,911    247,531 
  Nuclear refueling outage expenses   7,371    7,019    14,726    13,336 
  Other operation and maintenance   105,895    105,727    197,650    191,556 
Decommissioning   7,608    8,246    15,091    16,359 
Taxes other than income taxes   8,982    10,051    18,602    19,888 
Depreciation and amortization   54,143    48,023    106,961    99,800 
Other regulatory credits - net   (8,359)   (2,589)   (13,886)   (3,384)
TOTAL   428,427    362,988    813,332    668,501 
                 
OPERATING INCOME   75,796    87,109    138,513    148,956 
                 
OTHER INCOME                
Allowance for equity funds used during construction   1,916    3,491    3,818    7,450 
Interest and dividend income   3,998    5,078    11,673    9,370 
Miscellaneous - net   (687)   (47)   (1,572)   (679)
TOTAL   5,227    8,522    13,919    16,141 
                 
INTEREST AND OTHER CHARGES  
Interest on long-term debt   19,361    19,968    38,339    40,750 
Other interest - net   1,328     798    2,868    2,224 
Allowance for borrowed funds used during construction   (822)   (1,725)   (1,679)   (3,736)
TOTAL   19,867    19,041    39,528    39,238 
                 
INCOME BEFORE INCOME TAXES   61,156    76,590    112,904    125,859 
                 
Income taxes   5,421    28,300    28,246    45,638 
                 
NET INCOME   55,735    48,290    84,658    80,221 
                 
Preferred dividend requirements and other   2,085    1,944    4,123    3,888 
                 
EARNINGS APPLICABLE TO                
COMMON STOCK   $53,650    $46,346    $80,535    $76,333 
                 
See Notes to Respective Financial Statements.                
                 

 

50

 

ENTERGY ARKANSAS, INC.
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
     
    2006   2005
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $84,658    $80,221 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Reserve for regulatory adjustments   6,789    - 
  Other regulatory credits - net   (13,886)   (3,384)
  Depreciation, amortization, and decommissioning   122,052    116,159 
  Deferred income taxes and investment tax credits   (44,980)   17,049 
  Changes in working capital:        
    Receivables   (41,738)   33,568 
    Fuel inventory   (1,659)   (773)
    Accounts payable   (44,275)   (13,773)
    Taxes accrued   95,543    11,418 
    Interest accrued   (804)   1,196 
    Deferred fuel costs   85,047    (720)
    Other working capital accounts   8,588    (10,700)
  Provision for estimated losses and reserves   (829)   (3,645)
  Changes in other regulatory assets   (15,484)   25,435 
  Other   (13,069)   (41,781)
Net cash flow provided by operating activities   225,953    210,270 
         
INVESTING ACTIVITIES        
Construction expenditures   (121,269)   (123,690)
Allowance for equity funds used during construction   3,818    7,450 
Nuclear fuel purchases   -    (62,307)
Proceeds from sale/leaseback of nuclear fuel   -    62,248 
Proceeds from nuclear decommissioning trust fund sales   74,895    111,352 
Investment in nuclear decommissioning trust funds   (79,353)   (116,437)
Change in money pool receivable - net   (15,567)   (108,754)
Other regulatory investments   (9,888)   (16,094)
Net cash flow used in investing activities   (147,364)   (246,232)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt   -    272,817 
Retirement of long-term debt   -    (179,895)
Proceeds from the issuance of preferred stock   73,355    - 
Redemption of preferred stock   (75,885)   - 
Change in money pool payable - net   (27,346)   - 
Dividends paid:        
  Common stock   (34,800)   (31,400)
  Preferred stock   (4,255)   (3,888)
Net cash flow provided by (used in) financing activities   (68,931)   57,634 
         
Net increase in cash and cash equivalents   9,658    21,672 
         
Cash and cash equivalents at beginning of period   9,393    89,744 
         
Cash and cash equivalents at end of period   $19,051    $111,416 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
  Cash paid/(received) during the period for:        
    Interest - net of amount capitalized   $36,185    $37,395 
    Income taxes   ($23,543)   $19,476 
  Noncash financing activities:        
    Proceeds from long-term debt issued for the purpose        
     of refunding other long-term debt   $54,700    - 
         
See Notes to Respective Financial Statements.        

51

 

ENTERGY ARKANSAS, INC.
BALANCE SHEETS
ASSETS
June 30, 2006 and December 31, 2005
(Unaudited)
   
  2006   2005
  (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents:        
  Cash   $3,014    $9,393 
  Temporary cash investments - at cost,        
   which approximates market   16,037    - 
     Total cash and cash equivalents   19,051    9,393 
Accounts receivable:        
  Customer   93,536    115,321 
  Allowance for doubtful accounts   (13,464)   (15,777)
  Associated companies   55,602    30,902 
  Other   104,335    63,702 
  Accrued unbilled revenues   79,872    68,428 
     Total accounts receivable   319,881    262,576 
Deferred fuel costs   129,023    153,136 
Fuel inventory - at average cost   14,001    12,342 
Materials and supplies - at average cost   94,509    87,875 
Deferred nuclear refueling outage costs   17,821    30,967 
Prepayments and other   62,204    9,628 
TOTAL   656,490    565,917 
         
OTHER PROPERTY AND INVESTMENTS        
Investment in affiliates - at equity   11,206    11,206 
Decommissioning trust funds   404,525    402,124 
Non-utility property - at cost (less accumulated depreciation)   1,448    1,449 
Other   2,976    2,976 
TOTAL   420,155    417,755 
         
UTILITY PLANT        
Electric   6,435,831    6,344,435 
Property under capital lease   6,649    9,900 
Construction work in progress   150,928    139,208 
Nuclear fuel under capital lease   105,801    92,181 
Nuclear fuel   19,205    22,616 
TOTAL UTILITY PLANT   6,718,414    6,608,340 
Less - accumulated depreciation and amortization   2,928,168    2,843,904 
UTILITY PLANT - NET   3,790,246    3,764,436 
          
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  SFAS 109 regulatory asset - net   69,884    61,236 
  Other regulatory assets   470,283    461,015 
  Deferred fuel costs   -    51,046 
Other   48,102    46,605 
TOTAL   588,269    619,902 
          
TOTAL ASSETS   $5,455,160    $5,368,010 
         
See Notes to Respective Financial Statements.        
 
52
 
 
ENTERGY ARKANSAS, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 2006 and December 31, 2005
(Unaudited)
   
  2006   2005
  (In Thousands)
 
CURRENT LIABILITIES        
Accounts payable:        
  Associated companies   $76,966   $135,357
  Other   103,694   120,090
Customer deposits   47,149   45,432
Taxes accrued   34,327   -
Accumulated deferred income taxes   22,971   56,186
Interest accrued   18,403   19,207
Obligations under capital leases   48,281   46,857
Other   21,474   21,836
TOTAL   373,265   444,965
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   1,166,404   1,105,712
Accumulated deferred investment tax credits   61,917   64,001
Obligations under capital leases   64,169   55,224
Other regulatory liabilities   74,450   76,507
Decommissioning   457,206   442,115
Accumulated provisions   28,244   29,073
Long-term debt   1,356,585   1,298,238
Other   284,502   306,034
TOTAL   3,493,477   3,376,904
         
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 2006        
  and 2005   470   470
Paid-in capital   588,529   591,102
Retained earnings   883,069   838,219
TOTAL   1,588,418   1,546,141
         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $5,455,160   $5,368,010
         
See Notes to Respective Financial Statements.        
         

53

 

ENTERGY ARKANSAS, INC.
SELECTED OPERATING RESULTS
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
 
 
    Three Months Ended   Increase/    
Description   2006   2005   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 138   $ 124   $ 14    11 
  Commercial   91   80   11    14 
  Industrial   95   84   11    13 
  Governmental   4   4    
     Total retail   328   292   36    12 
  Sales for resale                
    Associated companies   106   64   42    66 
    Non-associated companies   33   50   (17)   (34)
  Other   37   44   (7)   (16)
     Total   $ 504   $ 450   $ 54    12 
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   1,591   1,481   110   
  Commercial   1,391   1,305   86   
  Industrial   1,836   1,720   116   
  Governmental   63   66   (3)   (5)
     Total retail   4,881   4,572   309   
  Sales for resale                
    Associated companies   2,432   1,622   810    50 
    Non-associated companies   674   1,065   (391)   (37)
     Total   7,987   7,259   728    10 
                 
                 
    Six Months Ended   Increase/    
Description   2006   2005   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 289   $ 259   $ 30    12 
  Commercial   171   149   22    15 
  Industrial   183   156   27    17 
  Governmental   9   9    
     Total retail   652   573   79    14 
  Sales for resale                 
    Associated companies   183   105   78    74 
    Non-associated companies   84   100   (16)   (16)
  Other   33   39   (6)   (15)
     Total   $ 952   $ 817   $ 135    17 
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   3,501   3,371   130   
  Commercial   2,670   2,554   116   
  Industrial   3,615   3,384   231   
  Governmental   128   134   (6)   (4)
     Total retail   9,914   9,443   471   
  Sales for resale                
    Associated companies   4,297   2,977   1,320    44 
    Non-associated companies   1,531   2,172   (641)   (30)
     Total   15,742   14,592   1,150   
                 
                 

54

 

 

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. The storms 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. Following is an update to the discussion in the Form 10-K.

Entergy Gulf States currently estimates that its total restoration costs for the repair or replacement of its electric and gas facilities damaged by Hurricanes Katrina and Rita and business continuity costs will be $633 million, the majority of which is due to Hurricane Rita.

As discussed in the Form 10-K, a federal hurricane aid package became law that includes funding for Community Development Block Grants (CDBG) that allows state and local leaders to fund individual recovery priorities. The law permits funding for infrastructure restoration. It is uncertain how much funding, if any, will be designated for utility reconstruction and the timing of such decisions is also uncertain. The U.S. Department of Housing and Urban Development has allocated approximately $10.4 billion for Louisiana, $5.1 billion for Mississippi, and $74 million for Texas, with an additional $1 billion approved by Congress but not yet allocated to the states. The states, in turn, will administer the grants. Entergy Gulf States is currently preparing applications to seek CDBG funding. In March 2006 Entergy Gulf States provided a justification statement to state and local officials in Louisiana. The statement, which will be reviewed by the Louisiana Recovery Authority, includes the estimated costs of Hurricanes Katrina and Rita damage in the Louisiana jurisdiction. The statement includes justification for a request for $164 million in CDBG funding attributable to the Louisiana portion of Entergy Gulf States' business.

Storm Costs Recovery Filings with Retail Regulators

On July 31, 2006, Entergy Louisiana and Entergy Gulf States filed a supplemental and amending storm cost recovery application with the LPSC, in which Entergy Louisiana and Entergy Gulf States requested that the LPSC (1) review Entergy Louisiana's and Entergy Gulf States' testimony and exhibits relating to the costs associated with Hurricanes Katrina and Rita, and declare that those verified, actual storm-related costs through May 31, 2006 are $466.8 million for Entergy Louisiana and $200.3 million for Entergy Gulf States in the Louisiana jurisdiction and that those costs were prudently incurred; (2) declare that the annual revenue requirements associated with the recovery of those costs, based on a ten-year levelized rate are $54.4 million for Entergy Louisiana and $26.2 million for Entergy Gulf States; (3) authorize Entergy Louisiana and Entergy Gulf States to recover the costs through Storm Cost Recovery Riders (SCRRs) proposed by Entergy Louisiana and Entergy Gulf States; (4) declare that the storm costs incurred subsequent to May 31, 2006 are to be filed by Entergy Louisiana and Entergy Gulf States with the LPSC on an annual basis in connection with their annual formula rate plan (FRP) filings, and that the SCRRs be adjusted annually to reflect such costs and any insurance proceeds or CDBG funds actually received, with the adjusted amounts to be collected through the SCRRs to take effect contemporaneous with the effective date of rate changes under the FRP; (5) declare that the storm-related costs incurred by Entergy Louisiana and Entergy Gulf States meet the conditions set forth in the FRP for exclusion from the sharing provisions in those FRPs and authorize the permanent recovery of storm costs outside of the FRPs adopted by the LPSC for Entergy Louisiana and Entergy Gulf States; and (6) authorize the funding of a storm reserve through securitization sufficient to fund a storm cost reserve of $132 million for Entergy Louisiana and $81 million for Entergy Gulf States. Hearings on the application are scheduled for the first quarter 2007.

 

55

 

 

In July 2006, Entergy Gulf States filed an application with the PUCT with respect to the $393.2 million of Hurricane Rita reconstruction costs incurred in its Texas retail jurisdiction through March 31, 2006. The filing asks the PUCT to determine that $393.2 million is the amount of reasonable and necessary hurricane reconstruction costs eligible for securitization and recovery, approve the recovery of carrying costs, and approve the manner in which Entergy Gulf States-Texas allocates those costs among its retail customer classes.  If approved, Entergy Gulf States' application will ultimately affect all its retail customers in Texas. Entergy Gulf States' filing does not request recovery of costs through a specific rider on customer bills or through any other means at this time. The hearing before the PUCT on the filing is scheduled for November 2006. This is the first of two filings authorized by a law passed earlier this year in a special session of the Texas Legislature. A second filing will request securitization and recovery of the eligible costs through retail rates and tariffs. Entergy Gulf States expects to make the second filing following the conclusion of the reconstruction cost case.

Results of Operations

Net Income

Second Quarter 2006 Compared to Second Quarter 2005

Net income increased $7.4 million primarily due to higher net revenue partially offset by higher interest and other charges and higher taxes other than income taxes.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net income increased $29.1 million primarily due to higher net revenue and higher other income, partially offset by higher other operation and maintenance expenses, higher taxes other than income taxes, and higher interest and other charges.

Net Revenue

Second Quarter 2006 Compared to Second Quarter 2005

Net revenue, which is Entergy Gulf States' measure of gross margin, 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 second quarter of 2006 to the second quarter of 2005.

 

 

Amount

 

 

(In Millions)

 

 

 

2005 net revenue

 

$302.8 

Base revenues

 

15.8 

Volume/weather

 

13.3 

Fuel recovery

 

10.5 

Net wholesale revenue

 

8.7 

Price applied to unbilled electric sales

 

(23.8)

Purchased power capacity

 

(11.8)

Other

 

11.2 

2006 net revenue

 

$326.7 

Base revenues increased due to increases in the Louisiana jurisdiction effective October 2005 for the 2004 formula rate plan filing and the annual revenue requirement related to the purchase of power from the Perryville generating station, and increases in the Texas jurisdiction related to an incremental purchased capacity recovery rider that began in December 2005 and a transition to competition rider that began in March 2006.

56

The volume/weather variance is primarily due to an increase in electricity usage, including the effect of more favorable weather compared to the same period in 2005. Billed electricity usage increased a total of 326 GWh in all sectors.

The fuel recovery variance resulted primarily from the under-recovery in 2005 of fuel costs from retail customers in addition to increased fuel cost recovery in 2006 as a result of special rate contracts.

The net wholesale revenue variance is primarily due to increased volume and higher margins on sales to municipal and co-op customers.

The price applied to unbilled sales variance is due to the exclusion in 2006 of the fuel cost component in the calculation of the price applied to unbilled sales. Effective January 1, 2006, the fuel cost component is no longer included in the unbilled revenue calculation, which is in accordance with regulatory treatment. Entergy Gulf States expects that the effect of this factor will be an approximately $40 million decrease in its annual net revenue for 2006 compared to 2005. See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" herein for a discussion of the accounting for unbilled revenues.

The purchased power capacity variance is primarily due to an increase in capacity charges primarily associated with power purchases from the Perryville generating station in addition to new purchase power contracts in 2006.

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

Gross operating revenues increased primarily due to an increase in fuel cost recovery revenues of $107.1 million due to higher fuel rates. Also contributing to the increase were the base revenue and volume/weather variances discussed above.

Fuel and purchased power expenses increased primarily due to an increase in deferred fuel expense as a result of higher fuel rates.

Other regulatory charges increased primarily due to the deferral of under-recovered purchased power capacity costs in 2005 combined with the recovery of purchased power capacity costs in 2005. A rider was implemented in December 2005 in the Texas jurisdiction to recover incremental purchased power capacity costs. Partially offsetting the increase was a regulatory credit of $4.5 million recorded during the second quarter of 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 7 to the domestic utility companies and System Energy financial statements for further discussion.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net revenue, which is Entergy Gulf States' measure of gross margin, 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 six months ended June 30, 2006 to the six months ended June 30, 2005.

57

 

 

Amount

 

 

(In Millions)

 

 

 

2005 net revenue

 

$544.5 

Base revenues

 

30.6 

Fuel recovery

 

29.7 

Volume/weather

 

20.5 

Net wholesale revenue

 

13.4 

Price applied to unbilled electric sales

 

(20.0)

Purchased power capacity costs

 

(17.5)

Other

 

20.4 

2006 net revenue

 

$621.6 

Base revenues increased due to increases in the Louisiana jurisdiction effective October 2005 for the 2004 formula rate plan filing and the annual revenue requirement related to the purchase of power from the Perryville generating station, and increases in the Texas jurisdiction related to an incremental purchased capacity recovery rider that began in December 2005 and a transition to competition rider that began in March 2006.

The fuel recovery variance resulted primarily from adjustments of fuel clause recoveries in Entergy Gulf States' Louisiana jurisdiction. The variance is also due to the under-recovery in 2005 of fuel costs from retail customers and increased fuel cost recovery in 2006 as a result of special rate contracts.

The volume/weather variance is due to increased weather-adjusted usage on billed sales in addition to an increase in usage during the unbilled sales period. Billed usage increased a total of 370 GWh in the residential and commercial sectors and decreased 350 GWh in the industrial sector.

The net wholesale revenue variance is primarily due to increased volume and higher margins on sales to municipal and co-op customers.

The price applied to unbilled sales variance is due to the exclusion in 2006 of the fuel cost component in the calculation of the price applied to unbilled sales. Effective January 1, 2006, the fuel cost component is no longer included in the unbilled revenue calculation, which is in accordance with regulatory treatment. Entergy Gulf States expects that the effect of this factor will be an approximately $40 million decrease in its annual net revenue for 2006 compared to 2005. See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" herein for a discussion of the accounting for unbilled revenues.

The purchased power capacity variance is primarily due to an increase in capacity charges primarily associated with power purchases from the Perryville generating station in addition to new purchase power contracts in 2006.

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

Gross operating revenues increased primarily due to an increase of $268 million in fuel cost recovery revenues due to higher fuel rates. Also contributing to the increase were the base revenue and volume/weather variances discussed above.

Fuel and purchased power expenses increased primarily due to an increase in deferred fuel expense in addition to increases in the market prices of natural gas and purchased power. The increase in deferred fuel expense was due to higher fuel rates.

Other regulatory charges increased primarily due to the deferral of under-recovered purchased power capacity costs in 2005 combined with the recovery of purchased power capacity costs in 2005. A rider was implemented in December 2005 in the Texas jurisdiction to recover incremental purchased power capacity costs. Partially offsetting the increase was a regulatory credit of

 

58

 

 $4.5 million recorded during the second quarter of 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 7 to the domestic utility companies and System Energy financial statements for further discussion.

Other Income Statement Variances

Second Quarter 2006 Compared to Second Quarter 2005

Taxes other than income taxes increased primarily due to higher Louisiana local franchise taxes primarily due to higher revenues as discussed above.

Interest and other charges increased primarily due to the increase in long-term debt outstanding as a result of the funding of the storm restoration costs resulting from Hurricanes Katrina and Rita.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Other operation and maintenance expenses increased primarily due to:

  • an increase of $5.7 million in loss reserves for storm damages consistent with the formula rate plan rate change in October 2005;
  • an increase of $3.3 million in nuclear labor and contract costs due to a non-refueling plant outage in February 2006;
  • an increase of $2.2 million as a result of system planning spending related to current year fossil projects; and
  • an increase of $2.1 million in customer service support costs, including an increase in customer write-offs.

Taxes other than income taxes increased primarily due to higher Louisiana local franchise taxes primarily due to higher revenues as discussed above.

Other income increased primarily due to:

  • an increase of $4.5 million in interest income recorded on the deferred fuel balance; and
  • an increase of $1.7 million related to additional proceeds received from the radwaste settlement discussed in "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Central States Compact Claim" in the Form 10-K.

Interest and other charges increased primarily due to the increase in long-term debt outstanding as a result of the funding of the storm restoration costs resulting from Hurricanes Katrina and Rita.

Income Taxes

The effective income tax rates for the second quarters of 2006 and 2005 were 39.1% and 38%, respectively. The difference in the effective income tax rates for the second quarter of 2006 and 2005 versus the federal statutory rate of 35% 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.

The effective income tax rates for the six months ended June 30, 2006 and 2005 were 34.2% and 32.7%, respectively. The difference in the effective income tax rate for the six months ended June 30, 2006 versus the federal statutory rate of 35% is primarily due to amortization of investment tax credits and book and tax differences related to the allowance for equity funds used during construction, partially offset by state income taxes. The difference in the effective income tax rate for the six months ended June 30, 2005 versus the federal statutory rate of 35% is primarily due to amortization of investment tax credits, book and tax differences related to the allowance for equity funds used during construction, and a downward revision in the estimate of federal income tax expense related to tax depreciation, partially offset by state income taxes and book and tax differences related to utility plant items.

 

59

 

Liquidity and Capital Resources

Cash Flow

Cash flows for the six months ended June 30, 2006 and 2005 were as follows:

 

 

2006

 

2005

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$25,373 

 

$6,974 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

290,950 

 

186,084 

 

Investing activities

 

(220,594)

 

(175,285)

 

Financing activities

 

(87,268)

 

(15,446)

Net decrease in cash and cash equivalents

 

(16,912)

 

(4,647)

 

 

 

 

 

Cash and cash equivalents at end of period

 

$8,461 

 

$2,327 

Operating Activities

Cash flow from operations increased $104.9 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to the timing of collections of receivables from customers, income tax refunds of $60.1 million for the six months ended June 30, 2006 compared to income tax payments of $14.5 million for the same period in 2005, and an increase in the recovery of deferred fuel costs, partially offset by the timing of payments to vendors.

In the first quarter 2006, Entergy Corporation received an income tax refund as a result of net operating loss carryback provisions contained in the Gulf Opportunity Zone Act of 2005, as discussed in Note 3 to the domestic utilities companies and System Energy financial statements in the Form 10-K. In accordance with Entergy's intercompany tax allocation agreement, in April 2006 Entergy Corporation distributed $23 million of the refund to Entergy Gulf States.

Investing Activities

Net cash used in investing activities increased $45.3 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to an increase in construction expenditures of $116.2 million due to storm-related projects, partially offset by money pool activity and a decrease in under-recovered fuel and purchased power expenses of $14.3 million in Texas that have been deferred and are expected to be collected over a period greater than twelve months.

Financing Activities

Net cash used in financing activities increased $71.8 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to an increase of $57.4 million in common stock dividends paid and the net issuance of $14.5 million of long-term debt in 2005.

60

Capital Structure

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

 

 

June 30,
2006

 

December 31,
2005

 

 

 

 

 

 

 

Net debt to net capital

 

51.7%

 

51.4%

 

Effect of subtracting cash from debt

 

-   

 

0.3%

 

Debt to capital

 

51.7%

 

51.7%

 

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 or (payables to) the money pool were as follows:

June 30,
2006

 

December 31,
2005

 

June 30,
2005

 

December 31,
2004

(In Thousands)

 

 

 

 

 

 

 

$2,982

 

$64,011

 

($149,447)

 

($59,720)

See Note 4 to the domestic utility companies and System Energy financial statements in the Form 10-K for a description of the money pool.

In February 2006, Entergy Gulf States established a $25 million line of credit. 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 June 30, 2006, and no borrowings were outstanding. The line of credit terminates in February 2011. In August 2006, Entergy Gulf States increased the capacity of the credit facility to $50 million.

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 and proceedings, the Energy Policy Act of 2005, state and local rate regulatory risk, industrial, commercial, and wholesale customers, market and credit risks, nuclear matters, environmental risks, and litigation risks. Following are updates to the information disclosed in the Form 10-K.

Jurisdictional Separation Plan

See the Form 10-K for a discussion of business and jurisdictional separation plans concerning Entergy Gulf States. In January 2006, the LPSC directed that Entergy Gulf States file a complete jurisdictional separation plan as soon as possible. Therefore, on April 26, 2006, Entergy Gulf States filed its plan for jurisdictional separation with the LPSC and requested that it grant approval no later than September 30, 2006.  The plan provides for Entergy Gulf States to be separated into two vertically integrated utilities, one subject solely to the retail jurisdiction of the LPSC and the other subject solely to the retail jurisdictional of the PUCT. The plan also provides that the Texas utility should own all the distribution and transmission assets located in Texas, the gas-fired

 

61

 

generating plants located in Texas, and undivided ownership shares of Entergy Gulf States' 70% interest in Nelson 6 and 42% interest in Big Cajun 2, Unit 3, which are coal-fired generating plants located in Louisiana. The Louisiana utility would own all of the remaining assets currently owned by Entergy Gulf States.  The Texas utility would purchase from the Louisiana utility pursuant to a life-of-the unit purchase power agreement (PPA) a share of capacity and energy of River Bend. Each separated utility also would purchase pursuant to a PPA a share of capacity and energy of the gas-fired generating plants owned by the other utility. The PPAs associated with the gas-fired generating plants would terminate when retail open access commences in the Texas utility's service territory. Until that time, each utility will participate in the System Agreement and the Entergy System generation will continue to be dispatched in the same manner as before the jurisdictional separation. Under the provisions of the System Agreement, the Texas utility will terminate its participation in the System Agreement, except for the aspects related to transmission equalization, when Texas implements retail open access for Entergy Gulf States. The plan also provides that the operation of the generating plants will not change as a result of the jurisdictional separation. A hearing is scheduled for September 25 to October 4, 2006 on the jurisdictional separation filing. Approvals of the FERC and the NRC may also be required for certain matters before any implementation of the jurisdictional separation of Entergy Gulf States. Although formal approval of the PUCT is not required for implementation of the jurisdictional separation, Entergy Gulf States will seek input from the PUCT and continue to keep it informed of the status of the proceedings.

State and Local Rate Regulation

As discussed in the Form 10-K, in August 2005, Entergy Gulf States filed with the PUCT an application for recovery of its transition to competition costs. Entergy Gulf States requested recovery of $189 million in transition to competition costs through implementation of a 15-year rider to be effective no later than March 1, 2006. The $189 million represents transition to competition costs Entergy Gulf States incurred from June 1, 1999 through June 17, 2005 in preparing for competition in its service area, including attendant AFUDC, and all carrying costs projected to be incurred on the transition to competition costs through February 28, 2006. The $189 million is before any gross-up for taxes or carrying costs over the 15-year recovery period. Entergy Gulf States reached a unanimous settlement agreement on all issues with the active parties in the transition to competition cost recovery case. The agreement allows Entergy Gulf States to recover $14.5 million per year in transition to competition costs over a 15-year period. Entergy Gulf States implemented interim rates based on this revenue level on March 1, 2006. The PUCT approved the settlement agreement in June 2006.

In March 2006, the LPSC approved an uncontested stipulated settlement in Entergy Gulf States' formula rate plan filing for the 2004 test year. The settlement includes a revenue requirement increase of $36.8 million and calls for Entergy Gulf States to apply a refund liability of $744 thousand to capacity deferrals. The refund liability pertained to the periods 2004-2005 as well as the interim period in which a $37.8 million revenue increase was in place.

In May 2006, Entergy Gulf States made its formula rate plan filing with the LPSC for the 2005 test year. The filing shows that Entergy Gulf States' return on equity was within the allowed bandwidth. The filing also indicates that under the formula rate plan rider for approved capacity additions, a $7.1 million rate increase is required to recover LPSC-approved incremental deferred and ongoing capacity requirements. The filing is subject to a period of LPSC Staff review, and rate changes associated with the formula rate plan are scheduled to take effect with the first billing cycle of September 2006.

In January 2006, Entergy Gulf States filed with the LPSC its gas rate stabilization plan. The filing showed a revenue deficiency of $4.1 million based on an ROE mid-point of 10.5%. On May 1, 2006, Entergy Gulf States implemented a $3.5 million rate increase pursuant to an uncontested agreement with the LPSC Staff.

Federal Regulation

System Agreement Proceedings

See Entergy Corporation and Subsidiaries' "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Federal Regulation - System Agreement Litigation, APSC Complaint filed with the FERC, and APSC System Agreement Investigation" for updates regarding proceedings involving the System Agreement.

62

Independent Coordinator of Transmission (ICT)

See Entergy Corporation and Subsidiaries' "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Federal Regulation - Independent Coordinator of Transmission" for an update regarding Entergy's ICT proposal.

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. Following is an update to that discussion.

Unbilled Revenue

As discussed in Note 7 to the domestic utility companies and System Energy financial statements, effective January 1, 2006, the Louisiana portion of Entergy Gulf States reclassified the fuel component of unbilled accounts receivable to deferred fuel and will no longer include the fuel component in its unbilled revenue calculation, which is in accordance with regulatory treatment.

Recently Issued Accounting Pronouncements

FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48) was issued in July 2006 and is effective for Entergy Gulf States in the first quarter of 2007. The FASB's objective in issuing this interpretation is to increase comparability among companies in financial reporting of income taxes. 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 Gulf States does not expect that the adoption of FIN 48 will materially affect its financial position, results of operations, or cash flows.

63

 

 

ENTERGY GULF STATES, INC.
INCOME STATEMENTS
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
 
  Three Months Ended   Six Months Ended
    2006   2005   2006   2005
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Domestic electric   $867,504    $746,987    $1,723,294    $1,399,383 
Natural gas   13,611    12,532    51,027    39,387 
TOTAL   881,115    759,519    1,774,321    1,438,770 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   215,255    147,889    500,130    367,845 
  Purchased power   337,834    314,372    650,926    532,108 
  Nuclear refueling outage expenses   4,427    4,525    9,101    8,596 
  Other operation and maintenance   123,996    124,428    245,553    233,121 
Decommissioning   2,676    2,346    5,297    4,644 
Taxes other than income taxes   31,663    28,937    67,688    59,475 
Depreciation and amortization   52,484    50,605    101,179    99,341 
Other regulatory charges (credits) - net   1,369    (5,581)   1,638    (5,702)
TOTAL   769,704    667,521    1,581,512    1,299,428 
                 
OPERATING INCOME   111,411    91,998    192,809    139,342 
                 
OTHER INCOME                
Allowance for equity funds used during construction   1,755    4,207    7,801    9,006 
Interest and dividend income   6,366    3,415    14,469    6,850 
Miscellaneous - net   510    (24)   (402)   624 
TOTAL   8,631    7,598    21,868    16,480 
                 
INTEREST AND OTHER CHARGES  
Interest on long-term debt   34,339    28,214    67,992    56,438 
Other interest - net   1,901    2,397    3,997    4,382 
Allowance for borrowed funds used during construction   (1,093)   (2,499)   (4,401)   (5,505)
TOTAL   35,147    28,112    67,588    55,315 
                 
INCOME BEFORE INCOME TAXES   84,895    71,484    147,089    100,507 
                 
Income taxes   33,191    27,197    50,336    32,871 
                 
NET INCOME   51,704    44,287    96,753    67,636 
                 
Preferred dividend requirements and other   1,009    1,063    2,031    2,126 
                 
EARNINGS APPLICABLE TO                
COMMON STOCK   $50,695    $43,224    $94,722    $65,510 
                 
See Notes to Respective Financial Statements.                

64

 

ENTERGY GULF STATES, INC.
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
     
    2006   2005
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $96,753    $67,636 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Reserve for regulatory adjustments   5,947    (62,423)
  Other regulatory charges (credits) - net   1,638    (5,702)
  Depreciation, amortization, and decommissioning   106,476    103,985 
  Deferred income taxes and investment tax credits   (5,903)   25,014 
  Changes in working capital:        
    Receivables   121,874    (28,123)
    Fuel inventory   (11,349)   (259)
    Accounts payable   (75,267)   (509)
    Taxes accrued   115,690    3,395 
    Interest accrued   (772)   266 
    Deferred fuel costs   55,433    (3,267)
    Other working capital accounts   16,379    5,914 
  Provision for estimated losses and reserves   (2,856)   345 
  Changes in other regulatory assets   (124,690)   (7,960)
  Other   (8,182)   (1,955)
Net cash flow provided by operating activities   291,171    96,357 
         
INVESTING ACTIVITIES        
Construction expenditures   (269,310)   (153,136)
Allowance for equity funds used during construction   7,801    9,006 
Nuclear fuel purchases   (38,233)   (371)
Proceeds from sale/leaseback of nuclear fuel   37,523    438 
Proceeds from nuclear decommissioning trust fund sales   35,710    15,131 
Investment in nuclear decommissioning trust funds   (42,406)   (21,076)
Change in money pool receivable - net   61,028     - 
Changes in other investments - net   915    2,629 
Other regulatory investments   (13,622)   (27,906)
Net cash flow used in investing activities   (220,594)   (175,285)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt   -    282,772 
Retirement of long-term debt   -    (268,229)
Redemption of preferred stock   (2,250)   (2,250)
Change in money pool payable - net   -    89,727 
Dividends paid:        
  Common stock   (83,000)   (25,600)
  Preferred stock   (2,018)   (2,139)
Net cash flow provided by (used in) financing activities   (87,268)   74,281 
         
Net decrease in cash and cash equivalents   (16,691)   (4,647)
         
Cash and cash equivalents at beginning of period   25,373    6,974 
         
Cash and cash equivalents at end of period   $8,682    $2,327 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
  Cash paid/(received) during the period for:        
    Interest - net of amount capitalized   $68,007    $56,788 
    Income taxes   ($60,096)   $14,450 
         
See Notes to Respective Financial Statements.        

65

 

 

ENTERGY GULF STATES, INC.
BALANCE SHEETS
ASSETS
June 30, 2006 and December 31, 2005
(Unaudited)
         
    2006   2005
  (In Thousands)
       
CURRENT ASSETS            
Cash and cash equivalents:            
  Cash       $3,452    $7,341 
  Temporary cash investments - at cost,            
   which approximates market       5,230    18,032 
     Total cash and cash equivalents       8,682    25,373 
Accounts receivable:             
  Customer       162,091    203,205 
  Allowance for doubtful accounts       (2,886)   (4,794)
  Associated companies       45,260    90,223 
  Other       47,608    50,445 
  Accrued unbilled revenues       90,631    186,527 
    Total accounts receivable       342,704    525,606 
Deferred fuel costs       182,458    254,950 
Fuel inventory - at average cost       71,545    60,196 
Materials and supplies - at average cost       115,764    112,544 
Prepayments and other       7,538    36,996 
TOTAL       728,691    1,015,665 
             
OTHER PROPERTY AND INVESTMENTS        
Decommissioning trust funds       316,068    310,779 
Non-utility property - at cost (less accumulated depreciation)       99,021    91,589 
Other       22,563    22,498 
TOTAL       437,652    424,866 
              
UTILITY PLANT        
Electric       8,844,296    8,569,073 
Natural gas       87,610    86,375 
Construction work in progress       157,542    526,017 
Nuclear fuel under capital lease       77,454    55,155 
Nuclear fuel       10,857    11,338 
TOTAL UTILITY PLANT       9,177,759    9,247,958 
Less - accumulated depreciation and amortization       4,103,135    4,075,724 
UTILITY PLANT - NET       5,074,624    5,172,234 
             
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:            
  SFAS 109 regulatory asset - net       473,980    459,136 
  Other regulatory assets       789,420    604,419 
  Deferred fuel costs       100,124    69,443 
Long-term receivables       13,156    16,151 
Other       35,810    41,195 
TOTAL       1,412,490    1,190,344 
             
TOTAL ASSETS       $7,653,457    $7,803,109 
             
See Notes to Respective Financial Statements.            
 
66
 
 
ENTERGY GULF STATES, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 2006 and December 31, 2005
(Unaudited)
   
    2006   2005
  (In Thousands)
 
CURRENT LIABILITIES        
Accounts payable:            
  Associated companies       $101,332    $100,313 
  Other       181,490    479,232 
Customer deposits       64,741    57,756 
Taxes accrued       40,836   
Accumulated deferred income taxes       59,905    71,196 
Nuclear refueling outage costs       1,022    15,548 
Interest accrued       33,566    34,338 
Obligations under capital leases       24,935    33,516 
Other       33,219    14,945 
TOTAL       541,046    806,844 
             
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued       1,700,037    1,619,890 
Accumulated deferred investment tax credits       130,055    132,909 
Obligations under capital leases       52,518    20,724 
Other regulatory liabilities       41,379    37,482 
Decommissioning and retirement cost liabilities       183,101    175,480 
Transition to competition       79,098    79,098 
Regulatory reserves       15,794    16,153 
Accumulated provisions       69,384    67,747 
Long-term debt       2,358,211    2,358,130 
Preferred stock with sinking fund       11,700    13,950 
Other       189,199    203,665 
TOTAL       4,830,476    4,725,228 
             
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 2006 and 2005       114,055    114,055 
Paid-in capital       1,457,486    1,457,486 
Retained earnings       665,300    653,578 
Accumulated other comprehensive loss       (2,233)   (1,409)
TOTAL       2,281,935    2,271,037 
             
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY       $7,653,457    $7,803,109 
             
See Notes to Respective Financial Statements.            

67

 

ENTERGY GULF STATES, INC.
STATEMENTS OF RETAINED EARNINGS AND COMPREHENSIVE INCOME
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
                     
        Three Months Ended
        2006   2005
        (In Thousands)
RETAINED EARNINGS                    
Retained Earnings - Beginning of period       $697,605        $531,068     
                     
  Add: Net Income       51,704    $51,704    44,287    $44,287 
                     
  Deduct:                    
    Dividends declared on common stock       83,000        21,200     
    Preferred dividend requirements and other       1,009    1,009    1,063    1,063 
        84,009        22,263     
                     
Retained Earnings - End of period       $665,300        $553,092     
                     
ACCUMULATED OTHER COMPREHENSIVE                    
INCOME (LOSS) (Net of Taxes):                    
Balance at beginning of period:                    
 Other accumulated comprehensive income items       ($1,354)       $722     
                     
Net unrealized investment gains       (879)   (879)   64    64 
                     
Balance at end of period:                    
 Other accumulated comprehensive income items       ($2,233)       $786     
Comprehensive Income           $49,816        $43,288 
                     
                     
        Six Months Ended
        2006   2005
        (In Thousands)
RETAINED EARNINGS                    
Retained Earnings - Beginning of period       $653,578        $513,182     
                     
  Add: Net Income       96,753    $96,753    67,636    $67,636 
                     
  Deduct:                    
    Dividends declared on common stock       83,000        25,600     
    Preferred dividend requirements and other       2,031    2,031    2,126    2,126 
        85,031        27,726     
                     
Retained Earnings - End of period       $665,300        $553,092     
                     
ACCUMULATED OTHER COMPREHENSIVE                    
INCOME (LOSS) (Net of Taxes):                    
Balance at beginning of period:                    
 Other accumulated comprehensive income items       ($1,409)       $714     
                     
Net unrealized investment gains       (824)   (824)   72    72 
                     
Balance at end of period:                    
 Other accumulated comprehensive income items       ($2,233)       $786     
Comprehensive Income           $93,898        $65,582 
                     
                     
See Notes to Respective Financial Statements.                    

68

 

ENTERGY GULF STATES, INC.
SELECTED OPERATING RESULTS
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2006   2005   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $258   $174   $84    48 
  Commercial   212   146   66    45 
  Industrial   284   223   61    27 
  Governmental   11   9     22 
     Total retail   765   552   213    39 
  Sales for resale                
    Associated companies   21   21    
    Non-associated companies   48   43     12 
  Other   34   131   (97)   (74)
     Total   $868   $747   $121    16 
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   2,352   2,124   228    11 
  Commercial   2,158   2,013   145   
  Industrial   3,831   3,879   (48)   (1)
  Governmental   110   109    
     Total retail   8,451   8,125   326   
  Sales for resale                
    Associated companies   567   729   (162)   (22)
    Non-associated companies   678   726   (48)   (7)
     Total   9,696   9,580   116   
                 
                 
    Six Months Ended   Increase/    
Description   2006   2005   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $498   $370   $128    35 
  Commercial   422   305   117    38 
  Industrial   601   467   134    29 
  Governmental   24   19     26 
     Total retail   1,545   1,161   384    33 
  Sales for resale                
    Associated companies   48   47    
    Non-associated companies   99   75   24    32 
  Other   31   116   (85)   (73)
     Total   $1,723   $1,399   $324    23 
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   4,448   4,279   169   
  Commercial   4,128   3,927   201   
  Industrial   7,510   7,860   (350)   (4)
  Governmental   222   214    
     Total retail   16,308   16,280   28   
  Sales for resale                
    Associated companies   1,153   1,294   (141)   (11)
    Non-associated companies   1,295   1,265   30   
     Total   18,756   18,839   (83)  
                 

69

 

 

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. Following is an update to the discussion in the Form 10-K.

Entergy Louisiana currently estimates that total restoration costs for the repair and/or replacement of its electric facilities damaged by Hurricanes Katrina and Rita and business continuity costs will be $541 million.

As discussed in the Form 10-K, a federal hurricane aid package became law that includes funding for Community Development Block Grants (CDBG) that allows state and local leaders to fund individual recovery priorities. The law permits funding for infrastructure restoration. It is uncertain how much funding, if any, will be designated for utility reconstruction and the timing of such decisions is also uncertain. The U.S. Department of Housing and Urban Development has allocated approximately $10.4 billion for Louisiana, $5.1 billion for Mississippi, and $74 million for Texas, with an additional $1 billion approved by Congress but not yet allocated to the states. The states, in turn, will administer the grants. Entergy Louisiana is currently preparing an application to seek CDBG funding. In March 2006, Entergy Louisiana provided a justification statement to state and local officials. The statement, which will be reviewed by the Louisiana Recovery Authority, includes the estimated costs of Hurricanes Katrina and Rita damage. The statement includes justification for a request for $472 million in CDBG funding.

Storm Costs Recovery Filing with Retail Regulator

On July 31, 2006, Entergy Louisiana and Entergy Gulf States filed a supplemental and amending storm cost recovery application with the LPSC, in which Entergy Louisiana and Entergy Gulf States requested that the LPSC (1) review Entergy Louisiana's and Entergy Gulf States' testimony and exhibits relating to the costs associated with Hurricanes Katrina and Rita, and declare that those verified, actual storm-related costs through May 31, 2006 are $466.8 million for Entergy Louisiana and $200.3 million for Entergy Gulf States in the Louisiana jurisdiction and that those costs were prudently incurred; (2) declare that the annual revenue requirements associated with the recovery of those costs, based on a ten-year levelized rate are $54.4 million for Entergy Louisiana and $26.2 million for Entergy Gulf States; (3) authorize Entergy Louisiana and Entergy Gulf States to recover the costs through Storm Cost Recovery Riders (SCRRs) proposed by Entergy Louisiana and Entergy Gulf States; (4) declare that the storm costs incurred subsequent to May 31, 2006 are to be filed by Entergy Louisiana and Entergy Gulf States with the LPSC on an annual basis in connection with their annual formula rate plan (FRP) filings, and that the SCRRs be adjusted annually to reflect such costs and any insurance proceeds or CDBG funds actually received, with the adjusted amounts to be collected through the SCRRs to take effect contemporaneous with the effective date of rate changes under the FRP; (5) declare that the storm-related costs incurred by Entergy Louisiana and Entergy Gulf States meet the conditions set forth in the FRP for exclusion from the sharing provisions in those FRPs and authorize the permanent recovery of storm costs outside of the FRPs adopted by the LPSC for Entergy Louisiana and Entergy Gulf States; and (6) authorize the funding of a storm reserve through securitization sufficient to fund a storm cost reserve of $132 million for Entergy Louisiana and $81 million for Entergy Gulf States. Hearings on the application are scheduled for the first quarter 2007.

 

70

 

Results of Operations

Net Income

Second Quarter 2006 Compared to Second Quarter 2005

Net income decreased $36.2 million primarily due to lower net revenue partially offset by higher other income.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net income decreased $20.6 million primarily due to lower net revenue partially offset by higher other income, lower other operation and maintenance expenses, and lower depreciation and amortization expenses.

Net Revenue

Second Quarter 2006 Compared to Second Quarter 2005

Net revenue, which is Entergy Louisiana's measure of gross margin, 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 second quarter of 2006 to the second quarter of 2005.

 

 

Amount

 

 

(In Millions)

 

 

 

2005 net revenue

 

$310.8 

Price applied to unbilled electric sales

 

(72.7)

Net wholesale revenue

 

6.1 

Other

 

0.8 

2006 net revenue

 

$245.0 

The price applied to unbilled sales variance is due to the exclusion in 2006 of the fuel cost component in the calculation of the price applied to unbilled sales. Effective January 1, 2006, the fuel cost component is no longer included in the unbilled revenue calculation, which is in accordance with regulatory treatment. Entergy Louisiana expects that the effect of this factor will be significantly less for its annual results for 2006. See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" herein for a discussion of the accounting for unbilled revenues.

The net wholesale revenue variance is primarily due to the sale of 75% of the generation from the Perryville plant to Entergy Gulf States pursuant to a long-term purchased power agreement.

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

Gross operating revenues decreased primarily due to:

  • a decrease of $72.7 million in the price applied to unbilled sales, as discussed above; and
  • a decrease of $47.2 million in fuel cost recovery revenues due to decreased usage and lower fuel rates.

The decrease was partially offset by an increase of $20.9 million in gross wholesale revenue due to increased sales to affiliated systems and the sale of a portion of the generation from Perryville.

Fuel and purchased power expenses decreased primarily due to a shift from higher priced gas and oil generation and purchased power to lower priced nuclear generation primarily as a result of a refueling outage in 2005. The decrease was partially offset by an increase in the recovery from customers of deferred fuel costs.

 

71

 

Other regulatory credits decreased primarily due to the LPSC order for the interim recovery of storm costs effective March 2006. Refer to "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - State and Local Regulation" in the Form 10-K for a discussion of Entergy Louisiana's filing with the LPSC regarding storm cost recovery.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net revenue, which is Entergy Louisiana's measure of gross margin, 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 six months ended June 30, 2006 to the six months ended June 30, 2005.

 

 

Amount

 

 

(In Millions)

 

 

 

2005 net revenue

 

$495.5 

Price applied to unbilled electric sales

 

(69.3)

Volume/weather

 

(21.8)

Net wholesale revenue

 

12.4 

Rate refund provisions

 

6.9 

Storm cost recovery

 

4.9 

Other

 

3.9 

2006 net revenue

 

$432.5 

The price applied to unbilled sales variance is due to the exclusion in 2006 of the fuel cost component in the calculation of the price applied to unbilled sales. Effective January 1, 2006, the fuel cost component is no longer included in the unbilled revenue calculation, which is in accordance with regulatory treatment. Entergy Louisiana expects that the effect of this factor will be significantly less for its annual results for 2006. See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" herein for a discussion of the accounting for unbilled revenues.

The volume/weather variance is due to a decrease in usage in all sectors primarily due to load losses caused by Hurricane Katrina and decreased usage during the unbilled sales period.

The net wholesale revenue variance is primarily due to the sale of 75% of the generation from the Perryville plant to Entergy Gulf States pursuant to a long-term purchased power agreement.

The rate refund provisions variance is primarily due to additional provisions recorded in 2005 related to LPSC-approved settlements in March and May 2005.

The storm cost recovery variance is due to the return earned on the interim recovery of storm-related costs as allowed by the LPSC effective March 2006.

Gross operating revenues and fuel and purchased power expenses

Gross operating revenues decreased primarily due to:

  • a decrease of $69.3 million in the price applied to unbilled sales, as discussed above;
  • a decrease of $31.1 million in fuel cost recovery revenues due to decreased usage and lower prices; and
  • a decrease of $21.8 million in volume/weather, as discussed above.

72

The decrease was substantially offset by:

  • an increase of $85.7 million in gross wholesale revenue due to increased sales to affiliated systems and the sale of a portion of the generation from Perryville; and
  • an increase of $6.9 million in rate refund provisions, as discussed above.

Fuel and purchased power expenses increased primarily due to an increase in the recovery from customers of deferred fuel costs, partially offset by a shift from higher priced gas and oil generation and purchased power to lower priced nuclear generation primarily as a result of a refueling outage in 2005.

Other Income Statement Variances

Second Quarter 2006 Compared to Second Quarter 2005

Other income increased primarily due to the write-off of $7.1 million in June 2005 of a portion of the customer care system investment and the related allowance for equity funds used during construction pursuant to an LPSC-approved settlement.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Other operation and maintenance expenses decreased primarily due to:

  • a decrease of $3.3 million due to a planned decrease in vegetation maintenance;
  • a decrease of $2.5 million due to loss provisions recorded in 2005 for the bankruptcy of CashPoint, which managed a network of payment agents for the domestic utility companies;
  • a decrease of $2.3 million due to the amortization of proceeds received in 2005 from the radwaste settlement which is discussed in "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Central States Compact Claim" in the Form 10-K;and
  • a decrease of $1.5 million in transmission overhead work.

The decrease was offset by:

  • an increase of $3.3 million as a result of a fossil plant maintenance outage; and
  • an increase of $3.3 million in customer service support costs including an increase in customer write-offs.

Depreciation and amortization expenses decreased primarily due to a change in the depreciation rate for Waterford 3 as approved by the LPSC effective April 2005 and a revision in 2005 of estimated depreciable lives involving certain intangible assets.

Other income increased primarily due to:

  • the write-off of $7.1 million in June 2005 of a portion of the customer care system investment and the related allowance for equity funds used during construction pursuant to an LPSC-approved settlement; and
  • an increase in the allowance for equity funds used during construction due to an increase in construction work in progress as a result of Hurricanes Katrina and Rita.

Income Taxes

The effective income tax rates for the second quarters of 2006 and 2005 were 38.4% and 40.0%, respectively. The effective income tax rates for the six months ended June 30, 2006 and 2005 were 38.9% and 39.8%, respectively. The difference in the effective income tax rate for the second quarter of 2006 and the six months ended June 30, 2006 and 2005 versus the federal statutory rate of 35.0% is primarily due to book and tax differences related to utility plant and state income taxes, partially offset by book and tax differences related to the allowance for equity

73

 

 funds used during construction and the amortization of investment tax credits. The difference in the effective income tax rate for the second quarter of 2005 versus the federal statutory rate of 35.0% is primarily due to state income taxes, book and tax differences related to utility plant items, and a federal tax reserve estimate revision necessary to appropriately provide for prior tax periods.

Liquidity and Capital Resources

Cash Flow

Cash flows for the six months ended June 30, 2006 and 2005 were as follows:

 

 

2006

 

2005

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$105,285 

 

$146,049 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

231,532 

 

69,063 

 

Investing activities

 

(287,999)

 

(295,005)

 

Financing activities

 

(45,979)

 

82,412 

Net decrease in cash and cash equivalents

 

(102,446)

 

(143,530)

 

 

 

 

 

Cash and cash equivalents at end of period

 

$2,839 

 

$2,519 

Operating Activities

Cash flow from operations increased $162.5 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to timing of collections of receivables from customers.

Investing Activities

Cash flow used by investing activities decreased $7.0 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005. Following are the significant investing activities occurring during the first six months of 2006 and 2005:

  • the purchase of the Perryville plant in June 2005 for $162 million;
  • an increase in distribution construction expenditures due to Hurricanes Katrina and Rita; and
  • money pool activity.

Financing Activities

Entergy Louisiana used $46.0 million of cash for financing activities for the six months ended June 30, 2006 compared to providing $82.4 million for the six months ended June 30, 2005 primarily due to:

  • money pool activity;
  • payment of $40 million on a credit facility in 2006; and
  • the retirement of $25 million of long-term debt in 2006.

Partially offsetting the above was the payment of $24.5 million of common stock dividends in 2005.

74

Capital Structure

Entergy Louisiana's capitalization is balanced between equity and debt, as shown in the following table. The decrease in debt to capital for Entergy Louisiana is primarily due to an increase in members' equity due to additional equity from its parent because of a revision in the estimate of the tax liabilities allocated to Entergy Louisiana Holdings in the merger-by-division that created Entergy Louisiana, LLC.

 

 

June 30,
2006

December 31,
2005

 

 

Net debt to net capital

 

47.1%

49.2%

Effect of subtracting cash from debt

 

 0.1%

2.1%

Debt to capital

 

 47.2%

51.3%

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 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.

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

June 30,
2006

 

December 31,
2005

 

June 30,
2005

 

December 31,
2004

(In Thousands)

 

 

 

 

 

 

($90,879)

 

($68,677)

 

($110,658)

 

$40,549

See Note 4 to the domestic utility companies and System Energy financial statements in the Form 10-K for a description of the money pool.

In April 2006, Entergy Louisiana's $85 million credit facility expired and was not renewed. Also, Entergy Louisiana's $15 million credit facility expired in May 2006 and was not renewed.

In June 2006, Entergy Louisiana redeemed, prior to maturity, $25 million of 5.95% Series of St. Charles Parish bonds.

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 and proceedings, the Energy Policy Act of 2005, utility restructuring, market and credit risks, nuclear matters, environmental risks, and litigation risks.

State and Local Rate Regulation

In May 2006, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2005 test year. The filing shows that Entergy Louisiana's return on equity was within the allowed bandwidth. The filing also indicates that under the formula rate plan rider for approved capacity additions, a $121 million rate increase is required to recover LPSC-approved incremental

 

75

 

deferred and ongoing capacity requirements. Entergy Louisiana requested recovery of the capacity deferrals over a three-year period, including carrying charges. $51 million of the rate increase is associated with these deferrals. The remaining $70 million of the rate increase is associated with ongoing capacity costs. The filing is subject to a period of LPSC Staff review.

Federal Regulation

System Agreement Proceedings

See Entergy Corporation and Subsidiaries' "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Federal Regulation - System Agreement Litigation, APSC Complaint filed with the FERC, and APSC System Agreement Investigation" for updates regarding proceedings involving the System Agreement.

Independent Coordinator of Transmission (ICT)

See Entergy Corporation and Subsidiaries' "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Federal Regulation - Independent Coordinator of Transmission" for an update regarding Entergy's ICT proposal.

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 costs. Following is an update to that discussion.

Unbilled Revenue

As discussed in Note 7 to the domestic utility companies and System Energy financial statements, effective January 1, 2006, Entergy Louisiana reclassified the fuel component of unbilled accounts receivable to deferred fuel and will no longer include the fuel component in its unbilled revenue calculation, which is in accordance with regulatory treatment.

Recently Issued Accounting Pronouncements

FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48) was issued in July 2006 and is effective for Entergy Louisiana in the first quarter of 2007. The FASB's objective in issuing this interpretation is to increase comparability among companies in financial reporting of income taxes. 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 Louisiana does not expect that the adoption of FIN 48 will materially affect its financial position, results of operations, or cash flows.

76

 

ENTERGY LOUISIANA, LLC
INCOME STATEMENTS
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
 
  Three Months Ended   Six Months Ended
    2006   2005   2006   2005
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Domestic electric   $550,580    $647,748    $1,102,637    $1,128,421 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   105,470    127,564    309,474    265,341 
  Purchased power   212,053    226,690    388,667    397,996 
  Nuclear refueling outage expenses   4,263    3,397    8,497    6,821 
  Other operation and maintenance   98,462    99,518    182,564    188,156 
Decommissioning   4,271    5,155    8,467    10,872 
Taxes other than income taxes   15,173    18,300    31,179    36,657 
Depreciation and amortization   47,417    43,645    89,502    95,453 
Other regulatory credits - net   (11,906)   (17,323)   (28,044)   (30,407)
TOTAL   475,203    506,946    990,306    970,889 
                 
OPERATING INCOME   75,377    140,802    112,331    157,532 
                 
OTHER INCOME                
Allowance for equity funds used during construction   3,590    1,840    9,177    4,377 
Interest and dividend income   3,810    5,074    9,252    8,140 
Miscellaneous - net   (620)   (6,481)   (1,418)   (6,848)
TOTAL   6,780    433    17,011    5,669 
                 
INTEREST AND OTHER CHARGES  
Interest on long-term debt   20,625    16,852    41,003    34,691 
Other interest - net   2,623    1,804    4,331    4,823 
Allowance for borrowed funds used during construction   (2,662)   (990)   (6,513)   (2,489)
TOTAL   20,586    17,666    38,821    37,025 
                 
INCOME BEFORE INCOME TAXES   61,571    123,569    90,521    126,176 
                 
Income taxes   23,617    49,406    35,171    50,242 
                 
NET INCOME   37,954    74,163    55,350    75,934 
                 
Preferred dividend requirements and other   1,737      3,475   
                 
EARNINGS APPLICABLE TO                
COMMON EQUITY   $36,217    $74,163    $51,875    $75,934 
                 
See Notes to Respective Financial Statements.                

 

77

 

 

 

 

 

 

 

 

 

 

 

 

 

(Page left blank intentionally)

 

 

78

 

 

ENTERGY LOUISIANA, LLC
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
     
    2006   2005
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $55,350    $75,934 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Reserve for regulatory adjustments   1,369    (11,724)
  Other regulatory credits - net   (28,044)   (30,407)
  Depreciation, amortization, and decommissioning   97,969    106,325 
  Deferred income taxes and investment tax credits   13,810    38,961 
  Changes in working capital:        
    Receivables   142,012    (11,462)
    Accounts payable   (24,674)   8,483 
    Taxes accrued   33,040    23,337 
    Interest accrued   (4,294)   (715)
    Deferred fuel costs   (75,432)   (80,330)
    Other working capital accounts   25,539    (22,957)
  Provision for estimated losses and reserves   5,164    2,179 
  Changes in other regulatory assets   (2,634)   17,229 
  Other   (7,643)   (45,790)
Net cash flow provided by operating activities   231,532    69,063 
         
INVESTING ACTIVITIES        
Construction expenditures   (273,527)   (151,902)
Allowance for equity funds used during construction   9,177    4,377 
Nuclear fuel purchases   -    (54,158)
Proceeds from the sale/leaseback of nuclear fuel   -    54,158 
Payment for purchase of plant   -    (162,075)
Proceeds from nuclear decommissioning trust fund sales   11,739    12,484 
Investment in nuclear decommissioning trust funds   (16,415)   (18,637)
Change in money pool receivable - net   -    40,549 
Other regulatory investments   (18,969)   (19,801)
Net cash flow used in investing activities   (287,995)   (295,005)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt   -    54,611 
Retirement of long-term debt   (25,000)   (55,000)
Change in money pool payable - net   22,202    110,658 
Changes in short-term borrowings   (40,000)   - 
Distributions paid:        
  Common equity   -    (24,500)
  Preferred membership interests   (3,185)   (3,357)
Net cash flow provided by (used in) financing activities   (45,983)   82,412 
         
Net decrease in cash and cash equivalents   (102,446)   (143,530)
         
Cash and cash equivalents at beginning of period   105,285    146,049 
         
Cash and cash equivalents at end of period   $2,839    $2,519 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
  Interest - net of amount capitalized   $47,609    $38,574 
  Income taxes     $11,114 
         
See Notes to Respective Financial Statements.        

 

79

 

ENTERGY LOUISIANA, LLC
BALANCE SHEETS
ASSETS
June 30, 2006 and December 31, 2005
(Unaudited)
   
  2006   2005
  (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents   $2,839    $105,285 
Accounts receivable:        
  Customer   95,335    176,169 
  Allowance for doubtful accounts   (7,445)   (6,141)
  Associated companies   41,245    24,453 
  Other   12,718    12,553 
  Accrued unbilled revenues   73,081    149,908 
     Total accounts receivable   214,934    356,942 
Deferred fuel costs   29,319    21,885 
Accumulated deferred income taxes   -    3,884 
Materials and supplies - at average cost   95,928    92,275 
Deferred nuclear refueling outage costs   6,334    15,337 
Prepayments and other   9,567    173,055 
TOTAL   358,921    768,663 
         
OTHER PROPERTY AND INVESTMENTS        
Decommissioning trust funds   191,274    187,101 
Non-utility property - at cost (less accumulated depreciation)   1,761    1,852 
Other   4    4 
TOTAL   193,039    188,957 
         
UTILITY PLANT        
Electric   6,495,427    6,233,711 
Property under capital lease   250,610    250,610 
Construction work in progress   220,952    415,475 
Nuclear fuel under capital lease   40,289    58,492 
TOTAL UTILITY PLANT   7,007,278    6,958,288 
Less - accumulated depreciation and amortization   2,808,533    2,805,944 
UTILITY PLANT - NET   4,198,745    4,152,344 
          
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  SFAS 109 regulatory asset - net   76,018    104,893 
  Other regulatory assets   607,328    599,451 
  Deferred fuel costs   67,998    - 
Long-term receivables   6,557    8,222 
Other   31,305    32,523 
TOTAL   789,206    745,089 
          
TOTAL ASSETS   $5,539,911    $5,855,053 
         
See Notes to Respective Financial Statements.        
 

80

 
ENTERGY LOUISIANA, LLC
BALANCE SHEETS
LIABILITIES AND MEMBERS' EQUITY
June 30, 2006 and December 31, 2005
(Unaudited)
   
  2006   2005
  (In Thousands)
 
CURRENT LIABILITIES        
Notes payable   $-   $40,000
Accounts payable:        
  Associated companies   168,936   121,382
  Other   205,865   398,507
Customer deposits   68,617   66,705
Taxes accrued   47,037   88,548
Accumulated deferred income taxes   21,524   -
Interest accrued   24,148   28,442
Obligations under capital leases   33,463   22,753
Other   33,058   8,721
TOTAL   602,648   775,058
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   1,860,334   2,055,083
Accumulated deferred investment tax credits   90,841   92,439
Obligations under capital leases   6,826   35,740
Other regulatory liabilities   42,383   58,129
Decommissioning   229,759   221,291
Accumulated provisions   98,329   93,165
Long-term debt   1,147,412   1,172,400
Other   138,776   146,576
TOTAL   3,614,660   3,874,823
         
Commitments and Contingencies        
         
MEMBERS' EQUITY        
Preferred membership interests without sinking fund   100,000   100,000
Members' equity   1,222,603   1,105,172
TOTAL   1,322,603   1,205,172
         
TOTAL LIABILITIES AND MEMBERS' EQUITY   $5,539,911   $5,855,053
         
See Notes to Respective Financial Statements.        

81

 

ENTERGY LOUISIANA, LLC
STATEMENTS OF MEMBERS' EQUITY
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
         
    Three Months Ended
    2006   2005
    (In Thousands)
MEMBERS' EQUITY        
Members' Equity - Beginning of period   $1,186,436   $1,029,317
         
  Add:        
  Net income   37,954   74,163
         
  Deduct:        
    Distributions declared:        
      Common equity   -   22,700
      Preferred membership interests   1,737   -
  Other   50   -
    1,787   22,700
         
Members' Equity - End of period   $1,222,603   $1,080,780
         
         
         
    Six Months Ended
    2006   2005
    (In Thousands)
MEMBERS' EQUITY        
Members' Equity - Beginning of period   $1,105,172   $1,029,346
         
  Add:        
  Net income   55,350   75,934
  Additional equity from parent   65,703   -
    121,053   75,934
         
  Deduct:        
    Distributions declared:        
      Common equity   -   24,500
      Preferred membership interests   3,475   -
    Other   147   -
    3,622   24,500
         
Members' Equity - End of period   $1,222,603   $1,080,780
         
         
         
See Notes to Respective Financial Statements.        

82

 

ENTERGY LOUISIANA, LLC
SELECTED OPERATING RESULTS
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2006   2005   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $163   $172   ($9)   (5)
  Commercial   116   122   (6)   (5)
  Industrial   177   198   (21)   (11)
  Governmental   9   10   (1)   (10)
     Total retail   465   502   (37)   (7)
  Sales for resale                
    Associated companies   53   32   21    66 
    Non-associated companies   3   3    
  Other   30   111   (81)   (73)
     Total   $551   $648   ($97)   (15)
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   1,947   1,894   53   
  Commercial   1,382   1,361   21   
  Industrial   3,175   3,341   (166)   (5)
  Governmental   105   108   (3)   (3)
     Total retail   6,609   6,704   (95)   (1)
  Sales for resale                
    Associated companies   571   285   286    100 
    Non-associated companies   25   31   (6)   (19)
     Total   7,205   7,020   185   
                 
                 
    Six Months Ended   Increase/    
Description   2006   2005   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $324   $337   ($13)   (4)
  Commercial   235   237   (2)   (1)
  Industrial   370   387   (17)   (4)
  Governmental   19   20   (1)   (5)
     Total retail   948   981   (33)   (3)
  Sales for resale                
    Associated companies   133   47   86    183 
    Non-associated companies   5   5    
  Other   17   95   (78)   (82)
     Total   $1,103   $1,128   ($25)   (2)
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   3,718   3,823   (105)   (3)
  Commercial   2,628   2,647   (19)   (1)
  Industrial   6,069   6,457   (388)   (6)
  Governmental   216   226   (10)   (4)
     Total retail   12,631   13,153   (522)   (4)
  Sales for resale                
    Associated companies   1,295   430   865    201 
    Non-associated companies   39   45   (6)   (13)
     Total   13,965   13,628   337   
                 

83

 

 

ENTERGY MISSISSIPPI, INC.

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

Hurricane Katrina

See the Form 10-K for a discussion of the effects of Hurricane Katrina, which hit Entergy Mississippi's service territory in August 2005 causing power outages and significant infrastructure damage to Entergy Mississippi's distribution and transmission systems. Entergy Mississippi currently estimates that its total restoration costs for the repair and/or replacement of its electric facilities damaged by Hurricane Katrina, and business continuity costs, and a small amount of damage caused by Hurricane Rita, will be $107 million.

As discussed in the Form 10-K, a federal hurricane aid package became law that includes funding for Community Development Block Grants (CDBG) that allows state and local leaders to fund individual recovery priorities. The law permits funding for infrastructure restoration. It is uncertain how much funding, if any, will be designated for utility reconstruction and the timing of such decisions is also uncertain. The U.S. Department of Housing and Urban Development has allocated approximately $10.4 billion for Louisiana, $5.1 billion for Mississippi, and $74 million for Texas, with an additional $1 billion approved by Congress but not yet allocated to the states. The states, in turn, will administer the grants. As discussed below, in June 2006 Entergy Mississippi filed a request with the Mississippi Development Authority for $89 million of CDBG funding for reimbursement of its Hurricane Katrina infrastructure restoration costs.

As discussed in the Form 10-K, in December 2005, Entergy Mississippi filed with the MPSC a Notice of Intent to change rates by implementing a Storm Damage Rider to recover storm damage restoration costs associated with Hurricanes Katrina and Rita totaling approximately $84 million as of November 30, 2005.  In February 2006, Entergy Mississippi filed an Application for an Accounting Order seeking certification by the MPSC of Entergy Mississippi's estimated $36 million of storm restoration costs not included in the December 2005 filing. In March 2006, the Governor signed a law that established a mechanism by which the MPSC may authorize and certify an electric utility financing order and the state may issue general obligation bonds to pay the costs of repairing damage caused by Hurricane Katrina to the systems of investor-owned electric utilities.  Because of the passage of this law and the possibility of Entergy Mississippi obtaining CDBG funds for Hurricane Katrina storm restoration costs, in March 2006, the MPSC issued an order approving a Joint Stipulation between Entergy Mississippi and the Mississippi Public Utilities Staff that provided for the review of Entergy Mississippi's total storm restoration costs in the Application for an Accounting Order proceeding.  The Stipulation stated that the procedural schedule of the December 2005 Notice of Intent filing should be suspended until the MPSC issues a final order in the Application for an Accounting Order proceeding. 

In June 2006, the MPSC issued an order certifying Entergy Mississippi's Hurricane Katrina restoration costs incurred through March 31, 2006 of $89 million, net of estimated insurance proceeds. Two days later Entergy Mississippi filed a request with the Mississippi Development Authority for $89 million of CDBG funding for reimbursement of its infrastructure restoration costs. Entergy Mississippi also filed a Petition for Financing Order with the MPSC for authorization of state general obligation bond financing of $169 million for Hurricane Katrina restoration costs and future storm costs. The $169 million amount includes Hurricane Katrina restoration costs plus $80 million to build Entergy Mississippi's storm damage reserve for the future. The amount financed through the bonds will be reduced dollar for dollar by any CDBG funds that Entergy Mississippi receives. Pursuant to the legislation, the MPSC must issue a financing order by the end of October 2006.

 

84

 

Results of Operations

Net Income

Second Quarter 2006 Compared to Second Quarter 2005

Net income increased $2.0 million primarily due to higher net revenue, partially offset by higher other operation and maintenance expenses, higher depreciation and amortization expense, and higher interest expense.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net income decreased $1.9 million primarily due to higher other operation and maintenance expense, higher taxes other than income taxes, and higher interest expense, partially offset by higher net revenue.

Net Revenue

Second Quarter 2006 Compared to Second Quarter 2005

Net revenue, which is Entergy Mississippi's measure of gross margin, 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 second quarter of 2006 to the second quarter of 2005.

   

Amount

   

(In Millions)

     

2005 net revenue

 

$116.4 

Deferral of Attala costs

 

6.6 

Volume/weather

 

4.3 

Reserve equalization

 

(2.1)

Other

 

(0.4)

2006 net revenue

 

$124.8 

The deferral of Attala costs variance is primarily due to the under-recovery of Attala power plant costs that will be 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.

The volume/weather variance is primarily due to an increase in electricity usage, including the effect of more favorable weather during the second quarter of 2006 compared to the second quarter of 2005. Billed electricity usage increased a total of 173 GWh in the service territory.

The reserve equalization variance is primarily due to changes in the Entergy System generation mix compared to the same period in 2005 and a revision of reserve equalization payments among Entergy companies due to a FERC ruling regarding the inclusion of interruptible loads in reserve equalization calculations.

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

Gross operating revenues increased primarily due to an increase of $104 million in fuel cost recovery revenues due to higher fuel rates.

Fuel and purchased power expenses increased primarily due to increased recovery of fuel and purchased power costs due to an increase in fuel rates. The increase was also due to an increase in demand.

85

Other regulatory credits increased primarily due to the refunding through the power management recovery rider in 2006 of over-recoveries in 2005 as a result of gains recorded on gas hedging contracts, in addition to the under-recovery of Attala costs, discussed above. There is no material effect on net income due to quarterly adjustments to the power management recovery rider.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net revenue, which is Entergy Mississippi's measure of gross margin, 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 six months ended June 30, 2006 to the six months ended June 30, 2005.

   

Amount

   

(In Millions)

     

2005 net revenue

 

$207.9 

Deferral of Attala costs

 

14.5 

Reserve equalization

 

(4.2)

Other

 

(3.1)

2006 net revenue

 

$215.1 

The deferral of Attala costs variance is primarily due to the under-recovery of Attala power plant costs that will be 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.

The reserve equalization variance is primarily due to changes in the Entergy System generation mix compared to the same period in 2005 and a revision of reserve equalization payments among Entergy companies due to a FERC ruling regarding the inclusion of interruptible loads in reserve equalization calculations.

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

Gross operating revenues increased primarily due to an increase of $239 million in fuel cost recovery revenues due to higher fuel rates.

Fuel and purchased power expenses increased primarily due to increased recovery of fuel and purchased power costs due to an increase in fuel rates. The increase was also due to an increase in demand.

Other regulatory credits increased primarily due to the refunding through the power management recovery rider in 2006 of over-recoveries in 2005 as a result of gains recorded on gas hedging contracts, in addition to the under-recovery of Attala costs, discussed above. There is no material effect on net income due to quarterly adjustments to the power management recovery rider.

Other Income Statement Variances

Second Quarter 2006 Compared to Second Quarter 2005

Other operation and maintenance expense increased primarily due to:

86

 

The increase was partially offset by a decrease of $1.6 million in vegetation maintenance costs in 2006.

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

Interest expense increased primarily due to additional long-term debt issued to finance the Attala power plant purchase.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Other operation and maintenance expense increased primarily due to:

  • an increase of $3 million due to the reclassification of storm charges from a regulatory asset in accordance with a Joint Stipulation with the MPSC;
  • an increase of $2.0 million in customer service costs; and
  • an increase of $1.1 million in pension costs.

The increase was partially offset by a decrease of $2.8 million in vegetation maintenance costs in 2006.

Taxes other than income taxes increased primarily due to higher assessed values for ad valorem tax purposes as a result of the Attala plant purchase and higher franchise taxes in 2006 due to higher revenues.

Interest expense increased primarily due to additional long-term debt issued to finance the Attala power plant purchase.

Income Taxes

The effective income tax rates for the second quarters of 2006 and 2005 were 35.1% and 34.9%, respectively. The effective income tax rates for the six months ended June 30, 2006 and 2005 were 31.7% and 33.5%, respectively. The difference in the effective tax rate for the six months ended June 30, 2006 versus the federal statutory rate of 35.0% is primarily due to book and tax differences related to the allowance for equity funds used during construction, the amortization of investment tax credits, and book and tax differences related to utility plant items, partially offset by state income taxes. The difference in the effective tax rate for the six months ended June 30, 2005 versus the federal statutory rate of 35% is primarily due to book and tax differences related to the allowance of equity funds used during construction and the amortization of investment tax credits, partially offset by state income taxes.

Liquidity and Capital Resources

Cash Flow

Cash flows for the six months ended June 30, 2006 and 2005 were as follows:

 

 

2006

 

2005

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$4,523 

 

$80,396 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

221,502 

 

48,399 

 

Investing activities

 

(200,314)

 

(99,320)

 

Financing activities

 

12,293 

 

16,255 

Net increase (decrease) in cash and cash equivalents

 

33,481 

 

(34,666)

 

 

 

 

 

Cash and cash equivalents at end of period

 

$38,004 

 

$45,730 

87

Operating Activities

Cash flow from operations increased $173.1 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to increased collection of deferred fuel and purchased power costs and the income tax refund discussed below, partially offset by the timing of payments to vendors.

In the first quarter of 2006, Entergy Corporation received an income tax refund as a result of net operating loss carryback provisions contained in the Gulf Opportunity Zone Act of 2005, as discussed in Note 3 to the domestic utilities companies and System Energy financial statements in the Form 10-K. In accordance with Entergy's intercompany tax allocation agreement, in April 2006 Entergy Corporation distributed $66 million of the refund to Entergy Mississippi.

Investing Activities

Net cash used in investing activities increased $101 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to the purchase of the 480 MW Attala power plant for $88 million in January 2006 and also due to storm-related spending.

Financing Activities

Net cash provided by financing activities decreased $4 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to money pool activity and the issuance of $30 million of preferred stock in 2005, partially offset by the issuance of $100 million of first mortgage bonds during 2006 and a decrease of $10 million in common stock dividends paid.

Capital Structure

Entergy Mississippi's capitalization is balanced between equity and debt, as shown in the following table. The increase in the debt to capital percentage as of June 30, 2006 is primarily due to the issuance of $100 million of First Mortgage Bonds in January 2006.

 

 

June 30,
2006

 

December 31,
2005

 

 

 

 

 

 

 

Net debt to net capital

 

54.0%

 

52.6%

 

Effect of subtracting cash from debt

 

1.3%

 

0.1%

 

Debt to capital

 

55.3%

 

52.7%

 

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.

See the table in the Form 10-K under "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYIS - Liquidity and Capital Resources - Uses of Capital" which sets forth the amounts of Entergy Mississippi's planned construction and other capital investments for 2006 through 2008. In January 2006, Entergy Mississippi purchased for $88 million the Attala power plant, a 480 MW natural gas-fired, combined-cycle generating facility owned by Central Mississippi Generating Company. Entergy Mississippi plans to invest approximately $20 million in

 

88

 

 

 facility upgrades at the Attala plant plus $3 million in other costs, bringing the total capital cost of the project to approximately $111 million. In November 2005, the MPSC issued an order approving the acquisition of the Attala plant. In December 2005, the MPSC issued an order approving the investment cost recovery through the power management rider and limited the recovery through the rider to a period that begins with the closing date of the purchase and ends the earlier of the date costs are incorporated into base rates or December 31, 2006. Entergy Mississippi intends to make an appropriate filing with the MPSC in 2006 to extend recovery in rates beyond 2006 of Entergy Mississippi's Attala costs. The planned construction and other capital investments line includes the majority of the estimated cost of the Attala acquisition as a 2006 capital commitment.

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

June 30,
2006

 

December 31,
2005

 

June 30,
2005

 

December 31,
2004

(In Thousands)

 

 

 

 

 

 

 

$30,499

 

($84,066)

 

$53,488

 

$21,584

See Note 4 to the domestic utility companies and System Energy financial statements in the Form 10-K for a description of the money pool.

In May 2006, Entergy Mississippi increased its $25 million credit facility to $30 million and renewed it through May 2007. Entergy Mississippi also entered into a new $20 million credit facility through May 2007. Borrowings on these credit facilities may be secured by a security interest in Entergy Mississippi's accounts receivable. No borrowings were outstanding on either facility as of June 30, 2006.

In January 2006, Entergy Mississippi issued $100 million of 5.92% Series of First Mortgage Bonds due February 2016. Entergy Mississippi used the proceeds to purchase the Attala power plant and to repay short-term indebtedness.

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 and proceedings and the Energy Policy Act of 2005, and market and credit risks. The following are updates to the information provided in the Form 10-K.

State and Local Rate Regulation

In March 2006, Entergy Mississippi made its annual scheduled formula rate plan filing with the MPSC.  The filing was amended by an April 2006 filing.  The amended filing showed that an increase of $3.1 million in electric revenues is warranted.  The MPSC has approved a settlement providing for a $1.8 million rate increase, which will be implemented in August 2006.

Federal Regulation

System Agreement Proceedings

See Entergy Corporation and Subsidiaries' "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Federal Regulation - System Agreement Litigation, APSC Complaint filed with the FERC, and APSC System Agreement Investigation" for updates regarding proceedings involving the System Agreement.

89

Independent Coordinator of Transmission (ICT)

See Entergy Corporation and Subsidiaries' "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Federal Regulation - Independent Coordinator of Transmission" for an update regarding Entergy's ICT proposal.

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 pension and other retirement costs.

Recently Issued Accounting Pronouncements

FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48) was issued in July 2006 and is effective for Entergy Mississippi in the first quarter of 2007. The FASB's objective in issuing this interpretation is to increase comparability among companies in financial reporting of income taxes. 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 Mississippi does not expect that the adoption of FIN 48 will materially affect its financial position, results of operations, or cash flows.

90

ENTERGY MISSISSIPPI, INC.
INCOME STATEMENTS
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
     
    Three Months Ended   Six Months Ended
    2006   2005   2006   2005
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Domestic electric   $387,849    $288,244    $761,083    $539,490 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   184,001    29,924    363,158    73,291 
  Purchased power   115,334    144,226    239,760    260,284 
  Other operation and maintenance   50,047    47,750    91,012    88,731 
Taxes other than income taxes   14,707    14,900    32,223    28,666 
Depreciation and amortization   19,074    17,982    36,070    35,919 
Other regulatory credits - net   (36,266)   (2,331)   (56,908)   (1,966)
TOTAL   346,897    252,451    705,315    484,925 
                 
OPERATING INCOME   40,952    35,793    55,768    54,565 
                 
OTHER INCOME                
Allowance for equity funds used during construction   873    1,060    2,114    2,061 
Interest and dividend income   726    690    955    1,328 
Miscellaneous - net   (470)   (322)   (1,032)   (691)
TOTAL   1,129    1,428    2,037    2,698 
                 
INTEREST AND OTHER CHARGES      
Interest on long-term debt   11,492    9,839    22,607    19,673 
Other interest - net   757    828    2,869    1,445 
Allowance for borrowed funds used during construction   (583)   (681)   (1,397)   (1,344)
TOTAL   11,666    9,986    24,079    19,774 
                 
INCOME BEFORE INCOME TAXES   30,415    27,235    33,726    37,489 
                 
Income taxes   10,668    9,516    10,682    12,548 
                 
NET INCOME   19,747    17,719    23,044    24,941 
                 
Preferred dividend requirements and other   707    858    1,414    1,700 
                 
EARNINGS APPLICABLE TO                
COMMON STOCK   $19,040    $16,861    $21,630    $23,241 
                 
See Notes to Respective Financial Statements.                

91

 

 

 

 

 

 

 

 

 

 

 

(Page left blank intentionally)

92

 

ENTERGY MISSISSIPPI, INC.
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
     
    2006   2005
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $23,044    $24,941 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Other regulatory credits - net   (56,908)   (1,966)
  Depreciation and amortization   36,070    35,919 
  Deferred income taxes and investment tax credits   (32,541)   (499)
  Changes in working capital:        
    Receivables   (6,727)   1,572 
    Fuel inventory   (5,295)   (776)
    Accounts payable   (23,111)   (8,553)
    Taxes accrued   76,333    (8,091)
    Interest accrued   (377)   525 
    Deferred fuel costs   207,786    8,056 
    Other working capital accounts   70,785    (9)
  Provision for estimated losses and reserves   (31)   319 
  Changes in other regulatory assets   (36,761)   (4,326)
  Other   (30,765)   1,287 
Net cash flow provided by operating activities   221,502    48,399 
         
INVESTING ACTIVITIES        
Construction expenditures   (82,229)   (69,477)
Payment for purchase of plant   (88,199)   - 
Allowance for equity funds used during construction   2,114    2,061 
Changes in other temporary investments - net   (1,501)   - 
Change in money pool receivable - net   (30,499)   (31,904)
Net cash flow used in investing activities   (200,314)   (99,320)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt   99,173    - 
Proceeds from the issuance of preferred stock   -    29,340 
Change in money pool payable - net   (84,066)   - 
Dividends paid:        
  Common stock   (1,400)   (11,400)
  Preferred stock   (1,414)   (1,685)
Net cash flow provided by financing activities   12,293    16,255 
         
Net increase (decrease) in cash and cash equivalents   33,481    (34,666)
         
Cash and cash equivalents at beginning of period   4,523    80,396 
         
Cash and cash equivalents at end of period   $38,004    $45,730 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid/(received) during the period for:        
  Interest - net of amount capitalized   $24,777    $19,549 
  Income taxes   ($52,278)   $4,446 
         

93

 

 

ENTERGY MISSISSIPPI, INC.
BALANCE SHEETS
ASSETS
June 30, 2006 and December 31, 2005
(Unaudited)
     
  2006   2005
  (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents:        
  Cash   $2,753    $4,523 
  Temporary cash investments - cost,        
   which approximates market   35,251   
     Total cash and cash equivalents   38,004    $4,523 
Accounts receivable:        
  Customer   100,371    102,202 
  Allowance for doubtful accounts   (797)   (1,826)
  Associated companies   39,851    5,415 
  Other   10,730    9,254 
  Accrued unbilled revenues   35,828    33,712 
     Total accounts receivable   185,983    148,757 
Deferred fuel costs     113,956 
Accumulated deferred income taxes   8,632   
Fuel inventory - at average cost   8,382    3,087 
Materials and supplies - at average cost   25,387    21,521 
Prepayments and other   8,862    62,759 
TOTAL   275,250    354,603 
         
OTHER PROPERTY AND INVESTMENTS        
Investment in affiliates - at equity   5,531    5,531 
Non-utility property - at cost (less accumulated depreciation)   6,130    6,199 
TOTAL   11,661    11,730 
         
UTILITY PLANT        
Electric   2,657,008    2,473,035 
Property under capital lease   26    50 
Construction work in progress   66,756    119,354 
TOTAL UTILITY PLANT   2,723,790    2,592,439 
Less - accumulated depreciation and amortization   901,307    886,687 
UTILITY PLANT - NET   1,822,483    1,705,752 
         
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  SFAS 109 regulatory asset - net   18,234    17,073 
  Other regulatory assets   206,850    186,197 
Long-term receivable   2,567    3,270 
Other   32,776    32,418 
TOTAL   260,427    238,958 
         
TOTAL ASSETS   $2,369,821    $2,311,043 
         
See Notes to Respective Financial Statements.        
 
94
 
ENTERGY MISSISSIPPI, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 2006 and December 31, 2005
(Unaudited)
     
  2006   2005
  (In Thousands)
 
CURRENT LIABILITIES        
Accounts payable:        
  Associated companies   $ 38,478    $ 158,579 
  Other   68,621    83,306 
Customer deposits   47,848    44,025 
Taxes accrued   30,161    33,121 
Accumulated deferred income taxes     13,233 
Interest accrued   13,274    13,651 
Deferred fuel costs   93,830   
Obligations under capital leases   28    40 
Other   19,669    2,739 
TOTAL   311,909    348,694 
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   509,276    491,857 
Accumulated deferred investment tax credits   11,702    12,358 
Obligations under capital leases     11 
Other regulatory liabilities     34,368 
Retirement cost liabilities   4,133    4,016 
Accumulated provisions   9,405    9,436 
Long-term debt   795,150    695,146 
Other   84,455    91,588 
TOTAL   1,414,121    1,338,780 
         
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 2006 and 2005   199,326    199,326 
Capital stock expense and other   (690)   (682)
Retained earnings   394,774    374,544 
TOTAL   643,791    623,569 
         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $2,369,821    $2,311,043 
         
See Notes to Respective Financial Statements.        
         

95

 

ENTERGY MISSISSIPPI, INC.
SELECTED OPERATING RESULTS
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2006   2005   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 137   $ 99   $ 38    38 
  Commercial   128   91   37    41 
  Industrial   64   46   18    39 
  Governmental   12   9     33 
     Total retail   341   245   96    39 
  Sales for resale                
    Associated companies   15   12     25 
    Non-associated companies   11   8     38 
  Other   21   23   (2)   (9)
     Total   $ 388   $ 288   $ 100    35 
                  
Billed Electric Energy                
 Sales (GWh):                
  Residential   1,144   1,060   84   
  Commercial   1,128   1,057   71   
  Industrial   720   708   12   
  Governmental   100   94    
     Total retail   3,092   2,919   173   
  Sales for resale                
    Associated companies   183   104   79    76 
    Non-associated companies   114   109    
     Total   3,389   3,132   257   
                 
                 
    Six Months Ended   Increase/    
Description   2006   2005   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 282   $ 195   $ 87    45 
  Commercial   258   176   82    47 
  Industrial   132   90   42    47 
  Governmental   25   18     39 
     Total retail   697   479   218    46 
  Sales for resale                
    Associated companies   23   18     28 
    Non-associated companies   19   17     12 
  Other   22   25   (3)   (12)
     Total   $ 761   $ 539   $ 222    41 
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   2,329   2,256   73   
  Commercial   2,168   2,078   90   
  Industrial   1,421   1,400   21   
  Governmental   193   186    
     Total retail   6,111   5,920   191   
  Sales for resale                
    Associated companies   254   121   133    110 
    Non-associated companies   182   177    
     Total   6,547   6,218   329   
                 

96

ENTERGY NEW ORLEANS, INC. (Debtor-in-possession)

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. Following is an update to the discussion in the Form 10-K.

As discussed in the Form 10-K, a federal hurricane aid package became law that includes funding for Community Development Block Grants (CDBG) that allows state and local leaders to fund individual recovery priorities. The law permits funding for infrastructure restoration. It is uncertain how much funding, if any, will be designated for utility reconstruction and the timing of such decisions is also uncertain. The U.S. Department of Housing and Urban Development has allocated approximately $10.4 billion for Louisiana, $5.1 billion for Mississippi, and $74 million for Texas, with an additional $1 billion approved by Congress but not yet allocated to the states. The states, in turn, will administer the grants. Entergy New Orleans is currently preparing an application to seek CDBG funding. In March 2006, Entergy New Orleans provided a justification statement to state and local officials. The statement, which will be reviewed by the Louisiana Recovery Authority, includes all the estimated costs of Hurricane Katrina damage, as well as a lost customer base component intended to help offset the need for storm-related rate increases. The statement includes justification for a request for $718 million in CDBG funding.

In the first quarter 2006, Entergy New Orleans reduced its accrued accounts payable for storm restoration costs by $97.4 million, with corresponding reductions of $88.7 million in construction work in progress and $8.7 million in regulatory assets, based on a reassessment of the nature and timing of expected restoration and rebuilding costs and the obligations associated with restoring service. Although Entergy New Orleans reduced its accrual for restoration spending by these amounts, it continues to expect to incur the related costs over time and Entergy New Orleans still expects its storm restoration and business continuity costs to total approximately $275 million. As discussed further in the Form 10-K, Entergy New Orleans still expects the cost of the longer-term accelerated replacement of the gas distribution system in New Orleans to be $355 million.

See "State and Local Rate Regulation" below for a discussion of rate filings made by Entergy New Orleans directed towards recovery of its storm losses and restoration costs.

Bankruptcy Proceedings

See Note 14 to the domestic utility companies and System Energy financial statements in the Form 10-K for a discussion of the Entergy New Orleans bankruptcy proceeding. Following are updates to that discussion.

As discussed in the Form 10-K, the bankruptcy court issued its order in December 2005 giving final approval for the $200 million debtor-in-possession credit facility, and the indenture trustee for Entergy New Orleans' first mortgage bonds appealed the order. On March 29, 2006 the bankruptcy court approved a settlement among Entergy New Orleans, Entergy Corporation, and the indenture trustee, and the indenture trustee dismissed its appeal.

In April 2006, the bankruptcy judge extended the exclusivity period for filing a plan of reorganization by Entergy New Orleans to August 21, 2006. Entergy New Orleans has filed another motion to extend the exclusivity period for filing its plan of reorganization, requesting that the deadline be extended an additional 120 days until December 19, 2006. The court entered an order extending the August 21, 2006 date for Entergy New Orleans' exclusive right to file a plan of reorganization until the court can hear and rule on Entergy New Orleans' motion to extend, which was set for hearing on September 18, 2006. In order to file a plan of reorganization no later than December 2006, Entergy New Orleans believes that it needs resolution of its June 2006 formula rate plan and storm rider filings and commitment on timing and amount of CDBG funds. If the motion to extend is granted, Entergy New Orleans will have the exclusive right to file its plan of reorganization until December 19, 2006, and will have until February 15, 2007 to obtain acceptances of its plan by each class of impaired creditors.

 

97

 

The bankruptcy judge set a date of April 19, 2006 by which creditors with prepetition claims against Entergy New Orleans must, with certain exceptions, file their proofs of claim in the bankruptcy case. Approximately 500 claims have been filed thus far in Entergy New Orleans' bankruptcy proceeding. Entergy New Orleans is currently analyzing the accuracy and validity of the claims filed, and has begun seeking withdrawal or modification of claims or objecting to claims with which it disagrees.

Municipalization is one potential outcome of Entergy New Orleans' recovery effort. In June 2006 Louisiana passed a law that establishes a governance structure for a public power authority, if municipalization of Entergy New Orleans' utility business is pursued.

Results of Operations

Net Income

Second Quarter 2006 Compared to Second Quarter 2005

Net income increased $2.4 million primarily due to lower operation and maintenance expense, interest charges, and taxes other than income taxes, partially offset by lower net revenue.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net income increased $2.3 million primarily due to lower operation and maintenance expense, interest charges, and taxes other than income taxes, and higher other income, partially offset by lower net revenue.

Net Revenue

Second Quarter 2006 Compared to Second Quarter 2005

Net revenue, which is Entergy New Orleans' measure of gross margin, 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 second quarter of 2006 to the second quarter of 2005.

   

Amount

   

(In Millions)

     

2005 net revenue

 

$67.8 

Volume/weather

 

(30.5)

Net wholesale revenue

 

16.0 

Other

 

(2.0)

2006 net revenue

 

$51.3 

The volume/weather variance is due to a decrease in electricity usage in the service territory caused by customer losses following Hurricane Katrina. Billed retail electricity usage decreased a total of 494 GWh compared to the second quarter of 2005, a decline of 35%.

The net wholesale revenue variance is due to an increase in energy available for sales for resale due to the decrease in retail usage caused by customer losses following Hurricane Katrina. The increased 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 demand caused by Hurricane Katrina and provide revenue support for the costs of Entergy New Orleans' share

 

98

 

of Grand Gulf. Beginning July 1, 2006, the City Council approved the return of Grand Gulf output to the service of Entergy New Orleans' load. The City Council also approved the recovery of all Grand Gulf costs through Entergy New Orleans' fuel adjustment clause (a portion of Grand Gulf costs was previously recovered through base rates). The City Council may consider alternative rate treatment for non-fuel Grand Gulf costs in connection with Entergy New Orleans' June 2006 electric formula rate plan filing.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net revenue, which is Entergy New Orleans' measure of gross margin, 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 six months ended June 30, 2006 to the six months ended June 30, 2005.

   

Amount

   

(In Millions)

     

2005 net revenue

 

$120.0 

Volume/weather

 

(53.2)

Net gas revenue

 

(7.5)

Price applied to unbilled electric sales

 

(3.3)

Net wholesale revenue

 

41.2 

Other

 

(5.6)

2006 net revenue

 

$91.6 

The volume/weather variance is due to a decrease in electricity usage in the service territory caused by customer losses following Hurricane Katrina. Billed retail electricity usage decreased a total of 1,075 GWh compared to the six months ended June 30, 2005, a decline of 40%.

The net gas revenue variance is due to a decrease in gas usage in the service territory caused by customer losses following Hurricane Katrina, partially offset by a revised estimate of deferred fuel costs.

The price applied to unbilled electric sales variance is due to a decrease in the fuel cost component of the price applied to unbilled sales. The decrease in the fuel cost component is due to a decrease in the average cost of generation due to a change in the generation mix from natural gas to solid fuel resources. See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates" in the Form 10-K and Note 1 to the domestic utility companies and System Energy financial statements in the Form 10-K for further discussion of the accounting for unbilled revenues.

The net wholesale revenue variance is due to an increase in energy available for sales for resale due to the decrease in retail usage caused by customer losses following Hurricane Katrina. The increased 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 demand caused by Hurricane Katrina and provide revenue support for the costs of Entergy New Orleans' share of Grand Gulf. Beginning July 1, 2006, the City Council approved the return of Grand Gulf output to the service of Entergy New Orleans' load. The City Council also approved the recovery of all Grand Gulf costs through Entergy New Orleans' fuel adjustment clause (a portion of Grand Gulf costs was previously recovered through base rates). The City Council may consider alternative rate treatment for non-fuel Grand Gulf costs in connection with Entergy New Orleans' June 2006 electric formula rate plan filing.

99

Other Income Statement Variances

Second Quarter 2006 Compared to Second Quarter 2005

Other operation and maintenance expenses decreased primarily due to shifts in costs from normal operations and maintenance work to storm restoration work as a result of Hurricane Katrina.

Taxes other than income taxes decreased primarily due to lower franchise taxes in 2006 due to lower revenues.

Interest and other charges decreased primarily due to the cessation of interest accruals on the first mortgage bonds as a result of the bankruptcy filing, partially offset by interest accrued on the DIP credit facility.

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Other operation and maintenance expenses decreased primarily due to shifts in costs from normal operations and maintenance work to storm restoration work as a result of Hurricane Katrina.

Taxes other than income taxes decreased primarily due to lower franchise taxes in 2006 due to lower revenues.

Interest and other charges decreased primarily due to the cessation of interest accruals on the first mortgage bonds as a result of the bankruptcy filing, partially offset by interest accrued on the DIP credit facility.

Income Taxes

The effective income tax rates for the second quarters of 2006 and 2005 were 38.6% and 41.9%, respectively. The effective income tax rates for the six months ended June 30, 2006 and 2005 were 38.3% and 40.4%, respectively. The differences in the effective income tax rates for the periods presented versus the federal statutory rate of 35.0% are primarily due to state income taxes and book and tax differences related to utility plant items.

Preferred Dividends

No preferred dividends were declared during the first quarter of 2006. Due to its bankruptcy, Entergy New Orleans did not pay the preferred stock dividends due October 1, 2005; January 1, 2006; or April 1, 2006. 

As discussed further in the Form 10-K, if dividends with respect to the 4.75% preferred stock are not paid for four quarters, the holders of these shares would have the right to elect a majority of the Entergy New Orleans board of directors.  Entergy New Orleans filed a motion in the bankruptcy court seeking authority to recommence paying dividends to the holders of the 4.75% preferred shares. After a hearing on the motion on May 3, 2006, the court granted Entergy New Orleans the authority to pay dividends to the holders of the 4.75% preferred shares, beginning with the dividend due on July 1, 2006, and thereafter, unless objections are filed by creditors forty-five days in advance of a dividend payment date. If any objections are filed, the matter would be heard by the bankruptcy court. Entergy New Orleans declared and paid the dividend due on July 1, 2006, and intends to declare and pay the dividends on the 4.75% preferred shares each quarter pending resolution of its plan of reorganization.

Liquidity and Capital Resources

Debtor-in-Possession Credit Facility

See the Form 10-K for a discussion of the Entergy New Orleans debtor-in-possession (DIP) credit facility. Following is an update to that discussion.

 

100

 

As discussed in the Form 10-K, the bankruptcy court issued its order in December 2005 giving final approval for the $200 million DIP credit facility, and the indenture trustee for Entergy New Orleans' first mortgage bonds appealed the order. On March 29, 2006 the bankruptcy court approved a settlement among Entergy New Orleans, Entergy Corporation, and the indenture trustee, and the indenture trustee dismissed its appeal. As of June 30, 2006, Entergy New Orleans had approximately $40 million of outstanding borrowings under the DIP credit facility. Management currently expects the bankruptcy court-authorized funding level to be sufficient to fund Entergy New Orleans' expected level of operations.

As discussed in the Form 10-K, borrowings under the DIP credit facility are due in full, and the agreement will terminate, at the earliest of several times or events, including August 23, 2006. Entergy and Entergy New Orleans have agreed to an amendment to the DIP credit agreement that extends the August 23, 2006 maturity date to August 23, 2007, and this amendment is subject to bankruptcy court approval. Entergy New Orleans has filed a motion with the bankruptcy court to authorize Entergy New Orleans to enter into the amendment, which is set for hearing August 16, 2006.

Cash Flow

Cash flows for the six months ended June 30, 2006 and 2005 were as follows:

 

 

2006

 

2005

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$48,056 

 

$7,954 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

78,453 

 

1,864 

 

Investing activities

 

(47,845)

 

(29,464)

 

Financing activities

 

(50,343)

 

27,704 

Net increase (decrease) in cash and cash equivalents

 

(19,735)

 

104 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$28,321 

 

$8,058 

Operating Activities

Net cash provided by operating activities increased $76.6 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to receipt of the income tax refund discussed below along with a decrease in interest paid.

In the first quarter of 2006, Entergy Corporation received an income tax refund as a result of net operating loss carryback provisions contained in the Gulf Opportunity Zone Act of 2005, as discussed in Note 3 to the domestic utilities companies and System Energy financial statements in the Form 10-K. In accordance with Entergy's intercompany tax allocation agreement, in April 2006, Entergy Corporation distributed $71 million of the refund to Entergy New Orleans. As discussed above, Entergy New Orleans used the income tax refund to repay a portion of the borrowings outstanding under the DIP credit facility.

Investing Activities

Net cash used in investing activities increased $18.4 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to capital expenditure activity related to Hurricane Katrina in addition to money pool activity in 2005.

101

Financing Activities

Financing activities used $50.3 million of cash for the six months ended June 30, 2006 because of the net repayment in 2006 of $50.3 million of borrowings under the DIP credit facility.

Capital Structure

Entergy New Orleans' capitalization is shown in the following table.

 

 

June 30,
2006

 

December 31,
2005

 

 

 

 

 

 

 

Debt to capital

 

60.5%

 

66.4%

 

Debt consists of notes payable and long-term debt, including the currently maturing portion. Capital consists of debt and shareholders' equity.

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

June 30,
2006

 

December 31,
2005

 

June 30,
2005

 

December 31,
2004

(In Thousands)

 

 

 

 

 

 

 

($35,558)

 

($35,558)

 

$7,758

 

$1,413

See Note 4 to the domestic utility companies and System Energy financial statements in the Form 10-K for a description of the money pool. Entergy New Orleans remains a participant in the money pool, but Entergy New Orleans has not made, and does not expect to make, any additional borrowings from the money pool while it is in bankruptcy proceedings. The money pool borrowings reflected on Entergy New Orleans' balance sheet as of June 30, 2006 are classified as a pre-petition obligation subject to compromise.

In addition, Entergy New Orleans had a 364-day credit facility in the amount of $15 million which expired in May 2006. As of June 30, 2006, the full amount of the credit facility remains outstanding under bankruptcy protection. In July 2006, the bankruptcy judge authorized Entergy New Orleans to set off $15 million of its cash currently held by the lender against the outstanding debt on 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, federal regulation and proceedings, the Energy Policy Act of 2005, market and credit risks, environmental risks, and litigation risks. Following are updates to the discussion in the Form 10-K.

State and Local Rate Regulation

In June 2006, Entergy New Orleans made its annual formula rate plan filings with the City Council.  The filings show various alternatives to reflect the effect of Entergy New Orleans' lost customers and decreased revenue. Entergy New Orleans' recommended alternative adjusts for lost customers and assumes that the City Council's June 2006 decision to allow recovery of all Grand Gulf costs through the fuel adjustment clause stays in place (a portion of Grand Gulf costs was previously recovered through base rates). Under that alternative, annual increases of $6.4

 

102

 

million in electric base rate revenues (an increase of 4.4%) and $22.8 million in gas base rate revenues (an increase of 160.9%) are warranted. The filings triggered the prescribed four-month period for review by the City Council's Advisors and other parties, and rate adjustments, if any, could be implemented as soon as the first billing cycle of November 2006.

At the same time as it made its formula rate plan filings, Entergy New Orleans also filed with the City Council a request to implement two storm-related riders. With the first rider, Entergy New Orleans seeks to recover over a ten-year period the $114 million in electric restoration costs and the $25 million in gas restoration costs that it has actually spent through March 31, 2006. Entergy New Orleans also proposed semiannual filings to update the rider for additional restoration spending and also to consider the receipt of CDBG funds or insurance proceeds that it may receive. With the second rider, Entergy New Orleans seeks to establish over a ten-year period a $150 million storm reserve to provide for the risk of another storm. Entergy New Orleans requested that the City Council consider the proposed riders within the same time frame as the formula rate plans, which would allow implementation as soon as the first billing cycle of November 2006.

Federal Regulation

System Agreement Proceedings

See Entergy Corporation and Subsidiaries' "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Federal Regulation - System Agreement Litigation, APSC Complaint filed with the FERC, and APSC System Agreement Investigation" for updates regarding proceedings involving the System Agreement.

Independent Coordinator of Transmission (ICT)

See Entergy Corporation and Subsidiaries' "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Federal Regulation - Independent Coordinator of Transmission" for an update regarding Entergy's ICT proposal.

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 pension and other retirement costs.

Recently Issued Accounting Pronouncements

FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48) was issued in July 2006 and is effective for Entergy New Orleans in the first quarter of 2007. The FASB's objective in issuing this interpretation is to increase comparability among companies in financial reporting of income taxes. 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 New Orleans does not expect that the adoption of FIN 48 will materially affect its financial position, results of operations, or cash flows.

 

103

 

 

ENTERGY NEW ORLEANS, INC.
(DEBTOR-IN-POSSESSION)
INCOME STATEMENTS
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
                 
  Three Months Ended   Six Months Ended
    2006   2005   2006   2005
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Domestic electric   $117,827    $158,799    $217,076    $289,971 
Natural gas   18,128    31,128    55,140    91,223 
TOTAL   135,955    189,927    272,216    381,194 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   16,433    54,843    51,101    135,939 
  Purchased power   67,211    66,001    127,448    122,783 
  Other operation and maintenance   16,279    30,143    30,089    50,990 
Taxes other than income taxes   8,089    10,693    16,689    21,373 
Depreciation and amortization   8,508    9,059    15,972    17,145 
Reorganization items   2,115      3,793   
Other regulatory charges - net   1,037    1,254    2,080    2,509 
TOTAL   119,672    171,993    247,172    350,739 
                 
OPERATING INCOME   16,283    17,934    25,044    30,455 
                 
OTHER INCOME                
Allowance for equity funds used during construction   909    246    1,988    528 
Interest and dividend income   786    308    1,589    526 
Miscellaneous - net   20    (254)   (132)   (377)
TOTAL   1,715    300    3,445    677 
                 
INTEREST AND OTHER CHARGES          
Interest on long-term debt   185    3,518    369    7,004 
Other interest - net   997    484    3,138    868 
Allowance for borrowed funds used during construction   (743)   (185)   (1,606)   (417)
TOTAL    439    3,817    1,901    7,455 
                 
INCOME BEFORE INCOME TAXES   17,559    14,417    26,588    23,677 
                  
Income taxes   6,785    6,043    10,171    9,567 
                 
NET INCOME   10,774    8,374    16,417    14,110 
                 
Preferred dividend requirements and other   92    241    92    482 
                 
EARNINGS APPLICABLE TO                 
COMMON STOCK   $10,682    $8,133    $16,325    $13,628 
                 
See Notes to Respective Financial Statements.                
                 

104

 

ENTERGY NEW ORLEANS, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
     
    2006   2005
    (In Thousands)
OPERATING ACTIVITIES        
Net income   $16,417    $14,110 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Other regulatory charges - net   2,080    2,509 
  Depreciation and amortization   15,972    17,145 
  Deferred income taxes and investment tax credits   2,811    3,407 
  Changes in working capital:        
    Receivables   8,438    4,130 
    Fuel inventory   6,068    4,181 
    Accounts payable   (3,613)   (13,223)
    Taxes accrued   64,541    6,045 
    Interest accrued   549    (403)
    Deferred fuel costs   (3,022)   (20,837)
    Other working capital accounts   (6,911)   (5,334)
  Provision for estimated losses and reserves   (81)   (317)
  Changes in pension liability   2,929    (9,955)
  Changes in other regulatory assets   (32,658)   3,936 
  Other   4,933    (3,530)
Net cash flow provided by operating activities   78,453    1,864 
         
INVESTING ACTIVITIES        
Construction expenditures   (49,833)   (23,647)
Allowance for equity funds used during construction   1,988    528 
Change in money pool receivable - net   -    (6,345)
Net cash flow used in investing activities   (47,845)   (29,464)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt   -    29,791 
Retirement of long-term debt   -    (5)
Repayment of DIP credit facility   (50,251)   - 
Dividends paid:        
  Common stock   -    (1,600)
  Preferred stock   (92)   (482)
Net cash flow provided by (used in) financing activities   (50,343)   27,704 
         
Net increase (decrease) in cash and cash equivalents   (19,735)   104 
         
Cash and cash equivalents at beginning of period   48,056    7,954 
         
Cash and cash equivalents at end of period   $28,321    $8,058 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid/(received) during the period for:        
  Interest - net of amount capitalized   $2,589    $7,882 
  Income taxes   ($59,730)   - 
         
See Notes to Respective Financial Statements.        
         

105

 

ENTERGY NEW ORLEANS, INC.
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS
ASSETS
June 30, 2006 and December 31, 2005
(Unaudited)
   
  2006   2005
  (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents   $28,321    $48,056 
Accounts receivable:        
  Customer   69,307    82,052 
  Allowance for doubtful accounts   (18,558)   (25,422)
  Associated companies   10,839    17,895 
  Other   6,989    6,530 
  Accrued unbilled revenues   27,738    23,698 
     Total accounts receivable   96,315    104,753 
Deferred fuel costs   33,615    30,593 
Fuel inventory - at average cost   1,980    8,048 
Materials and supplies - at average cost   7,046    8,961 
Prepayments and other   7,485    61,581 
TOTAL   174,762    261,992 
         
OTHER PROPERTY AND INVESTMENTS        
Investment in affiliates - at equity   3,259    3,259 
Non-utility property at cost (less accumulated depreciation)   1,107    1,107 
TOTAL   4,366    4,366 
         
UTILITY PLANT        
Electric   739,678    691,045 
Natural gas   191,799    189,207 
Construction work in progress   59,685    202,353 
TOTAL UTILITY PLANT   991,162    1,082,605 
Less - accumulated depreciation and amortization   430,333    428,053 
UTILITY PLANT - NET   560,829    654,552 
         
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  Other regulatory assets   173,045    166,133 
Long term receivables   1,090    1,812 
Other   22,641    31,266 
TOTAL   196,776    199,211 
         
TOTAL ASSETS   $936,733    $1,120,121 
         
See Notes to Respective Financial Statements.        
 
106
 
ENTERGY NEW ORLEANS, INC.
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, 2006 and December 31, 2005
(Unaudited)
   
  2006   2005
  (In Thousands)
 
CURRENT LIABILITIES        
DIP credit facility   $39,749   $90,000
Notes payable   15,000   15,000
Accounts payable:        
  Associated companies   46,464   55,923
  Other   62,613   228,496
Customer deposits   12,321   16,930
Taxes accrued   5,510   -
Accumulated deferred income taxes   5,017   1,898
Interest accrued   1,744   1,195
Other   3,200   2,018
TOTAL CURRENT LIABILITIES NOT SUBJECT TO COMPROMISE   191,618   411,460
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   121,008   127,680
Accumulated deferred investment tax credits   3,358   3,570
SFAS 109 regulatory liability - net   59,053   52,229
Other regulatory liabilities   -   591
Retirement cost liability   2,505   2,421
Accumulated provisions   2,099   2,119
Pension liability   38,623   35,694
Other   5,492   5,730
TOTAL NON-CURRENT LIABILITIES NOT SUBJECT TO COMPROMISE   232,138   230,034
         
LIABILITIES SUBJECT TO COMPROMISE   326,942   308,917
         
TOTAL LIABILITIES   750,698   950,411
         
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 2006        
 and 2005   33,744   33,744
Paid-in capital   36,294   36,294
Retained earnings   96,217   79,892
TOTAL   186,035   169,710
         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $936,733   $1,120,121
         
See Notes to Respective Financial Statements.        

107

 

ENTERGY NEW ORLEANS, INC.
(DEBTOR-IN-POSSESSION)
SELECTED OPERATING RESULTS
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2006   2005   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $22   $38   ($16)   (42)
  Commercial   37   40   (3)   (8)
  Industrial   10   9     11 
  Governmental   14   17   (3)   (18)
     Total retail   83   104   (21)   (20)
  Sales for resale                
    Associated companies   4   35   (31)   (89)
    Non-associated companies   18   -   18   
  Other   13   20   (7)   (35)
     Total   $118   $159   ($41)   (26)
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   206   447   (241)   (54)
  Commercial   402   552   (150)   (27)
  Industrial   141   162   (21)   (13)
  Governmental   161   243   (82)   (34)
     Total retail   910   1,404   (494)   (35)
  Sales for resale                
    Associated companies   6   400   (394)   (99)
    Non-associated companies   369   6   363    6,050 
     Total   1,285   1,810   (525)   (29)
                 
                 
    Six Months Ended   Increase/    
Description   2006   2005   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $39   $67   ($28)   (42)
  Commercial   72   74   (2)   (3)
  Industrial   19   16     19 
  Governmental   24   29   (5)   (17)
     Total retail   154   186   (32)   (17)
  Sales for resale                
    Associated companies   11   81   (70)   (86)
    Non-associated companies   45   1   44    4,400 
  Other   7   22   (15)   (68)
     Total   $217   $290   ($73)   (25)
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   344   847   (503)   (59)
  Commercial   762   1,071   (309)   (29)
  Industrial   244   306   (62)   (20)
  Governmental   267   468   (201)   (43)
     Total retail   1,617   2,692   (1,075)   (40)
  Sales for resale                
    Associated companies   126   1,006   (880)   (87)
    Non-associated companies   776   10   766    7,660 
     Total   2,519   3,708   (1,189)   (32)
                 
                 

108

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 $3.7 million for the second quarter of 2006 compared to the second quarter of 2005 primarily due to an increase in rate base in 2006 resulting in higher operating income. Net income increased by $8.2 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to an increase in rate base in 2006 resulting in higher operating income combined with higher interest income earned on money pool investments.

Liquidity and Capital Resources

Cash Flow

Cash flows for the six months ended June 30, 2006 and 2005 were as follows:

 

 

2006

 

2005

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$75,704 

 

$216,355 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

(83,809)

 

120,292 

 

Investing activities

 

162,738 

 

(119,859)

 

Financing activities

 

(92,989)

 

(81,590)

Net decrease in cash and cash equivalents

 

(14,060)

 

(81,157)

 

 

 

 

 

Cash and cash equivalents at end of period

 

$61,644 

 

$135,198 

Operating Activities

Operating activities used $83.8 million in cash flow for the six months ended June 30, 2006 compared to providing $120.3 million in cash flow for the six months ended June 30, 2005 primarily due to an increase of $208.5 million in income tax payments.

Investing Activities

Investing activities provided $162.7 million in cash flow for the six months ended June 30, 2006 compared to using $119.9 million in cash flow for the six months ended June 30, 2005 primarily due to money pool activity. Partially offsetting the increase in cash provided was an increase in construction expenditures primarily resulting from capital spending on dry fuel storage.

 

109

 

Financing Activities

The increase of $11.4 million in net cash used in financing activities for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 was primarily due to an increase of $17.2 million in common stock dividends paid, partially offset by a decrease of $5.8 million in the January 2006 principal payment made on the Grand Gulf sale-leaseback compared to the January 2005 principal payment.

Capital Structure

System Energy's capitalization is balanced between equity and debt, as shown in the following table.

 

 

June 30,
2006

 

December 31,
2005

 

 

 

 

 

 

 

Net debt to net capital

 

48.5%

 

49.0%

 

Effect of subtracting cash from debt

 

1.8%

 

2.1%

 

Debt to capital

 

50.3%

 

51.1%

 

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 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 is an update to the Form 10-K.

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

June 30,
2006

 

December 31,
2005

 

June 30,
2005

 

December 31,
2004

(In Thousands)

 

 

 

 

 

 

 

$88,331

 

$277,287

 

$163,416

 

$61,592

See Note 4 to the domestic utility companies and System Energy financial statements in the Form 10-K for a description of the 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 market risks, 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 pension and other retirement benefits.

 

110

 

Recently Issued Accounting Pronouncements

FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48) was issued in July 2006 and is effective for System Energy in the first quarter of 2007. The FASB's objective in issuing this interpretation is to increase comparability among companies in financial reporting of income taxes. 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. System Energy does not expect that the adoption of FIN 48 will materially affect its financial position, results of operations, or cash flows.

111

 

SYSTEM ENERGY RESOURCES, INC.
INCOME STATEMENTS
For the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
 
  Three Months Ended   Six Months Ended
    2006   2005   2006   2005
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Domestic electric   $129,176    $126,364    $260,830    $251,154 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   10,168    10,139    21,381    19,858 
  Nuclear refueling outage expenses   3,962    3,026    7,535    6,019 
  Other operation and maintenance   26,563    27,346    49,815    50,482 
Decommissioning   5,925    6,240    11,744    12,368 
Taxes other than income taxes   5,817    6,322    12,006    12,371 
Depreciation and amortization   23,811    24,158    49,488    50,702 
Other regulatory credits - net   (3,766)   (4,126)   (5,746)   (8,511)
TOTAL   72,480    73,105    146,223    143,289 
                 
OPERATING INCOME   56,696    53,259    114,607    107,865 
                 
OTHER INCOME                
Allowance for equity funds used during construction   775    321    1,458    627 
Interest and dividend income   4,271    3,672    9,900    6,517 
Miscellaneous - net   (91)   (108)   (198)   (221)
TOTAL   4,955    3,885    11,160    6,923 
                 
INTEREST AND OTHER CHARGES          
Interest on long-term debt   11,996    12,812    24,529    25,668 
Other interest - net   26      54   
Allowance for borrowed funds used during construction   (244)   (102)   (459)   (199)
TOTAL   11,778    12,716    24,124    25,477 
                 
INCOME BEFORE INCOME TAXES   49,873    44,428    101,643    89,311 
                 
Income taxes   20,265    18,503    41,287    37,154 
                 
NET INCOME   $29,608    $25,925    $60,356    $52,157 
                 
See Notes to Respective Financial Statements.                
                 

112

 

SYSTEM ENERGY RESOURCES, INC.
STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2006 and 2005
(Unaudited)
     
    2006   2005
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $60,356    $52,157 
Adjustments to reconcile net income to net cash flow provided by (used in) operating activities:        
  Other regulatory credits - net   (5,746)   (8,511)
  Depreciation, amortization, and decommissioning   61,231    63,070 
  Deferred income taxes and investment tax credits   (9,633)   (12,140)
  Changes in working capital:        
    Receivables   5,111    6,179 
    Accounts payable   (901)   (4,750)
    Taxes accrued   (180,245)   28,065 
    Interest accrued   (31,520)   (27,831)
    Other working capital accounts   (602)   153 
  Provision for estimated losses and reserves   1    50 
  Changes in other regulatory assets   (9,921)   (9,080)
  Other   28,060    32,930 
Net cash flow provided by (used in) operating activities   (83,809)   120,292 
         
INVESTING ACTIVITIES        
Construction expenditures   (14,557)   (7,982)
Allowance for equity funds used during construction   1,458    627 
Nuclear fuel purchases   (370)   - 
Proceeds from sale/leaseback of nuclear fuel   370    - 
Proceeds from nuclear decommissioning trust fund sales   52,562    52,287 
Investment in nuclear decommissioning trust funds   (65,681)   (62,967)
Changes in money pool receivable - net   188,956    (101,824)
Net cash flow provided by (used in) investing activities   162,738    (119,859)
         
FINANCING ACTIVITIES        
Retirement of long-term debt   (22,989)   (28,790)
Dividends paid:        
  Common stock   (70,000)   (52,800)
Net cash flow used in financing activities   (92,989)   (81,590)
         
Net decrease in cash and cash equivalents   (14,060)   (81,157)
         
Cash and cash equivalents at beginning of period   75,704    216,355 
         
Cash and cash equivalents at end of period   $61,644    $135,198 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
  Interest - net of amount capitalized   $53,199    $50,605 
  Income taxes   $220,423    $11,914 
         
See Notes to Respective Financial Statements.        
         

113

 

SYSTEM ENERGY RESOURCES, INC.
BALANCE SHEETS
ASSETS
June 30, 2006 and December 31, 2005
(Unaudited)
             
    2006   2005
  (In Thousands)
             
CURRENT ASSETS            
Cash and cash equivalents:            
  Cash       $13   $204
  Temporary cash investments - at cost,            
   which approximates market       61,631   75,500
     Total cash and cash equivalents       61,644   75,704
Accounts receivable:            
  Associated companies       134,078   327,454
  Other       2,594   3,285
     Total accounts receivable       136,672   330,739
Materials and supplies - at average cost       57,315   55,183
Deferred nuclear refueling outage costs       14,193   17,853
Prepayments and other       3,853   1,878
TOTAL       273,677   481,357
             
OTHER PROPERTY AND INVESTMENTS        
Decommissioning trust funds       249,517   236,003
             
UTILITY PLANT        
Electric       3,222,080   3,212,596
Property under capital lease       467,005   467,005
Construction work in progress       51,220   47,178
Nuclear fuel under capital lease       72,048   87,500
TOTAL UTILITY PLANT       3,812,353   3,814,279
Less - accumulated depreciation and amortization       1,944,612   1,889,886
UTILITY PLANT - NET       1,867,741   1,924,393
             
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:            
  SFAS 109 regulatory asset - net       92,386   92,883
  Other regulatory assets       302,492   292,968
Other       17,071   18,435
TOTAL       411,949   404,286
             
TOTAL ASSETS       $2,802,884   $3,046,039
             
See Notes to Respective Financial Statements.            
 
114
 
SYSTEM ENERGY RESOURCES, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
June 30, 2006 and December 31, 2005
(Unaudited)
             
    2006   2005
  (In Thousands)
 
CURRENT LIABILITIES        
Currently maturing long-term debt       $23,335    $22,989 
Accounts payable:            
  Associated companies       (745)  
  Other       22,614    22,770 
Taxes accrued       48,074    228,168 
Accumulated deferred income taxes       5,276    6,678 
Interest accrued       13,589    45,109 
Obligations under capital leases       30,236    27,716 
Other       1,656    1,811 
TOTAL       144,035    355,241 
             
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued       256,573    267,913 
Accumulated deferred investment tax credits       70,398    72,136 
Obligations under capital leases       41,812    63,307 
Other regulatory liabilities       250,828    224,997 
Decommissioning       330,670    318,927 
Accumulated provisions       2,400    2,399 
Long-term debt       799,872    819,642 
Other       22,312    27,849 
TOTAL       1,774,865    1,797,170 
             
Commitments and Contingencies            
             
SHAREHOLDER'S EQUITY        
Common stock, no par value, authorized 1,000,000 shares;            
 issued and outstanding 789,350 shares in 2006 and 2005       789,350    789,350 
Retained earnings       94,634    104,278 
TOTAL       883,984    893,628 
             
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY       $2,802,884    $3,046,039 
             
See Notes to Respective Financial Statements.            
             

115

 

ENTERGY ARKANSAS, ENTERGY GULF STATES, ENTERGY LOUISIANA, ENTERGY MISSISSIPPI, ENTERGY NEW ORLEANS (DEBTOR-IN-POSSESSION), AND SYSTEM ENERGY

NOTES TO RESPECTIVE FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. COMMITMENTS AND CONTINGENCIES

Entergy New Orleans Bankruptcy (Entergy New Orleans)

See Note 6 to the domestic utility companies and System Energy financial statements for information on the Entergy New Orleans bankruptcy proceeding.

Nuclear Insurance (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy)

See Note 8 to the domestic utility companies and System Energy financial statements in the Form 10-K for information on nuclear liability and property insurance associated with Entergy Arkansas', Entergy Gulf States', Entergy Louisiana's, and System Energy's nuclear power plants.

Non-Nuclear Property Insurance (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans)

See Note 8 to the domestic utility companies and System Energy financial statements in the Form 10-K for information on Entergy's non-nuclear property insurance program. Beginning in June 2006, the aggregation limit for all parties insured by Oil Insurance Limited for any one occurrence was reduced to $500 million. Most of Entergy's non-nuclear excess property insurance coverage includes a $75 million drop-down feature in the event of an OIL aggregation loss to which an Entergy loss contributes.

Nuclear Decommissioning and Other Asset Retirement Costs (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, and System Energy)

See Note 8 to the domestic utility companies and System Energy financial statements in the Form 10-K for information on nuclear decommissioning and other retirement costs.

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

See Note 8 to the domestic utility companies and System Energy financial statements in the Form 10-K for information regarding the bankruptcy of CashPoint, which managed a network of payment agents for the domestic utility companies.

City Franchise Ordinances (Entergy New Orleans)

Entergy New Orleans provides electric and gas service in the City of New Orleans pursuant to franchise ordinances. These ordinances contain a continuing option for the City of New Orleans to purchase Entergy New Orleans' electric and gas utility properties.

Employment Litigation (Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy)

Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and System Energy are defendants in numerous lawsuits filed by former employees asserting that they were wrongfully terminated and/or discriminated against on the basis of age, race, sex, or other protected characteristics. The defendant companies deny any liability to the plaintiffs.

116

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

See Note 8 to the domestic utility companies and System Energy 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

Storm Costs Recovery Filings with Retail Regulators

On July 31, 2006, Entergy Louisiana and Entergy Gulf States filed a supplemental and amending storm cost recovery application with the LPSC, in which Entergy Louisiana and Entergy Gulf States requested that the LPSC (1) review Entergy Louisiana's and Entergy Gulf States' testimony and exhibits relating to the costs associated with Hurricanes Katrina and Rita, and declare that those verified, actual storm-related costs through May 31, 2006 are $466.8 million for Entergy Louisiana and $200.3 million for Entergy Gulf States in the Louisiana jurisdiction and that those costs were prudently incurred; (2) declare that the annual revenue requirements associated with the recovery of those costs, based on a ten-year levelized rate are $54.4 million for Entergy Louisiana and $26.2 million for Entergy Gulf States; (3) authorize Entergy Louisiana and Entergy Gulf States to recover the costs through Storm Cost Recovery Riders (SCRRs) proposed by Entergy Louisiana and Entergy Gulf States; (4) declare that the storm costs incurred subsequent to May 31, 2006 are to be filed by Entergy Louisiana and Entergy Gulf States with the LPSC on an annual basis in connection with their annual formula rate plan (FRP) filings, and that the SCRRs be adjusted annually to reflect such costs and any insurance proceeds or CDBG funds actually received, with the adjusted amounts to be collected through the SCRRs to take effect contemporaneous with the effective date of rate changes under the FRP; (5) declare that the storm-related costs incurred by Entergy Louisiana and Entergy Gulf States meet the conditions set forth in the FRP for exclusion from the sharing provisions in those FRPs and authorize the permanent recovery of storm costs outside of the FRPs adopted by the LPSC for Entergy Louisiana and Entergy Gulf States; and (6) authorize the funding of a storm reserve through securitization sufficient to fund a storm cost reserve of $132 million for Entergy Louisiana and $81 million for Entergy Gulf States. Hearings on the application are scheduled for the first quarter 2007.

In July 2006, Entergy Gulf States filed an application with the PUCT with respect to the $393.2 million of Hurricane Rita reconstruction costs incurred in its Texas retail jurisdiction through March 31, 2006. The filing asks the PUCT to determine that $393.2 million is the amount of reasonable and necessary hurricane reconstruction costs eligible for securitization and recovery, approve the recovery of carrying costs, and approve the manner in which Entergy Gulf States-Texas allocates those costs among its retail customer classes.  If approved, Entergy Gulf States' application will ultimately affect all its retail customers in Texas. Entergy Gulf States' filing does not request recovery of costs through a specific rider on customer bills or through any other means at this time. The hearing before the PUCT on the filing is scheduled for November 2006. This is the first of two filings authorized by a law passed earlier this year in a special session of the Texas Legislature. A second filing will request securitization and recovery of the eligible costs through retail rates and tariffs. Entergy Gulf States expects to make the second filing following the conclusion of the reconstruction cost case.

As discussed in the Form 10-K, in December 2005, Entergy Mississippi filed with the MPSC a Notice of Intent to change rates by implementing a Storm Damage Rider to recover storm damage restoration costs associated with Hurricanes Katrina and Rita totaling approximately $84 million as of November 30, 2005.  In February 2006, Entergy Mississippi filed an Application for an Accounting Order seeking certification by the MPSC of Entergy Mississippi's estimated $36 million of storm restoration costs not included in the December 2005 filing. In March 2006, the Governor signed a law that established a mechanism by which the MPSC may authorize and certify an electric utility financing order and the state may issue general obligation bonds to pay the costs of repairing damage caused by Hurricane Katrina to the systems of investor-owned electric utilities.  Because of the passage of this law and the possibility of Entergy Mississippi obtaining CDBG funds for Hurricane Katrina storm restoration costs, in March 2006, the MPSC issued an order approving a Joint Stipulation between Entergy Mississippi and the Mississippi

 

117

 

Public Utilities Staff that provided for the review of Entergy Mississippi's total storm restoration costs in the Application for an Accounting Order proceeding.  The Stipulation stated that the procedural schedule of the December 2005 Notice of Intent filing should be suspended until the MPSC issues a final order in the Application for an Accounting Order proceeding. 

In June 2006, the MPSC issued an order certifying Entergy Mississippi's Hurricane Katrina restoration costs incurred through March 31, 2006 of $89 million, net of estimated insurance proceeds. Two days later Entergy Mississippi filed a request with the Mississippi Development Authority for $89 million of CDBG funding for reimbursement of its infrastructure restoration costs. Entergy Mississippi also filed a Petition for Financing Order with the MPSC for authorization of state general obligation bond financing of $169 million for Hurricane Katrina restoration costs and future storm costs. The $169 million amount includes Hurricane Katrina restoration costs plus $80 million to build Entergy Mississippi's storm damage reserve for the future. The amount financed through the bonds will be reduced dollar for dollar by any CDBG funds that Entergy Mississippi receives. Pursuant to the legislation, the MPSC must issue a financing order by the end of October 2006.

Deferred Fuel Costs

See Note 2 to the domestic utility companies and System Energy financial statements in the Form 10-K for information regarding fuel proceedings involving the domestic utility companies. The following are updates to the Form 10-K.

Entergy Arkansas

In March 2006, Entergy Arkansas filed with the APSC its annual redetermination of the energy cost rate for application to the period April 2006 through March 2007. The filed energy cost rate of $0.02827 per kWh was proposed to replace the interim rate of $0.01900 per kWh that had been in place since October 2005. The interim energy cost rate is discussed in the Form 10-K, along with the investigation that the APSC commenced concerning Entergy Arkansas' interim energy cost rate. The increase in the energy cost rate is due to increases in the cost of purchased power primarily due to the natural gas cost increase and the effect that Hurricanes Katrina and Rita had on market conditions, increased demand for purchased power during the ANO 1 refueling and steam generator replacement outage in the fall of 2005, and coal plant generation curtailments during off-peak periods due to coal delivery problems.

On March 31, 2006, the APSC suspended implementation of the $0.02827 per kWh energy cost rate, and ordered that the $0.01900 per kWh interim rate remain in effect pending the APSC proceedings on the energy cost recovery filings. The APSC also extended its investigation into Entergy Arkansas' interim energy cost rate to cover the costs included in Entergy Arkansas' March 2006 filing. The extended investigation does not identify new issues in addition to the four issues listed in the Form 10-K and covers the same time period. On April 7, 2006, the APSC issued a show cause order in the investigation proceeding that ordered Entergy Arkansas to file a cost of service study by June 8, 2006. The order also directed Entergy Arkansas to file testimony to support the cost of service study, to support the $0.02827 per kWh cost rate, and to address the general topic of elimination of the energy cost recovery rider.

Entergy Arkansas filed for rehearing of the APSC's orders, asking that the energy cost rate filed in March 2006 be implemented in May 2006 subject to refund, asserting that the APSC did not follow appropriate procedures in suspending the operation of the energy cost recovery rider, and asking the APSC to rescind its show cause order. On May 8, 2006 the APSC denied Entergy Arkansas' requests for rehearing. Entergy Arkansas appealed the APSC's decision, but later filed a motion to dismiss the appeal following the APSC's decision described below.

In June 2006, Entergy Arkansas once again filed a motion with the APSC seeking to implement the redetermined energy cost rate of $0.02827 per kWh. After a hearing the APSC approved Entergy Arkansas' request and the redetermined rate was implemented in July 2006, subject to refund pending the outcome of the APSC energy cost recovery investigation. Because of the delay in implementing the redetermined energy cost rate, Entergy Arkansas estimated in its motion that $46 million of energy costs would remain under-recovered at December 31, 2006.

 

118

 

A hearing in the APSC energy cost recovery investigation is scheduled for October 2006.

On June 7, 2006, Entergy Arkansas filed the cost of service study ordered by the APSC. On that date Entergy Arkansas also filed notice with the APSC that it intends to file for a change in base rates within 60 to 90 days of its notice. Entergy Arkansas expects to make that filing in August 2006.

Entergy Gulf States

On March 1, 2006, Entergy Gulf States filed with the PUCT an application to implement an interim fuel surcharge in connection with the under-recovery of $97 million including interest of eligible fuel costs for the period August 2005 through January 2006. This surcharge is in addition to an interim surcharge that went into effect in January 2006. Entergy Gulf States entered into a unanimous settlement that reduced the requested surcharge for actual over-collections from the months of February and March 2006, resulting in a surcharge of $78.8 million to be implemented over a twelve-month period beginning in June 2006. The PUCT approved the surcharge in June 2006. Amounts collected through the interim fuel surcharges 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 is reconciling $1.6 billion of fuel and purchased power costs on a Texas retail basis. Hearings are scheduled for February 2007 and a PUCT decision is expected in July 2007.

Entergy Gulf States and Entergy Louisiana

In November 2005, the LPSC authorized its staff to initiate an expedited proceeding to audit the fuel and power procurement activities of Entergy Louisiana and Entergy Gulf States for the period January 1, 2005 through October 31, 2005. In April 2006, the LPSC accepted the LPSC Staff's audit report finding that the prices paid for natural gas and purchased power were reasonable and that given the market conditions surrounding Hurricanes Katrina and Rita, Entergy Louisiana and Entergy Gulf States acted reasonably and prudently in response to an extremely difficult environment.

Retail Rate Proceedings

See Note 2 to the domestic utility companies and System Energy financial statements in the Form 10-K for information regarding retail rate proceedings involving the domestic utility companies. The following are updates to the Form 10-K.

Filings with the APSC (Entergy Arkansas)

As discussed above in "Deferred Fuel Costs," on June 7, 2006, Entergy Arkansas filed notice with the APSC that it intends to file for a change in base rates within 60 to 90 days of its notice. Entergy Arkansas expects to make that filing in August 2006.

Filings with the PUCT and Texas Cities (Entergy Gulf States)

As discussed in the Form 10-K, in August 2005, Entergy Gulf States filed with the PUCT an application for recovery of its transition to competition costs. Entergy Gulf States requested recovery of $189 million in transition to competition costs through implementation of a 15-year rider to be effective no later than March 1, 2006. The $189 million represents transition to competition costs Entergy Gulf States incurred from June 1, 1999 through June 17, 2005 in preparing for competition in its service area, including attendant AFUDC, and all carrying costs

 

119

 

projected to be incurred on the transition to competition costs through February 28, 2006. The $189 million is before any gross-up for taxes or carrying costs over the 15-year recovery period. Entergy Gulf States reached a unanimous settlement agreement on all issues with the active parties in the transition to competition cost recovery case. The agreement allows Entergy Gulf States to recover $14.5 million per year in transition to competition costs over a 15-year period. Entergy Gulf States implemented interim rates based on this revenue level on March 1, 2006. The PUCT approved the settlement agreement in June 2006.

Filings with the LPSC

Retail Rates - Electric

(Entergy Gulf States)

In March 2006, the LPSC approved an uncontested stipulated settlement in Entergy Gulf States' formula rate plan filing for the 2004 test year. The settlement includes a revenue requirement increase of $36.8 million and calls for Entergy Gulf States to apply a refund liability of $744 thousand to capacity deferrals. The refund liability pertained to the periods 2004-2005 as well as the interim period in which a $37.8 million revenue increase was in place.

In May 2006, Entergy Gulf States made its formula rate plan filing with the LPSC for the 2005 test year. The filing shows that Entergy Gulf States' return on equity was within the allowed bandwidth. The filing also indicates that under the formula rate plan rider for approved capacity additions, a $7.1 million rate increase is required to recover LPSC-approved incremental deferred and ongoing capacity requirements. The filing is subject to a period of LPSC Staff review, and rate changes associated with the formula rate plan are scheduled to take effect with the first billing cycle of September 2006.

(Entergy Louisiana)

In May 2006, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2005 test year. The filing shows that Entergy Louisiana's return on equity was within the allowed bandwidth. The filing also indicates that under the formula rate plan rider for approved capacity additions, a $121 million rate increase is required to recover LPSC-approved incremental deferred and ongoing capacity requirements. Entergy Louisiana requested recovery of the capacity deferrals over a three-year period, including carrying charges. $51 million of the rate increase is associated with these deferrals. The remaining $70 million of the rate increase is associated with ongoing capacity costs. The filing is subject to a period of LPSC Staff review, and rate changes associated with the formula rate plan are scheduled to take effect with the first billing cycle of September 2006.

Retail Rates - Gas (Entergy Gulf States)

In January 2006, Entergy Gulf States filed with the LPSC its gas rate stabilization plan. The filing showed a revenue deficiency of $4.1 million based on an ROE mid-point of 10.5%. On May 1, 2006, Entergy Gulf States implemented a $3.5 million rate increase pursuant to an uncontested agreement with the LPSC Staff.

Filings with the MPSC (Entergy Mississippi)

Formula Rate Plan Filings

In March 2006, Entergy Mississippi made its annual scheduled formula rate plan filing with the MPSC.  The filing was amended by an April 2006 filing.  The amended filing showed that an increase of $3.1 million in electric revenues is warranted.  The MPSC has approved a settlement providing for a $1.8 million rate increase, which will be implemented in August 2006.

120

Filings with the City Council (Entergy New Orleans)

In June 2006, Entergy New Orleans made its annual formula rate plan filings with the City Council.  The filings show various alternatives to reflect the effect of Entergy New Orleans' lost customers and decreased revenue. Entergy New Orleans' recommended alternative adjusts for lost customers and assumes that the City Council's June 2006 decision to allow recovery of all Grand Gulf costs through the fuel adjustment clause stays in place (a portion of Grand Gulf costs was previously recovered through base rates). Under that alternative, annual increases of $6.4 million in electric base rate revenues (an increase of 4.4%) and $22.8 million in gas base rate revenues (an increase of 160.9%) are warranted. The filings triggered the prescribed four-month period for review by the City Council's Advisors and other parties, and rate adjustments, if any, could be implemented as soon as the first billing cycle of November 2006.

At the same time as it made its formula rate plan filings, Entergy New Orleans also filed with the City Council a request to implement two storm-related riders. With the first rider, Entergy New Orleans seeks to recover over a ten-year period the $114 million in electric restoration costs and the $25 million in gas restoration costs that it has actually spent through March 31, 2006. Entergy New Orleans also proposed semiannual filings to update the rider for additional restoration spending and also to consider the receipt of CDBG funds or insurance proceeds that it may receive. With the second rider, Entergy New Orleans seeks to establish over a ten-year period a $150 million storm reserve to provide for the risk of another storm. Entergy New Orleans requested that the City Council consider the proposed riders within the same time frame as the formula rate plans, which would allow implementation as soon as the first billing cycle of November 2006.

 

NOTE 3. LINES OF CREDIT, RELATED SHORT-TERM BORROWINGS, AND LONG-TERM DEBT

The short-term borrowings of the domestic utility companies (other than Entergy New Orleans) and System Energy are limited to amounts authorized by the FERC. The current FERC-authorized limits are effective through March 31, 2008. In addition to borrowing 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. There were no external short-term borrowings outstanding for the domestic utility companies (other than Entergy New Orleans) and System Energy as of June 30, 2006. The following are the FERC-authorized limits for short-term borrowings effective February 2006 and the outstanding short-term borrowings from the money pool for the domestic utility companies (other than Entergy New Orleans) and System Energy as of June 30, 2006:

 

 

Authorized

 

Borrowings

 

 

(In Millions)

 

 

 

 

 

Entergy Arkansas

 

$250

 

-

Entergy Gulf States

 

$350

 

-

Entergy Louisiana

 

$250

 

$90.9

Entergy Mississippi

 

$175

 

-

System Energy

 

$200

 

-

Under a savings provision in PUHCA 2005, which repealed PUHCA 1935, Entergy New Orleans may continue to be a participant in the money pool to the extent authorized by its SEC PUHCA 1935 order. However, Entergy New Orleans has not, and does not expect to make, any additional money pool borrowings while it is in bankruptcy proceedings. Entergy New Orleans had $35.6 million in borrowings outstanding from the money pool as of its bankruptcy filing date, September 23, 2005. The money pool borrowings reflected on Entergy New Orleans' Balance Sheet as of June 30, 2006 are classified as a pre-petition obligation subject to compromise.

121

Entergy Arkansas, Entergy Gulf States, and Entergy Mississippi, each have credit facilities available as of June 30, 2006 as follows:


Company

 


Expiration Date

 

Amount of
Facility

 

Amount Drawn as of
June 30, 2006

 

 

 

 

 

 

 

Entergy Arkansas

 

April 2007

 

$85 million

 

-

Entergy Gulf States

 

February 2011

 

$25 million (a)

 

-

Entergy Mississippi

 

May 2007

 

$30 million (b)

 

-

Entergy Mississippi

 

May 2007

 

$20 million (b)

 

-

(a)

The credit facility allows Entergy Gulf States to issue letters of credit against the borrowing capacity of the facility. As of June 30, 2006, $1.4 million in letters of credit had been issued.

(b)

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

In May 2006, Entergy Mississippi increased its $25 million credit facility to $30 million and renewed it through May 2007. Entergy Mississippi also entered into a new $20 million credit facility through May 2007.

In August 2006, Entergy Gulf States increased the capacity of its credit facility to $50 million.

In addition, Entergy New Orleans, which is currently in bankruptcy and is no longer consolidated in Entergy's financial statements, had a 364-day credit facility in the amount of $15 million which expired in May 2006. As of June 30, 2006, the full amount of the credit facility remains outstanding under bankruptcy protection. In July 2006, the bankruptcy judge authorized Entergy New Orleans to set off $15 million of its cash currently held by the lender against the outstanding debt on the credit facility.

The credit facilities have variable interest rates and the average commitment fee is 0.13%. The $85 million Entergy Arkansas credit facility requires that it maintain total shareholders' equity of at least 25% of its total assets. In July 2005, Entergy New Orleans granted the lender a security interest in its customer accounts receivables to secure its borrowings under its facility.

Entergy New Orleans Debtor-in-Possession Credit Facility

See Note 4 to the domestic utility companies and System Energy financial statements in the Form 10-K for a discussion of the Entergy New Orleans $200 million debtor-in-possession (DIP) credit facility. As discussed in the Form 10-K, the bankruptcy court issued its order in December 2005 giving final approval for the credit facility, and the indenture trustee for Entergy New Orleans' first mortgage bonds appealed the order. On March 29, 2006 the bankruptcy court approved a settlement among Entergy New Orleans, Entergy Corporation, and the indenture trustee, and the indenture trustee dismissed its appeal. As of June 30, 2006, Entergy New Orleans had approximately $40 million of outstanding borrowings under the DIP credit facility.

As discussed in the Form 10-K, borrowings under the DIP credit facility are due in full, and the agreement will terminate, at the earliest of several times or events, including August 23, 2006. Entergy and Entergy New Orleans have agreed to an amendment to the DIP credit agreement that extends the August 23, 2006 maturity date to August 23, 2007, and this amendment is subject to bankruptcy court approval. Entergy New Orleans has filed a motion with the bankruptcy court to authorize Entergy New Orleans to enter into the amendment, which is set for hearing August 16, 2006.

The interest rate on borrowings under the DIP credit agreement will be the average interest rate of borrowings outstanding under Entergy Corporation's $2 billion revolving credit facility, which is currently approximately 5.8% per annum.

122

Long-term Debt

The following long-term debt has been issued by the domestic utility companies and System Energy in 2006:

 

Issue Date

 

Amount

 

 

 

(In Thousands)

Mortgage Bonds:

 

 

 

5.92% Series due February 2016 - Entergy Mississippi

January 2006

 

$100,000

Other Long-term Debt:

 

 

 

4.60% Series due October 2017, Jefferson County - Arkansas
  (Entergy Arkansas) (secured by a series of collateral first
  mortgage bonds)



June 2006



$54,700

The following long-term debt was retired by domestic utility companies and System Energy in 2006:

 

Retirement Date

 

Amount

 

 

 

(In Thousands)

Other Long-term Debt:

 

 

 

5.95% Series due December 2023, St. Charles Parish - (Entergy Louisiana)

June 2006 

$25,000

Grand Gulf Lease Obligation payment

N/A

$22,989

Retirements after the balance sheet date:

5.6% Series due October 2017, Jefferson County - Arkansas (Entergy
  Arkansas)


July 2006


$45,500

6.3% Series due June 2018, Jefferson County - Arkansas (Entergy Arkansas)

July 2006

$9,200

Entergy Mississippi used the proceeds from the January 2006 issuance to purchase the Attala power plant from Central Mississippi Generating Company, LLC and to repay short-term indebtedness.

Entergy Arkansas used the proceeds from the June 2006 issuance to redeem, prior to maturity, $45.5 million of 5.6% Series of Jefferson County bonds and $9.2 million of 6.3% Series of Jefferson County bonds in July 2006. The issuance is shown as a non-cash transaction on the cash flow statement since the proceeds were placed in a trust and never held as cash by Entergy Arkansas.

 

NOTE 4. PREFERRED STOCK

(Entergy Arkansas)

In March 2006, Entergy Arkansas issued 3,000,000 shares of $25 par value 6.45% Series Preferred Stock, all of which were outstanding as of June 30, 2006. The dividends are cumulative and payable quarterly beginning July 1, 2006. The preferred stock is redeemable on or after April 1, 2011, at Entergy Arkansas' option, at the call price of $25 per share. In April 2006, Entergy Arkansas used the proceeds from this issuance to redeem the following preferred stock:

Series of Entergy Arkansas Preferred Stock

 

Redemption Price Per Share

     

7.32% Preferred Stock, Cumulative, $100.00 par value

 

$103.17

7.80% Preferred Stock, Cumulative, $100.00 par value

 

$103.25

7.40% Preferred Stock, Cumulative, $100.00 par value

 

$102.80

7.88% Preferred Stock, Cumulative, $100.00 par value

 

$103.00

$1.96 Preferred Stock, Cumulative, $0.01 par value

 

$ 25.00

123

(Entergy New Orleans)

Since the filing of the bankruptcy proceedings, Entergy New Orleans has not been able to declare and pay dividends on its 4.75% preferred stock for three quarters. As discussed further in the Form 10-K, if dividends with respect to the 4.75% preferred stock are not paid for four quarters, the holders of these shares would have the right to elect a majority of the Entergy New Orleans board of directors.  Entergy New Orleans filed a motion in the bankruptcy court seeking authority to recommence paying dividends to the holders of the 4.75% preferred shares. After a hearing on the motion on May 3, 2006, the court granted Entergy New Orleans the authority to pay dividends to the holders of the 4.75% preferred shares, beginning with the dividend due on July 1, 2006, and thereafter, unless objections are filed by creditors forty-five days in advance of a dividend payment date. If any objections are filed, the matter would be heard by the bankruptcy court. Entergy New Orleans declared and paid the dividend due on July 1, 2006, and intends to declare and pay the dividends on the 4.75% preferred shares each quarter pending resolution of its plan of reorganization.

 

NOTE 5. RETIREMENT AND OTHER POSTRETIREMENT BENEFITS

Components of Net Pension Cost

The domestic utility companies' and System Energy's qualified pension cost, including amounts capitalized, for the second quarters of 2006 and 2005, included the following components:

 

 

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 

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2005

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

  during the period

 

$3,329 

 

$2,704 

 

$1,957 

 

$1,005 

 

$436 

 

$944 

Interest cost on projected

 

 

 

 

 

 

 

 

 

 

 

 

  benefit obligation

 

9,115 

 

7,235 

 

5,525 

 

2,998 

 

1,148 

 

1,413 

Expected return on assets

 

(9,009)

 

(9,709)

 

(6,666)

 

(3,566)

 

(731)

 

(1,324)

Amortization of transition asset

 

 

 

 

 

 

(69)

Amortization of prior service cost

 

415 

 

378 

 

163 

 

128 

 

57 

 

17 

Amortization of loss

 

1,613 

 

1,213 

 

730 

 

527 

 

151 

 

229 

Net pension cost

 

$5,463 

 

$1,821 

 

$1,709 

 

$1,092 

 

$1,061 

 

$1,210 

124

The domestic utility companies' and System Energy's pension cost, including amounts capitalized, for the six months ended June 30, 2006 and 2005, included the following components:

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2006

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

  during the period

 

$7,252 

 

$5,986 

 

$4,365 

 

$2,154 

 

$1,002 

 

$2,062 

Interest cost on projected

 

 

 

 

 

 

 

 

 

 

 

 

  benefit obligation

 

19,830 

 

15,828 

 

12,103 

 

6,504 

 

2,563 

 

3,209 

Expected return on assets

 

(19,668)

 

(20,351)

 

(14,227)

 

(7,366)

 

(1,767)

 

(3,551)

Amortization of prior service cost

 

831 

 

617 

 

281 

 

257 

 

112 

 

24 

Amortization of loss

 

4,875 

 

1,280 

 

3,018 

 

1,449 

 

1,018 

 

334 

Net pension cost

 

$13,120 

 

$3,360 

 

$5,540 

 

$2,998 

 

$2,928 

 

$2,078 

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2005

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

  during the period

 

$6,658 

 

$5,408 

 

$3,914 

 

$2,010 

 

$872 

 

$1,888 

Interest cost on projected

 

 

 

 

 

 

 

 

 

 

 

 

  benefit obligation

 

18,230 

 

14,470 

 

11,050 

 

5,996 

 

2,296 

 

2,826 

Expected return on assets

 

(18,018)

 

(19,418)

 

(13,332)

 

(7,132)

 

(1,462)

 

(2,648)

Amortization of transition asset

 

 

 

 

 

 

(138)

Amortization of prior service cost

 

830 

 

756 

 

326 

 

256 

 

114 

 

34 

Amortization of loss

 

3,226 

 

2,426 

 

1,460 

 

1,054 

 

302 

 

458 

Net pension cost

 

$10,926 

 

$3,642 

 

$3,418 

 

$2,184 

 

$2,122 

 

$2,420 

The domestic utility companies recognized the following pension cost for their non-qualified pension plans in the second quarters of 2006 and 2005:

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

 

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

 

 

(In Thousands)

Non-Qualified Pension Cost
  Second Quarter 2006

 

$113 

 

$220 

 

$5 

 

$36 

 

$54 

 

Non-Qualified Pension Cost
  Second Quarter 2005

 

$101 

 

$296 

 

$6 

 

$37 

 

$51 

 

The domestic utility companies recognized the following pension cost for their non-qualified pension plans for the six months ended June 30, 2006 and 2005:

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

 

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

 

 

(In Thousands)

Non-Qualified Pension Cost Six
  Months Ended June 30, 2006

 

$226 

 

$439 

 

$11 

 

$73 

 

$107 

 

Non-Qualified Pension Cost Six
  Months Ended June 30, 2005

 

$203 

 

$593 

 

$11 

 

$75 

 

$102 

 

125

Components of Net Other Postretirement Benefit Cost

The domestic utility companies' and System Energy's other postretirement benefit cost, including amounts capitalized, for the second quarters of 2006 and 2005, included the following components:

 

 

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 

 

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2005

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

  during the period

 

$1,157 

 

$1,634 

 

$689 

 

$363 

 

$192 

 

$415 

Interest cost on APBO

 

2,589 

 

2,924 

 

1,673 

 

833 

 

789 

 

394 

Expected return on assets

 

(1,637)

 

(1,366)

 

 

(669)

 

(579)

 

(387)

Amortization of transition obligation

 

205 

 

947 

 

95 

 

88 

 

435 

 

Amortization of prior service cost

 

(173)

 

 

18 

 

(46)

 

10 

 

(139)

Amortization of loss

 

1,276 

 

770 

 

691 

 

471 

 

211 

 

146 

Net other postretirement benefit cost

 

$3,417 

 

$4,909 

 

$3,166 

 

$1,040 

 

$1,058 

 

$433 

The domestic utility companies' and System Energy's other postretirement benefit cost, including amounts capitalized, for the six months ended June 30, 2006 and 2005, included the following components:

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2006

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

  during the period

 

$2,674 

 

$2,508 

 

$1,708 

 

$838 

 

$464 

 

$828 

Interest cost on APBO

 

5,688 

 

5,494 

 

3,712 

 

1,888 

 

1,712 

 

814 

Expected return on assets

 

(3,594)

 

(2,978)

 

 

(1,418)

 

(1,222)

 

(842)

Amortization of transition obligation

 

410 

 

302 

 

192 

 

176 

 

832 

 

Amortization of prior service cost

 

(816)

 

 

(48)

 

(274)

 

20 

 

(602)

Amortization of loss

 

3,342 

 

2,004 

 

1,786 

 

1,288 

 

686 

 

414 

Net other postretirement benefit cost

 

$7,704 

 

$7,330 

 

$7,350 

 

$2,498 

 

$2,492 

 

$616 

126

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

2005

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

  during the period

 

$2,314 

 

$3,268 

 

$1,378 

 

$726 

 

$384 

 

$830 

Interest cost on APBO

 

5,178 

 

5,848 

 

3,346 

 

1,666 

 

1,578 

 

788 

Expected return on assets

 

(3,274)

 

(2,732)

 

 

(1,338)

 

(1,158)

 

(774)

Amortization of transition obligation

 

410 

 

1,894 

 

190 

 

176 

 

870 

 

Amortization of prior service cost

 

(346)

 

 

36 

 

(92)

 

20 

 

(278)

Amortization of loss

 

2,552 

 

1,540 

 

1,382 

 

942 

 

422 

 

292 

Net other postretirement benefit cost

 

$6,834 

 

$9,818 

 

$6,332 

 

$2,080 

 

$2,116 

 

$866 

Employer Contributions

The domestic utility companies and System Energy expect to contribute the following to pension plans in 2006. A portion of these contributions were planned to be made in 2005, but were delayed until January 2006 in accordance with the Katrina Emergency Tax Relief Act. For further information on pension funding refer to Note 10 to the domestic utility companies and System Energy's financial statements in the Form 10-K.

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

 

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Expected 2006 pension contributions
  disclosed in Form 10-K

 


$114,544

 


$22,102

 


$54,048

 


$16,357

 


$ -

 


$13,037

Pension contributions made through
  July 2006

 

$48,614

 

$13,398

 


$20,298

 

$7,211

 

$ -

 

$8,262

Remaining estimated pension
  contributions to be made in 2006

 

$65,930

 

$8,704

 


$33,750

 

$9,146

 

$ -

 

$4,775

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, 2005 Accumulated Postretirement Benefit Obligation (APBO), the second quarters 2006 and 2005 other postretirement benefit cost, and the six months ended June 30, 2006 and 2005 for the domestic utility companies and System Energy as follows:

 

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

Entergy

 

System

 

 

Arkansas

 

Gulf States

 

Louisiana

 

Mississippi

 

New Orleans

 

Energy

 

 

(In Thousands)

Reduction in 12/31/2005 APBO

 

($42,337)

 

($36,740)

 

($23,640)

 

($14,407)

 

($11,206)

 

($5,972)

Reduction in second quarter 2006
  other postretirement benefit cost

 

($1,562)

 

($1,332)

 

($865)

 

($512)

 

($376)

 

($268)

Reduction in second quarter 2005
  other postretirement benefit cost

 

($1,446)

 

($1,269)

 

($790)

 

($476)

 

($350)

 

($245)

Reduction in six months ended June 30,
  2006 other postretirement benefit cost

($3,124)

 

($2,664)

 

($1,730)

 

($1,024)

 

($752)

 

($536)

Reduction in six months ended June 30,
  2005 other postretirement benefit cost

($2,892)

 

($2,538)

 

($1,580)

 

($952)

 

($700)

 

($490)

127

For further information on the Medicare Act refer to Note 10 to the domestic utility companies and System Energy's financial statements in the Form 10-K.

 

NOTE 6. ENTERGY NEW ORLEANS BANKRUPTCY PROCEEDING

See Note 14 to the domestic utility companies and System Energy financial statements in the Form 10-K for a discussion of the Entergy New Orleans bankruptcy proceeding. Following are updates to that discussion.

As discussed in the Form 10-K, the bankruptcy court issued its order in December 2005 giving final approval for the $200 million debtor-in-possession (DIP) credit facility, and the indenture trustee for Entergy New Orleans' first mortgage bonds appealed the order. On March 29, 2006 the bankruptcy court approved a settlement among Entergy New Orleans, Entergy Corporation, and the indenture trustee, and the indenture trustee dismissed its appeal.

In April 2006, the bankruptcy judge extended the exclusivity period for filing a plan of reorganization by Entergy New Orleans to August 21, 2006. Entergy New Orleans has filed another motion to extend the exclusivity period for filing its plan of reorganization, requesting that the deadline be extended an additional 120 days until December 19, 2006. The court entered an order extending the August 21, 2006 date for Entergy New Orleans' exclusive right to file a plan of reorganization until the court can hear and rule on Entergy New Orleans' motion to extend, which was set for hearing on September 18, 2006. In order to file a plan of reorganization no later than December 2006, Entergy New Orleans believes that it needs resolution of its June 2006 formula rate plan and storm rider filings and commitment on timing and amount of CDBG funds. If the motion to extend is granted, Entergy New Orleans will have the exclusive right to file its plan of reorganization until December 19, 2006, and will have until February 15, 2007 to obtain acceptances of its plan by each class of impaired creditors.

The bankruptcy judge set a date of April 19, 2006 by which creditors with prepetition claims against Entergy New Orleans must, with certain exceptions, file their proofs of claim in the bankruptcy case. Approximately 500 claims have been filed thus far in Entergy New Orleans' bankruptcy proceeding. Entergy New Orleans is currently analyzing the accuracy and validity of the claims filed, and has begun seeking withdrawal or modification of claims or objecting to claims with which it disagrees.

Certain pre-petition liabilities have been classified as liabilities subject to compromise in Entergy New Orleans' Balance Sheet as of June 30, 2006 and December 31, 2005. The following table summarizes the components of liabilities subject to compromise as of June 30, 2006 and December 31, 2005:

   

June 30, 2006

 

December 31, 2005

   

(In Thousands)

         

Accounts payable - Associated companies

 

$64,893

 

$46,815

Accounts payable - Other

 

25,000

 

25,000

Interest accrued

 

1,473

 

1,473

Accumulated provisions

 

5,709

 

5,770

Long-term debt

 

229,867

 

229,859

Total Liabilities Subject to Compromise

 

$326,942

 

$308,917

Payment terms for the amount classified as subject to compromise will be established in connection with a plan of reorganization.

The accompanying financial statements have been prepared on the basis that Entergy New Orleans will continue as a going concern. Entergy New Orleans' filing for protection under Chapter 11 of the United States Bankruptcy Code as a result of the liquidity issues caused by Hurricane Katrina gives rise to substantial doubt regarding Entergy New Orleans' ability to continue as a going concern for a reasonable period of time, primarily because of the loss of control inherent in the bankruptcy process. The financial statements do not include any adjustments that might

128

 

 

result from the outcome of this uncertainty including adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that may be necessary if Entergy New Orleans is unable to continue as a going concern. The financial statements also do not attempt to reflect liabilities at the priority or status of any claims that the holders of such liabilities will have.

Entergy continues to work with the federal, state, and local authorities to resolve the bankruptcy in a manner that allows Entergy New Orleans' customers to be served by a financially viable entity as required by law. Key factors that will influence the timing and outcome of the Entergy New Orleans bankruptcy include:

  • The amount of insurance recovery, if any, and the timing of receipt of proceeds;
  • The amount of assistance, if any, from federal and state government, and the timing of that funding, including Entergy New Orleans' intended application for CDBG funding;
  • The level of economic recovery of New Orleans;
  • The number of customers that return to New Orleans, and the timing of their return; and
  • The amount and timing of any regulatory recovery approved by the City Council.

 

NOTE 7. ACCOUNTING POLICY UPDATES

Revenue and Fuel Costs

Entergy recognizes revenue from electric power and gas sales when it delivers power or gas to its customers. To the extent that deliveries have occurred but a bill has not been issued, the domestic utility companies accrue an estimate of the revenues for energy delivered since the latest billings. Entergy calculates the estimate based upon several factors including billings through the last billing cycle in a month, actual generation in the month, historical line loss factors, and prices in effect in the domestic utility companies' various jurisdictions. Each month the estimated unbilled revenue amounts are recorded as revenue and unbilled accounts receivable, and the prior month's estimate is reversed. Therefore, changes in price and volume differences resulting from factors such as weather affect the calculation of unbilled revenues from one period to the next, and may result in variability in reported revenues from one period to the next as prior estimates are so recorded and reversed.

Prior to 2006, Entergy Louisiana and the Louisiana portion of Entergy Gulf States included a component of fuel cost recovery in their unbilled revenue calculations. Effective January 1, 2006, this fuel component of unbilled accounts receivable was reclassified to deferred fuel and is no longer included in the unbilled revenue calculations for Entergy Louisiana and the Louisiana portion of Entergy Gulf States, which is in accordance with regulatory treatment.

Application of SFAS 71

During 2005 and 2006 Entergy filed notices with the FERC to withdraw its market-based rate authority for wholesale transactions in the Entergy control area and submitted new cost-based rates to the FERC for approval. During the second quarter of 2006, the FERC issued an order accepting the cost based rates filed by Entergy. As described further in Note 1 to the domestic utility companies and System Energy financial statements in the Form 10-K, the domestic utility companies and System Energy apply the provisions of SFAS 71 to operations that meet three criteria including that rates are approved by a regulator, are cost-based and can be charged to and collected from customers. As also described in Note 1 to the domestic utility companies and System Energy financial statements in the Form 10-K, Entergy Gulf States did not apply regulatory accounting principles to its wholesale jurisdiction. The FERC decision in the second quarter of 2006 results in Entergy Gulf States meeting the SFAS 71 criteria discussed above for its wholesale jurisdiction and, therefore, Entergy Gulf States reinstated the application of regulatory accounting principles to its wholesale business which resulted in a regulatory credit of approximately $4.5 million during the second quarter of 2006.

__________________________________

129

In the opinion of the management of 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 domestic utility companies and System Energy 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.

 

Part I, Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of June 30, 2006, 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 (individually "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.

130

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 proceedings affecting Entergy. Following are updates to that discussion.

Texas Power Price Lawsuit

See "Texas Power Price Lawsuit" in Part I, Item 1 of the Form 10-K for a discussion of the lawsuit 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 from January 1, 1994 to the present. In April 2006, the Court of Appeals denied a motion for rehearing of the decision to remand the case to the district court.  In May 2006, Entergy filed a petition for discretionary review with the Texas Supreme Court.

Entergy New Orleans Rate of Return Lawsuit and Entergy New Orleans Fuel Clause Litigation

See "Entergy New Orleans Rate of Return Lawsuit" in Part I, Item 1 of the Form 10-K for a discussion of the lawsuit filed by a group of residential and business ratepayers against Entergy New Orleans in state court in Orleans Parish purportedly on behalf of all ratepayers in New Orleans.  In accordance with the procedural schedule, the evidentiary record and post-hearing briefs of the parties were submitted to the City Council in March 2006. In April 2006, the City Council unanimously approved a resolution dismissing with prejudice the plaintiffs' claims. The plaintiffs appealed the resolution to the Civil District Court for the Parish of Orleans. The district court has not yet issued a procedural schedule for the appeal.

Additionally, in the Entergy New Orleans bankruptcy proceeding, the complaint filed by the named plaintiffs in the Entergy New Orleans rate of return lawsuit, together with the named plaintiffs in the Entergy New Orleans fuel clause lawsuit, asking the court to declare that Entergy New Orleans, Entergy Corporation, and Entergy Services are a single business enterprise, and as such, are liable in solido with Entergy New Orleans for any claims asserted in the Entergy New Orleans rate of return lawsuit and the Entergy New Orleans fuel clause lawsuit, was dismissed on April 26, 2006. The matter is on appeal to the U.S. District Court for the Eastern District of Louisiana. In addition, in April 2006, proofs of claim were filed by the plaintiffs in the Entergy New Orleans rate of return lawsuit and by the plaintiffs in the Entergy New Orleans fuel adjustment clause litigation relating to both the City Council and class action proceedings. The plaintiffs in the Entergy New Orleans rate of return lawsuit and the plaintiffs in the Entergy New Orleans fuel adjustment clause litigation also filed for class certification. In July 2006, the bankruptcy court denied the request for class certification. The individual claims of the approximately 14 individual named plaintiffs remain pending in the bankruptcy proceeding, and it is uncertain whether the bankruptcy judge will re-open the bar date for other ratepayers to file individual proofs of claim based on the allegations in the two lawsuits.

Murphy Oil Lawsuit

See "Murphy Oil Lawsuit" in Part I, Item 1 of the Form 10-K for a discussion of the several lawsuits filed in state court in St. Bernard Parish, Louisiana against Murphy Oil, Entergy Louisiana, and others for injuries they allegedly suffered as a result of an explosion at the refinery in June 1995. Claiborne P. Deming, who became a director of Entergy Corporation in 2002, is the President and Chief Executive Officer of Murphy Oil. Mr. Deming did not stand for re-election to the Entergy Corporation Board of Directors and his term expired in May 2006. In June 2006, the Louisiana Fourth Circuit Court of Appeal affirmed the trial court's allocation of fault against Entergy Louisiana, but reduced the amount of damages owed by Entergy Louisiana to approximately $1.2 million. Murphy Oil filed a motion for rehearing seeking to have the appellate court reverse its decision to reduce the damages.

131

Environmental Regulation and Proceedings

On April 19, 2006, an environmental advocacy organization served a notice of intent to bring an environmental citizen's suit pursuant to the federal Resource Conservation and Recovery Act (RCRA) against Entergy.  Notice of suit is required by RCRA sixty days before actual filing.  The suit, if filed, will allege that Entergy violated an EPA regulation by failing formally to report a discovered release of radioactive material into the environment at Indian Point.  These allegations relate to the ongoing site investigation of radionuclides found in groundwater wells at the site.  It is expected that the environmental advocacy organization will ask the court to require Entergy formally to notify EPA of the site condition, will seek to have EPA formally involved in the ongoing site investigation and any required remediation, will seek attorney's fees under the statute, and may seek to have the judge impose statutory penalties. Entergy continues to investigate the matter.

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

In accordance with Entergy's stock-based compensation plans, Entergy periodically grants stock options to its employees that 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. See Note 7 to the consolidated financial statements in the Form 10-K for additional discussion of the stock-based compensation plans. Entergy's management has been authorized to repurchase on the open market shares up to an amount sufficient to fund the exercise of grants under the plans, and this authorization does not have an expiration date. In August 2004, Entergy announced a program under which Entergy Corporation will repurchase up to $1.5 billion of its common stock. This repurchase program is incremental to the existing authority to repurchase shares to fund the exercise of employee stock options. As a result of Hurricanes Katrina and Rita, the $1.5 billion program was temporarily suspended, and the Board extended authorization for its completion through 2008. Entergy Corporation did not repurchase any shares of common stock during the six months ended June 30, 2006. At any point in time through 2008, Entergy Corporation may elect to repurchase shares to complete the remaining $400 million of authorization under the $1.5 billion program or to fund the exercise of grants under its employee based compensation plans.

Item 4. Submission of Matters to a Vote of Security Holders

Election of Board of Directors

Entergy Corporation

The annual meeting of stockholders of Entergy Corporation was held on May 12, 2006. The following matters were voted on and received the specified number of votes for, abstentions, votes withheld (against), and broker non-votes:

132

  1. Election of Directors:
  2. Name of Nominee

     

    Votes For

     

    Votes Withheld

             

    Maureen S. Bateman

     

    181,913,615

     

    3,159,171

    W. Frank Blount

     

    177,995,619

     

    7,077,167

    Simon D. deBree

     

    181,832,243

     

    3,240,543

    Gary W. Edwards

     

    181,813,592

     

    3,259,194

    Alexis M. Herman

     

    180,732,615

     

    4,340,171

    Donald C. Hintz

     

    181,413,474

     

    3,659,312

    J. Wayne Leonard

     

    181,518,863

     

    3,553,923

    Stuart L. Levenick

     

    182,579,969

     

    2,492,817

    Robert v.d. Luft*

     

    181,366,991

     

    3,705,795

    James R. Nichols

     

    181,459,874

     

    3,612,912

    William A. Percy, II

     

    182,578,764

     

    2,494,022

    W. J. "Billy" Tauzin

     

    182,310,093

     

    2,762,693

    Steven V. Wilkinson

     

    182,683,898

     

    2,388,888

    Mr. Luft retired from the Board effective August 1, 2006.

  3. Ratify the appointment of independent public accountants, Deloitte & Touche LLP for the year 2006: 182,954,456 votes for; 749,253 votes against; 1,369,075 abstentions; and 2 broker non-votes.
  4. Stockholder proposal regarding Majority Election of Directors: 72,133,704 votes for; 89,908,171 votes against; 2,642,450 abstentions; and 20,388,461 broker non-votes.
  5. Shareholder approval to amend the Certificate of Incorporation to eliminate supermajority vote requirement with respect to the removal of directors: 181,666,560 votes for; 1,892,364 votes against; and 1,513,862 abstentions.
  6. Shareholder approval of 2007 Equity Ownership and Long Term Cash Incentive Plan: 142,784,783 votes for; 20,133,978 votes against; 1,765,565 abstentions; and 20,388,460 broker non-votes.

Entergy Arkansas

A consent in lieu of a meeting of common stockholders was executed on June 22, 2006. The consent was signed on behalf of Entergy Corporation, the holder of all issued and outstanding shares of common stock. The common stockholder, by such consent, elected the following individuals to serve as directors constituting the Board of Directors of Entergy Arkansas: Hugh T. McDonald, Chairman, Leo P. Denault, Mark Savoff, and Richard J. Smith.

Entergy Gulf States

A consent in lieu of a meeting of common stockholders was executed on June 22, 2006. The consent was signed on behalf of Entergy Corporation, the holder of all issued and outstanding shares of common stock. The common stockholder, by such consent, elected the following individuals to serve as directors constituting the Board of Directors of Entergy Gulf States: Joseph F. Domino, Chairman, E. Renae Conley, Leo P. Denault, Mark Savoff, and Richard J. Smith.

Entergy Louisiana

A consent in lieu of a meeting of members was executed on June 22, 2006. The consent was signed on behalf of Entergy Louisiana Holdings, Inc., the holder of all issued and outstanding common membership interests. The holder of the common membership interests by such consent, elected the following individuals to serve as directors constituting the Board of Directors of Entergy Louisiana: E. Renae Conley, Chair, Leo P. Denault, Mark Savoff, and Richard J. Smith.

 

133

Entergy Mississippi

A consent in lieu of a meeting of common stockholders was executed on June 22, 2006. The consent was signed on behalf of Entergy Corporation, the holder of all issued and outstanding shares of common stock. The common stockholder, by such consent, elected the following individuals to serve as directors constituting the Board of Directors of Entergy Mississippi: Carolyn C. Shanks, Chairman, Leo P. Denault, Mark Savoff, and Richard J. Smith.

Entergy New Orleans

A consent in lieu of a meeting of common stockholders was executed on July 31, 2006. The consent was signed on behalf of Entergy Corporation, the holder of all issued and outstanding shares of common stock. The common stockholder, by such consent, elected the following individuals to serve as directors constituting the Board of Directors of Entergy New Orleans: Daniel F. Packer, Chairman, Tracie L. Boutte, and Roderick K. West.

System Energy

A consent in lieu of a meeting of common stockholders was executed on June 22, 2006. The consent was signed on behalf of Entergy Corporation, the holder of all issued and outstanding shares of common stock. The common stockholder, by such consent, elected the following individuals to serve as directors constituting the Board of Directors of System Energy: Gary J. Taylor, Chairman, Steven C. McNeal, and Leo P. Denault.

 

Item 5. Other Information

Executive Agreements (Entergy Corporation)

Grant of Restricted Stock Units to Chairman of the Board and Chief Executive Officer.  On August 3, 2006, the Personnel Committee of the Board of Directors of Entergy Corporation approved a grant of 100,000 restricted stock units ("Restricted Units") to Mr. J. Wayne Leonard, Entergy Corporation's Chairman of the Board and Chief Executive Officer.  The units were issued under Entergy's 1998 Equity Ownership Plan ("EOP") pursuant to a restricted unit agreement ("Restricted Unit Agreement").  Subject to Mr. Leonard's continued employment within the Entergy System, the Restricted Units will vest in equal installments on August 3, 2008 (50,000 units) and August 3, 2009 (50,000 units).  On the vesting date, Mr. Leonard will receive in cash for each vested unit the cash equivalent of a share of Entergy Corporation's common stock.  The Restricted Units do not accrue dividend equivalents.

Under certain conditions, Mr. Leonard's Restricted Units may vest on an earlier date under the terms and conditions set forth in the Restricted Unit Agreement, Mr. Leonard's October 2000 Retention Agreement ("Retention Agreement"), or the EOP, although Mr. Leonard will receive payment for accelerated vesting of the restricted units under only one of the acceleration provisions. Under the Restricted Unit Agreement, these accelerated vesting conditions include any one of the following events, as defined under the agreement: (i) termination of employment by Mr. Leonard for Good Reason; (ii) death or Disability; or (iii) termination of Mr. Leonard's employment for any reason other than Cause. "Good Reason" is generally defined in the Restricted Unit Agreement as (i) a substantial reduction in duties or responsibilities, (ii) a five percent or greater reduction in base salary, (iii) relocation to a location other than Entergy Corporation's corporate headquarters, and/or (iv) discontinuation of participation in certain compensation and other benefit plans (other than as a result of changes similarly affecting other executive officers).  Under the Retention Agreement, among other things, the Restricted Units may vest on an earlier date if Mr. Leonard's employment is terminated on account of a Qualifying Termination or a Merger Related Termination, as those terms are defined in the Retention Agreement. Under the EOP, the Restricted Units may vest on an earlier date if Mr. Leonard's employment is terminated on account of a Qualifying Event, as that term is defined in the EOP.

For additional information regarding Mr. Leonard's employment arrangements, see "Executive Retention Agreements- Retention Agreement with Mr. Leonard" in Entergy Corporation's proxy statement dated March 24, 2006.

134

Retention Agreement with Executive Vice President and Chief Financial Officer.  On August 3, 2006, the Personnel Committee of the Board of Directors approved a retention agreement to be entered into between Entergy Corporation and Leo P. Denault, its Executive Vice President and Chief Financial Officer ("Retention Agreement").  The Retention Agreement entitles Mr. Denault to receive certain benefits if his employment with a System Company is terminated under specified circumstances.  If Mr. Denault's employment should terminate prior to attainment of age 55 on account of a Termination Event, as defined in the Retention Agreement and described below, then Mr. Denault is entitled to receive, among other things, (a) 2.99 times his base salary and annual cash bonus, as described in the Retention Agreement; (b) Target LTIP Awards, described as the value of his unvested performance shares units (calculated at target payout levels) under the EOP and under the 2007 Equity Ownership and Long Term Cash Incentive Plan ("Equity Plan"), and (c) Other EOP Awards, described as the value of any unvested restricted shares, stock options, and other equity awards that may be granted under the Equity Plan.  If Mr. Denault's employment should terminate on or after attainment of age 55 on account of a Termination Event, as defined in the Retention Agreement and described below, then Mr. Denault is entitled to receive (a) SERP Credited Service and SERP Permission to Retire, as defined in the Retention Agreement; (b) Target LTIP Awards (as described above); and (c) Other EOP Awards (as described above).

"Termination Event" is generally defined to include (i) termination of Mr. Denault's employment by Entergy for reasons other than Cause or Disability, as defined in the Retention Agreement or (ii) Mr. Denault's termination of employment for "Good Reason" (as defined in the Retention Agreement and described above in the description of Mr. Leonard's Restricted Unit Agreement).

Should Mr. Denault, on or after attainment of 55, terminate employment for any reason other than a Termination Event, death or disability, then he shall be entitled to SERP Credited Service but not SERP Permission to Retire. If Mr. Denault should terminate employment at any time on account of death or Disability, then he or his estate shall receive (a) SERP Credited Service and SERP Permission to Retire or separate, in the case of Disability; (b) Target LTIP Awards (as described above); and (c) Other EOP Awards (as described above). 

For additional information regarding Mr. Denault's employments arrangements, including his participation in an Entergy-sponsored executive severance plan, see "System Executive Continuity Plans" in Entergy Corporation's proxy statement dated March 24, 2006.  Cash payments otherwise payable under the Retention Agreement shall be offset, on a dollar for dollar basis, by cash payments under the System Executive Continuity Plan or any other severance program or arrangement. 

The terms and conditions of Mr. Leonard's Restricted Unit Agreement and Mr. Denault's Retention Agreement are summaries and are qualified in their entirety by reference to the terms and conditions of the actual agreements, which are filed as Exhibits 10(a) and 10(b) to this Form 10-Q.

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

The domestic utility companies and System Energy 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,

 

June 30,

 

2001

 

2002

 

2003

 

2004

 

2005

 

2006

                       

Entergy Arkansas

3.29

 

2.79

 

3.17

 

3.37

 

3.75

 

3.71

Entergy Gulf States

2.36

 

2.49

 

1.51

 

3.04

 

3.34

 

3.46

Entergy Louisiana

2.76

 

3.14

 

3.93

 

3.60

 

3.50

 

2.98

Entergy Mississippi

2.14

 

2.48

 

3.06

 

3.41

 

3.16

 

2.89

Entergy New Orleans

(a)

 

(b)

 

1.73

 

3.60

 

1.22

 

1.62

System Energy

2.12

 

3.25

 

3.66

 

3.95

 

3.85

 

4.08

135

 

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

 

Twelve Months Ended

 

December 31,

 

June 30,

 

2001

 

2002

 

2003

 

2004

 

2005

 

2006

                       

Entergy Arkansas

2.99

 

2.53

 

2.79

 

2.98

 

3.34

 

3.29

Entergy Gulf States

2.21

 

2.40

 

1.45

 

2.90

 

3.18

 

3.32

Entergy Louisiana

2.76

 

3.14

 

3.93

 

3.60

 

3.50

 

2.81

Entergy Mississippi

1.96

 

2.27

 

2.77

 

3.07

 

2.83

 

2.64

Entergy New Orleans

(a)

 

(b)

 

1.59

 

3.31

 

1.12

 

1.54

(a)

Earnings for the twelve months ended December 31, 2001, for Entergy New Orleans were not adequate to cover fixed charges and combined fixed charges and preferred dividends by $6.6 million and $9.5 million, respectively.

(b)

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.

Item 6. Exhibits *

 

3(a) -

Certificate of Amendment of the Certificate of Incorporation of Entergy Corporation dated June 12, 2006.

     
 

4(a) -

Sixty-sixth Supplemental Indenture, dated as of June 1, 2006, to Entergy Arkansas' Mortgage and Deed of Trust, dated as of October 1, 1944.

     
 

+10(a)

Restricted Unit Agreement between J. Wayne Leonard and Entergy Corporation.

     
 

+10(b)

Retention Agreement effective August 3, 2006 between Leo P. Denault and Entergy Corporation.

     
 

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.

     
     
     
136
     
     
     
 

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.

     
 

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.

     
 

99(a) -

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

     
 

99(b) -

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

     
 

99(c) -

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

     
 

99(d) -

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

     
 

99(e) -

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

     
 

99(f) -

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

___________________________

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.

137

*

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 June 30, 2006, 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 June 30, 2006.

+ Management contracts or compensatory plans or arrangements.

138

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/ Nathan E. Langston
Nathan E. Langston
Senior Vice President and Chief Accounting Officer
(For each Registrant and for each as
Principal Accounting Officer)

 

Date: August 8, 2006

 

139