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ENTERGY NEW ORLEANS, LLC - Quarter Report: 2012 September (Form 10-Q)

a05512.htm

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

FORM 10-Q

(Mark One)
 
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the Quarterly Period Ended September 30, 2012
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from ____________ to ____________

 
Commission
File Number
Registrant, State of Incorporation or Organization,
Address of Principal Executive Offices, Telephone
Number, and IRS Employer Identification No.
 
 
Commission
File Number
Registrant, State of Incorporation or Organization,
Address of Principal Executive Offices, Telephone
Number, and IRS Employer Identification No.
1-11299
ENTERGY CORPORATION
(a Delaware corporation)
639 Loyola Avenue
New Orleans, Louisiana 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
 
0-05807
ENTERGY NEW ORLEANS, INC.
(a Louisiana corporation)
1600 Perdido Street
New Orleans, Louisiana 70112
Telephone (504) 670-3700
72-0273040
         
         
0-20371
ENTERGY GULF STATES LOUISIANA, L.L.C.
(a Louisiana limited liability company)
446 North Boulevard
Baton Rouge, Louisiana 70802
Telephone (800) 368-3749
74-0662730
 
1-34360
ENTERGY TEXAS, INC.
(a Texas corporation)
350 Pine Street
Beaumont, Texas 77701
Telephone (409) 981-2000
61-1435798
         
         
1-32718
ENTERGY LOUISIANA, LLC
(a Texas limited liability company)
446 North Boulevard
Baton Rouge, Louisiana 70802
Telephone (800) 368-3749
75-3206126
 
1-09067
SYSTEM ENERGY RESOURCES, INC.
(an Arkansas corporation)
Echelon One
1340 Echelon Parkway
Jackson, Mississippi 39213
Telephone (601) 368-5000
72-0752777
         

__________________________________________________________________________________________


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

Indicate by check mark whether the registrants have submitted electronically and posted on Entergy’s corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

 
Large
accelerated
filer
 
 
Accelerated
filer
 
Non-
accelerated
filer
 
Smaller
reporting
company
Entergy Corporation
Ö
           
Entergy Arkansas, Inc.
       
Ö
   
Entergy Gulf States Louisiana, L.L.C.
       
Ö
   
Entergy Louisiana, LLC
       
Ö
   
Entergy Mississippi, Inc.
       
Ö
   
Entergy New Orleans, Inc.
       
Ö
   
Entergy Texas, Inc.
       
Ö
   
System Energy Resources, Inc.
       
Ö
   

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

Common Stock Outstanding
 
Outstanding at October 31, 2012
Entergy Corporation
($0.01 par value)
177,732,990

Entergy Corporation, Entergy Arkansas, Inc., Entergy Gulf States Louisiana, L.L.C., Entergy Louisiana, LLC, Entergy Mississippi, Inc., Entergy New Orleans, Inc., Entergy Texas, 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, 2011 and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012 and June 30, 2012, filed by the individual registrants with the SEC, and should be read in conjunction therewith.



ENTERGY CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2012

 
Page Number
   
iii
v
Entergy Corporation and Subsidiaries
 
1
24
25
26
28
30
31
32
83
Entergy Arkansas, Inc. and Subsidiaries
 
84
90
91
92
94
95
Entergy Gulf States Louisiana, L.L.C.
 
96
105
106
107
108
110
111
Entergy Louisiana, LLC and Subsidiaries
 
112
121
122
123
124
126
127
Entergy Mississippi, Inc.
 
128
135
137
138
140
141


ENTERGY CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2012

 
Page Number
   
Entergy New Orleans, Inc.
 
142
148
149
150
152
153
Entergy Texas, Inc. and Subsidiaries
 
154
161
163
164
166
167
System Energy Resources, Inc.
 
168
171
173
174
176
 
177
177
177
178
183
186




FORWARD-LOOKING INFORMATION

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

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

·  
resolution of pending and future rate cases and negotiations, including various performance-based rate discussions, Entergy's utility supply plan, and recovery of fuel and purchased power costs;
·  
the termination of Entergy Arkansas’s and Entergy Mississippi’s participation in the System Agreement in December 2013 and November 2015, respectively;
·  
regulatory and operating challenges and uncertainties associated with the Utility operating companies’ proposal to move to the MISO RTO and the operations of the independent coordinator of transmission for Entergy's Utility service area;
·  
risks associated with the proposed spin-off and subsequent merger of Entergy’s electric transmission business into a subsidiary of ITC Holdings Corp., including the risk that Entergy and the Utility operating companies may not be able to timely satisfy the conditions or obtain the approvals required to complete such transaction or such approvals may contain material restrictions or conditions, and the risk that if completed, the transaction may not achieve its anticipated results;
·  
changes in utility regulation, including the beginning or end of retail and wholesale competition, the ability to recover net utility assets and other potential stranded costs, and the application of more stringent transmission reliability requirements or 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 owned or operated by the Entergy Wholesale Commodities business, and the effects of new or existing safety or environmental concerns regarding nuclear power plants and nuclear fuel;
·  
resolution of pending or future applications, and related regulatory proceedings and litigation, for license renewals or modifications of nuclear generating facilities;
·  
the performance of and deliverability of power from Entergy's generation resources, including the capacity factors at its nuclear generating facilities;
·  
Entergy's ability to develop and execute on a point of view regarding future prices of electricity, natural gas, and other energy-related commodities;
·  
prices for power generated by Entergy's merchant generating facilities and the ability to hedge, meet credit support requirements for hedges, sell power forward, or otherwise reduce the market price risk associated with those facilities, including the Entergy Wholesale Commodities nuclear plants;
·  
the prices and availability of fuel and power Entergy must purchase for its Utility customers, and Entergy's ability to meet credit support requirements for fuel and power supply contracts;


FORWARD-LOOKING INFORMATION (Concluded)

·  
volatility and changes in markets for electricity, natural gas, uranium, and other energy-related commodities;
·  
changes in law resulting from federal or state energy legislation or legislation subjecting energy derivatives used in hedging and risk management transactions to governmental regulation;
·  
changes in environmental, tax, and other laws, including requirements for reduced emissions of sulfur, nitrogen, carbon, mercury, and other substances, and changes in costs of compliance with environmental and other laws and regulations;
·  
uncertainty regarding the establishment of interim or permanent sites for spent nuclear fuel and nuclear waste storage and disposal;
·  
variations in weather and the occurrence of hurricanes and other storms and disasters, including uncertainties associated with efforts to remediate the effects of hurricanes, ice storms, or other weather events and the recovery of costs associated with restoration, including accessing funded storm reserves, federal and local cost recovery mechanisms, securitization, and insurance;
·  
effects of climate change;
·  
Entergy's ability to manage its capital projects and operation and maintenance costs;
·  
Entergy's ability to purchase and sell assets at attractive prices and on other attractive terms;
·  
the economic climate, and particularly economic conditions in Entergy's Utility service area and the Northeast United States and events that could influence economic conditions in those areas;
·  
the effects of Entergy's strategies to reduce tax payments;
·  
changes in the financial markets, particularly those affecting the availability of capital and Entergy's ability to refinance existing debt, execute share repurchase programs, and fund investments and acquisitions;
·  
actions of rating agencies, including changes in the ratings of debt and preferred stock, changes in general corporate ratings, and changes in the rating agencies' ratings criteria;
·  
changes in inflation and interest rates;
·  
the effect of litigation and government investigations or proceedings;
·  
advances in technology;
·  
the potential effects of threatened or actual terrorism, cyber-attacks or data security breaches, and war or a catastrophic event such as a nuclear accident or a natural gas pipeline explosion;
·  
Entergy's ability to attract and retain talented management and directors;
·  
changes in accounting standards and corporate governance;
·  
declines in the market prices of marketable securities and resulting funding requirements for Entergy's defined benefit pension and other postretirement benefit plans;
·  
changes in decommissioning trust fund values or earnings or in the timing of or cost to decommission nuclear plant sites;
·  
factors that could lead to impairment of long-lived assets; and
·  
the ability to successfully complete merger, acquisition, or divestiture plans, regulatory or other limitations imposed as a result of merger, acquisition, or divestiture, and the success of the business following a merger, acquisition, or divestiture.


DEFINITIONS

Certain abbreviations or acronyms used in the text and notes are defined below:
 
Abbreviation or Acronym
 
 
Term
AFUDC
Allowance for Funds Used During Construction
ALJ
Administrative Law Judge
ANO 1 and 2
Units 1 and 2 of Arkansas Nuclear One (nuclear), owned by Entergy Arkansas
APSC
Arkansas Public Service Commission
ASLB
Atomic Safety and Licensing Board, the board within the NRC that conducts hearings and performs other regulatory functions that the NRC authorizes
ASU
Accounting Standards Update issued by the FASB
Board
Board of Directors of Entergy Corporation
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
D.C. Circuit
U.S. Court of Appeals for the District of Columbia Circuit
Entergy
Entergy Corporation and its direct and indirect subsidiaries
Entergy Corporation
Entergy Corporation, a Delaware corporation
Entergy Gulf States, Inc.
Predecessor company for financial reporting purposes to Entergy Gulf States Louisiana that included the assets and business operations of both Entergy Gulf States Louisiana and Entergy Texas
Entergy Gulf States Louisiana
Entergy Gulf States Louisiana, L.L.C., a company created in connection with the jurisdictional separation of Entergy Gulf States, Inc. and the successor company to Entergy Gulf States, Inc. for financial reporting purposes.  The term is also used to refer to the Louisiana jurisdictional business of Entergy Gulf States, Inc., as the context requires.
Entergy Texas
Entergy Texas, Inc., a company created in connection with the jurisdictional separation of Entergy Gulf States, Inc.  The term is also used to refer to the Texas jurisdictional business of Entergy Gulf States, Inc., as the context requires.
Entergy Wholesale
Commodities (EWC)
Entergy’s non-utility business segment primarily comprised of the ownership and operation of six nuclear power plants, the ownership of interests in non-nuclear power plants, and the sale of the electric power produced by those plants to wholesale customers
 
EPA
United States Environmental Protection Agency
ERCOT
Electric Reliability Council of Texas
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
FitzPatrick
James A. FitzPatrick Nuclear Power Plant (nuclear), owned by an Entergy subsidiary in the Entergy Wholesale Commodities business segment
Form 10-K
Annual Report on Form 10-K for the calendar year ended December 31, 2011 filed with the SEC by Entergy Corporation and its Registrant Subsidiaries
Grand Gulf
Unit No. 1 of Grand Gulf Nuclear 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
Indian Point 2
Unit 2 of Indian Point Energy Center (nuclear), owned by an Entergy subsidiary in the Entergy Wholesale Commodities business segment
Indian Point 3
Unit 3 of Indian Point Energy Center (nuclear), owned by an Entergy subsidiary in the Entergy Wholesale Commodities business segment
IRS
Internal Revenue Service
ISO
Independent System Operator


DEFINITIONS (Concluded)

Abbreviation or Acronym
 
Term
kW
Kilowatt, which equals one thousand watts
kWh
Kilowatt-hour(s)
LPSC
Louisiana Public Service Commission
MISO
Midwest Independent Transmission System Operator, Inc., a regional transmission organization
MMBtu
One million British Thermal Units
MPSC
Mississippi Public Service Commission
MW
Megawatt(s), which equals one thousand kilowatts
MWh
Megawatt-hour(s)
Net MW in operation
Installed capacity owned and operated
NRC
Nuclear Regulatory Commission
NYPA
New York Power Authority
Palisades
Palisades Power Plant (nuclear), owned by an Entergy subsidiary in the Entergy Wholesale Commodities business segment
Pilgrim
Pilgrim Nuclear Power Station (nuclear), owned by an Entergy subsidiary in the Entergy Wholesale Commodities business segment
PPA
Purchased power agreement or power purchase agreement
PUCT
Public Utility Commission of Texas
Registrant Subsidiaries
Entergy Arkansas, Inc., Entergy Gulf States Louisiana, L.L.C., Entergy Louisiana, LLC, Entergy Mississippi, Inc., Entergy New Orleans, Inc., Entergy Texas, Inc., and System Energy Resources, Inc.
River Bend
River Bend Station (nuclear), owned by Entergy Gulf States Louisiana
RTO
Regional transmission organization
SEC
Securities and Exchange Commission
SPP
Southwest Power Pool
System Agreement
Agreement, effective January 1, 1983, as modified, among the Utility operating companies relating to the sharing of generating capacity and other power resources
System Energy
System Energy Resources, Inc.
TWh
Terawatt-hour(s), which equals one billion kilowatt-hours
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
Utility operating companies
Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and Entergy Texas
Vermont Yankee
Vermont Yankee Nuclear Power Station (nuclear), owned by an Entergy subsidiary in the Entergy Wholesale Commodities business segment
Waterford 3
Unit No. 3 (nuclear) of the Waterford Steam Electric Station, 100% owned or leased by Entergy Louisiana
weather-adjusted usage
Electric usage excluding the effects of deviations from normal weather





ENTERGY CORPORATION AND SUBSIDIARIES

MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS


Entergy operates primarily through two business segments: Utility and Entergy Wholesale Commodities.

·  
The Utility business segment includes the generation, transmission, distribution, and sale of electric power in portions of Arkansas, Mississippi, Texas, and Louisiana, including the City of New Orleans; and operates a small natural gas distribution business.  As discussed in more detail in “Plan to Spin Off the Utility’s Transmission Business,” in the Form 10-K, in December 2011, Entergy entered into an agreement to spin off its transmission business and merge it with a newly-formed subsidiary of ITC Holdings Corp.
·  
The Entergy Wholesale Commodities business segment includes the ownership and operation of six nuclear power plants located in the northern United States and the sale of the electric power produced by those plants to wholesale customers.  This business also provides services to other nuclear power plant owners.  Entergy Wholesale Commodities also owns interests in non-nuclear power plants that sell the electric power produced by those plants to wholesale customers.

Hurricane Isaac

In August 2012, Hurricane Isaac caused extensive damage to portions of Entergy's service area in Louisiana, and to a lesser extent in Mississippi and Arkansas.  The storm resulted in widespread power outages, significant damage primarily to distribution infrastructure, and the loss of sales during the power outages.  Total restoration costs for the repair and/or replacement of Entergy's electric facilities in areas with damage from Hurricane Isaac are currently estimated to be in the range of $400 million to $500 million, as follows:

 
Company
 
Hurricane Isaac
Restoration Costs
   
(In Millions)
Entergy Arkansas
 
$10
Entergy Gulf States Louisiana
 
70-90
Entergy Louisiana
 
240-300
Entergy Mississippi
 
30-40
Entergy New Orleans
 
50-60
Total
 
$400-500

The Utility operating companies are considering all reasonable avenues to recover storm-related costs from Hurricane Isaac, including, but not limited to, accessing funded storm reserves; securitization or other alternative financing; and traditional retail recovery on an interim and permanent basis.  Each Utility operating company is responsible for its restoration cost obligations and for recovering or financing its storm-related costs.  Storm cost recovery or financing may be subject to review by applicable regulatory authorities.

Entergy has recorded accounts payable for the estimated costs incurred that were necessary to return customers to service.  Entergy recorded corresponding regulatory assets of approximately $130 million and construction work in progress of approximately $270 million.  Entergy recorded the regulatory assets in accordance with its accounting policies and based on the historic treatment of such costs in its service areas because management believes that recovery through some form of regulatory mechanism is probable.  Because Entergy has not gone through the regulatory process regarding these storm costs, however, there is an element of risk, and Entergy is unable to predict with certainty the degree of success it may have in its recovery initiatives, the amount of restoration costs that it may ultimately recover, or the timing of such recovery.


 
1

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis


Results of Operations

Third Quarter 2012 Compared to Third Quarter 2011

Following are income statement variances for Utility, Entergy Wholesale Commodities, Parent & Other, and Entergy comparing the third quarter 2012 to the third quarter 2011 showing how much the line item increased or (decreased) in comparison to the prior period:

   
 
 
Utility
 
Entergy
Wholesale
Commodities
 
 
Parent &
Other (1)
 
 
 
Entergy
   
(In Thousands)
                 
3rd Qtr 2011 Consolidated Net Income
 
$528,459 
 
$130,862 
 
($26,252)
 
$633,069 
                 
Net revenue (operating revenue less fuel
  expense, purchased power, and other
  regulatory charges/credits)
 
 
 
189,220 
 
 
 
(46,721)
 
 
 
(2,626)
 
 
 
139,873 
Other operation and maintenance expenses
 
40,964 
 
16,059 
 
(602)
 
56,421 
Taxes other than income taxes
 
(2,248)
 
(617)
 
(130)
 
(2,995)
Depreciation and amortization
 
13,902 
 
(15,664)
 
(79)
 
(1,841)
Other income
 
(5,287)
 
(2,847)
 
(365)
 
(8,499)
Interest expense
 
9,485 
 
(2,227)
 
12,951 
 
20,209 
Other expenses
 
3,442 
 
(5,097)
 
 
(1,655)
Income taxes
 
346,341 
 
(29,926)
 
35,219 
 
351,634 
                 
3rd Qtr 2012 Consolidated Net Income
 
$300,506 
 
$118,766 
 
($76,602)
 
$342,670 

(1)
Parent & Other include eliminations, which are primarily intersegment activity.

Net income for Utility in the third quarter 2011 was significantly affected by a settlement with the IRS related to the mark-to-market income tax treatment of power purchase contracts, which resulted in a reduction in income tax expense.  The net income effect was partially offset by a regulatory charge, which reduced net revenue in the third quarter 2011, because Entergy Louisiana is sharing the benefits with customers.  See Note 3 to the financial statements in the Form 10-K for additional discussion of the settlement and benefit sharing.

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


 
2

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis


Net Revenue

Utility

Following is an analysis of the change in net revenue comparing the third quarter 2012 to the third quarter 2011.

  
 
Amount
  
 
(In Millions)
     
2011 net revenue
 
$1,319 
Mark-to-market tax settlement sharing
 
200 
Grand Gulf recovery
 
31 
Retail electric price
 
26 
Purchased power capacity
 
(12)
Net wholesale revenue
 
(15)
Volume/weather
 
(35)
Other
 
(6)
2012 net revenue
 
$1,508 

           The mark-to-market tax settlement sharing variance results from a regulatory charge recorded in September 2011 because Entergy Louisiana is sharing the benefits of a settlement with the IRS related to the mark-to-market income tax treatment of power purchase contracts with customers.  See Note 3 to the financial statements in the Form 10-K for additional discussion of the settlement and benefit sharing.

The Grand Gulf recovery variance is primarily due to increased recovery of higher expenses resulting from the Grand Gulf uprate.

The retail electric price variance is primarily due to an increase in the storm cost recovery rider at Entergy Mississippi, as approved by the MPSC for a five-month period effective August 2012, and an increase in the energy efficiency rider at Entergy Arkansas, as approved by the APSC, effective July 2012.  The storm costs provision and costs related to the energy efficiency program are included in other operation and maintenance expenses and therefore the increased revenues have no effect on net income.

The purchased power capacity variance is primarily due to price increases for ongoing purchased power capacity and additional capacity purchases.

The net wholesale revenue variance is primarily due to lower margins on co-owner contracts and higher wholesale energy costs.

The volume/weather variance is primarily due to decreased electricity usage, including the effect of milder weather as compared to the prior period on residential and commercial sales.  Hurricane Isaac, which hit the Utility’s service area in August 2012, also contributed to the decrease in electricity usage.  Billed retail electricity usage decreased a total of 1,290 GWh, or 4%, across all customer classes.




 
3

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis


Entergy Wholesale Commodities

Following is an analysis of the change in net revenue comparing the third quarter 2012 to the third quarter 2011.

  
 
Amount
  
 
(In Millions)
     
2011 net revenue
 
$542 
Nuclear realized price changes
 
(48)
Nuclear volume
 
(22)
Other
 
23 
2012 net revenue
 
$495 

As shown in the table above, net revenue for Entergy Wholesale Commodities decreased by $47 million, or 9%, in the third quarter 2012 compared to the third quarter 2011 primarily due to lower pricing in its contracts to sell power and lower volume in its nuclear fleet resulting from more unplanned and refueling outage days in 2012 compared to the same period in 2011 which was partially offset by the exercise of resupply options provided for in purchase power agreements whereby Entergy Wholesale Commodities may elect to supply power from another source when the plant is not running.  Amounts related to the exercise of resupply options are included in the GWh billed in the table below.  Partially offsetting the lower net revenue from the nuclear fleet was higher net revenue from the Rhode Island State Energy Center, which was acquired in December 2011.

Following are key performance measures for Entergy Wholesale Commodities for the third quarter 2012 and 2011:

   
2012
 
2011
         
Owned capacity
 
6,612
 
6,016
GWh billed
 
12,002
 
11,255
Average realized revenue per MWh
 
$51.88
 
$56.02
         
Entergy Wholesale Commodities Nuclear Fleet
Capacity factor
 
90%
 
98%
GWh billed
 
10,480
 
10,645
Average realized revenue per MWh
 
$52.27
 
$56.07
Refueling Outage Days:
       
FitzPatrick
 
15
 
-

Realized Revenue per MWh for Entergy Wholesale Commodities Nuclear Plants

See the Form 10-K for a discussion of Entergy Wholesale Commodities nuclear business’s average realized price per MWh, including the factors that influence it and the decrease in the annual average realized price per MWh to $54.73 in 2011 from $59.16 in 2010.  Entergy Wholesale Commodities’ nuclear business is likely to continue to experience a decrease again in 2012 from 2011 because, as shown in the contracted sale of energy table in "Market and Credit Risk Sensitive Instruments," Entergy Wholesale Commodities has 89% of its planned nuclear energy output under contract for the remainder of 2012 for a minimum average contracted energy price of $47 per MWh.  In addition, Entergy Wholesale Commodities has 84% of its planned nuclear energy output under contract for 2013 for a minimum average contracted energy price of $45 per MWh.


 
4

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis


Other Income Statement Items

Utility

Other operation and maintenance expenses increased from $478 million for the third quarter 2011 to $519 million for the third quarter 2012 primarily due to:

·  
the deferral in 2011 of $13 million of 2010 Michoud plant maintenance costs pursuant to the settlement of Entergy New Orleans’ 2010 test year formula rate plan filing approved by the City Council in September 2011.  See Note 2 to the financial statements in the Form 10-K for further discussion of the Entergy New Orleans 2010 test year formula rate plan filing and settlement;
·  
$11 million of costs incurred in 2012 related to the planned spin-off and merger of the Utility’s transmission business;
·  
an increase of $10 million resulting from a temporary increase in the Entergy Mississippi storm damage reserve authorized by the MPSC effective August 2012;
·  
an increase of $7 million in energy efficiency costs at Entergy Arkansas.  These costs are recovered through the energy efficiency rider and have no effect on net income;
·  
an increase of $7 million in compensation and benefits costs primarily due to decreasing discount rates and changes in certain actuarial assumptions resulting from a recent experience study.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for further discussion of benefits costs; and
·  
the amortization of $4 million of Hurricane Rita storm costs in accordance with a rate order from the PUCT effective September 2012.  See Note 2 to the financial statements for discussion of the PUCT order.

These increases were partially offset by a decrease of approximately $7 million as a result of the deferral or capitalization of storm restoration costs for Hurricane Isaac, which hit the Utility's service area in August 2012.

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

Interest expense increased primarily due to a revision in 2011 caused by FERC’s acceptance of a change in the treatment of funds received from independent power producers for transmission interconnection projects.  Also contributing to the increase were net debt issuances by certain of the Utility operating companies.

Entergy Wholesale Commodities

           Other operation and maintenance expenses increased from $229 million for the third quarter 2011 to $245 million for the third quarter 2012 primarily due to:

·  
an increase of $5 million in compensation and benefits costs primarily due to decreasing discount rates and changes in certain actuarial assumptions resulting from a recent experience study.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for further discussion of benefits costs;
·  
an increase of $4 million due to the operations of the Rhode Island State Energy Center, which was acquired in December 2011; and
·  
other items, including additional material and supply costs.

Depreciation and amortization expense decreased primarily due to an adjustment resulting from a final court decision in the Entergy Nuclear Indian Point 2 lawsuit against the U.S. Department of Energy related to spent nuclear fuel disposal.  The effects of recording the proceeds from the judgment reduced the plant in service balance with a corresponding $19 million reduction to previously-recorded depreciation expense.  The litigation is discussed in more detail in Part II, Item 5, “Spent Nuclear Fuel.”
 
 
5

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis


Parent & Other

Interest expense increased primarily due to the issuance of $500 million of 4.7% senior notes by Entergy Corporation in January 2012 and a higher interest rate on outstanding borrowings under the Entergy Corporation credit facility.

Income Taxes

The effective income tax rate for the third quarter 2012 was 40.4%. The difference in the effective income tax rate versus the statutory rate of 35% for the third quarter 2012 is primarily due to state income taxes.

The effective income tax rate for the third quarter 2011 was (23.2%).  The difference in the effective income tax rate versus the statutory rate of 35% for the third quarter 2011 was primarily due to a settlement with the IRS related to the mark-to-market income tax treatment of power purchase contracts, which resulted in a reduction in income tax expense of $422 million.  See Note 3 to the financial statements in the Form 10-K for further discussion of the settlement.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Following are income statement variances for Utility, Entergy Wholesale Commodities, Parent & Other, and Entergy comparing the nine months ended September 30, 2012 to the nine months ended September 30, 2011 showing how much the line item increased or (decreased) in comparison to the prior period:

   
 
 
Utility
 
Entergy
Wholesale
Commodities
 
 
Parent &
Other (1)
 
 
 
Entergy
   
(In Thousands)
                 
2011 Consolidated Net Income
 
$949,854 
 
$319,651 
 
($62,159)
 
$1,207,346 
                 
Net revenue (operating revenue less fuel
  expense, purchased power, and other
  regulatory charges/credits)
 
 
 
(6,473)
 
 
 
(149,942)
 
 
 
(4,871)
 
 
 
(161,286)
Other operation and maintenance expenses
 
120,313 
 
56,486 
 
5,893 
 
182,692 
Asset impairment
 
 
355,524 
 
 
355,524 
Taxes other than income taxes
 
3,684 
 
14,297 
 
(145)
 
17,836 
Depreciation and amortization
 
28,061 
 
(3,931)
 
(91)
 
24,039 
Other income
 
1,102 
 
8,098 
 
(207)
 
8,993 
Interest expense
 
17,546 
 
1,346 
 
23,306 
 
42,198 
Other expenses
 
6,288 
 
(54,105)
 
 
(47,817)
Income taxes
 
92,347 
 
(223,380)
 
45,101 
 
(85,932)
                 
2012 Consolidated Net Income
 
$676,244 
 
$31,570 
 
($141,301)
 
$566,513 

(1)
Parent & Other include eliminations, which are primarily intersegment activity.

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


 
6

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis


As discussed in more detail in Note 11 to the financial statements, results of operations for the nine months ended September 30, 2012 include a $355.5 million ($223.5 million after-tax) impairment charge to write down the carrying values of Vermont Yankee and related assets to their fair values.  Also, net income for Utility in the nine months ended September 30, 2012 was significantly affected by a settlement with the IRS related to the income tax treatment of the Louisiana Act 55 financing of the Hurricane Katrina and Hurricane Rita storm costs, which resulted in a reduction in income tax expense.  The net income effect was partially offset by a regulatory charge, which reduced net revenue in the nine months ended September 30, 2012, because Entergy Louisiana and Entergy Gulf States Louisiana are sharing the benefits with customers.  See Note 10 to the financial statements for additional discussion of the settlement and benefit sharing.  Net income for Utility for the nine months ended September 30, 2011 was significantly affected by a settlement with the IRS related to the mark-to-market income tax treatment of power purchase contracts, which resulted in a reduction in income tax expense.  The net income effect was partially offset by a regulatory charge, which reduced net revenue in the nine months ended September 30, 2011, because Entergy Louisiana is sharing the benefits with customers.  See Note 3 to the financial statements in the Form 10-K for additional discussion of the settlement and benefit sharing.

Net Revenue

Utility

Following is an analysis of the change in net revenue comparing the nine months ended September 30, 2012 to the nine months ended September 30, 2011.

  
 
Amount
  
 
(In Millions)
     
2011 net revenue
 
$3,772 
Louisiana Act 55 financing tax settlement sharing
 
(163)
Volume/weather
 
(84)
Purchased power capacity
 
(25)
Net wholesale revenue
 
(24)
Grand Gulf recovery
 
31 
Retail electric price
 
43 
Mark-to-market tax settlement sharing
 
201 
Other
 
14 
2012 net revenue
 
$3,765 

The Louisiana Act 55 financing tax settlement sharing variance results from a regulatory charge recorded in 2012 because Entergy Louisiana and Entergy Gulf States Louisiana are sharing the benefits of the settlement with the IRS related to the uncertain tax position regarding the Hurricane Katrina and Hurricane Rita Louisiana Act 55 financing with customers.  See Note 10 to the financial statements for additional discussion of the settlement and benefit sharing.

The volume/weather variance is primarily due to the effect of milder weather, as compared to the prior period, on residential and commercial sales.  Hurricane Isaac, which hit the Utility’s service area in August 2012, also contributed to the decrease in electricity usage.  This was partially offset by an increase in industrial sales largely due to expansions.  This sector had growth from both large and small industrial customers.  Improvements in chemicals were partially offset by declines in refineries and pipelines.

The purchased power capacity variance is primarily due to price increases for ongoing purchased power capacity and additional capacity purchases.

The net wholesale revenue variance is primarily due to lower margins on co-owner contracts and higher wholesale energy costs.
 
 
7

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis


The Grand Gulf recovery variance is primarily due to increased recovery of higher expenses resulting from the Grand Gulf uprate.

The retail electric price variance is primarily due to:

·  
an increase in the energy efficiency rider at Entergy Arkansas, as approved by the APSC, effective July 2012.  This increase is offset by costs included in other operation and maintenance expenses and has no effect on net income;
·  
an increase in the storm cost recovery rider at Entergy Mississippi, as approved by the MPSC for a five-month period effective August 2012.  This increase is offset by costs included in other operation and maintenance expenses and has no effect on net income;
·  
a special formula rate plan rate increase at Entergy Louisiana effective May 2011 in accordance with a previous LPSC order relating to the acquisition of Unit 2 of the Acadia Energy Center; and
·  
a base rate increase at Entergy Texas beginning May 2011 as a result of the settlement of the December 2009 rate case.

These increases were partially offset by a formula rate plan decrease at Entergy New Orleans effective October 2011.  See Note 2 to the financial statements in the Form 10-K for further discussion of these proceedings.

The mark-to-market tax settlement sharing variance results from a regulatory charge recorded in 2011 because Entergy Louisiana is sharing the benefits of a settlement with the IRS related to the mark-to-market income tax treatment of power purchase contracts with customers.  See Note 3 to the financial statements in the Form 10-K for additional discussion of the settlement and benefit sharing.

Entergy Wholesale Commodities

Following is an analysis of the change in net revenue comparing the nine months ended September 30, 2012 to the nine months ended September 30, 2011.

  
 
Amount
  
 
(In Millions)
     
2011 net revenue
 
$1,541 
Nuclear realized price changes
 
(162)
Nuclear volume
 
(30)
Other
 
42 
2012 net revenue
 
$1,391 

As shown in the table above, net revenue for Entergy Wholesale Commodities decreased by $150 million, or 10%, in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to lower pricing in its contracts to sell power and lower volume in its nuclear fleet resulting from more planned and unplanned outage days in 2012 compared to the same period in 2011 which was partially offset by the exercise of resupply options provided for in purchase power agreements whereby Entergy Wholesale Commodities may elect to supply power from another source when the plant is not running.  Amounts related to the exercise of resupply options are included in the GWh billed in the table below.  Partially offsetting the lower net revenue from the nuclear fleet was higher net revenue from the Rhode Island State Energy Center, which was acquired in December 2011.



 
8

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis



Following are key performance measures for Entergy Wholesale Commodities for the nine months ended September 30, 2012 and 2011:

   
2012
 
2011
         
Owned capacity
 
6,612
 
6,016
GWh billed
 
34,957
 
32,376
Average realized revenue per MWh
 
$49.84
 
$55.20
         
Entergy Wholesale Commodities Nuclear Fleet
Capacity factor
 
88%
 
93%
GWh billed
 
30,744
 
30,551
Average realized revenue per MWh
 
$50.42
 
$55.31
Refueling Outage Days:
       
FitzPatrick
 
15
 
-
Indian Point 2
 
28
 
-
Indian Point 3
 
-
 
30
Palisades
 
34
 
-
Pilgrim
 
-
 
25

Other Income Statement Items

Utility

Other operation and maintenance expenses increased from $1,411 million for the nine months ended September 30, 2011 to $1,531 million for the nine months ended September 30, 2012 primarily due to:

·  
an increase of $42 million in compensation and benefits costs primarily due to decreasing discount rates and changes in certain actuarial assumptions resulting from a recent experience study.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for further discussion of benefits costs;
·  
$27 million of costs incurred in 2012 related to the planned spin-off and merger of the Utility’s transmission business;
·  
an increase of $17 million in fossil-fueled generation expenses resulting from higher outage costs primarily because of the timing of the outages and increased scope of outages compared to the same period in the prior year;
·  
the deferral in 2011 of $13 million of 2010 Michoud plant maintenance costs pursuant to the settlement of Entergy New Orleans’ 2010 test year formula rate plan filing approved by the City Council in September 2011.  See Note 2 to the financial statements in the Form 10-K for further discussion of the Entergy New Orleans 2010 test year formula rate plan filing and settlement;
·  
an increase of $10 million resulting from a temporary increase in the Entergy Mississippi storm damage reserve authorized by the MPSC effective August 2012;
·  
an increase of $9 million in energy efficiency costs at Entergy Arkansas.  These costs are recovered through the energy efficiency rider and have no effect on net income;
·  
nuclear insurance refunds of $5 million received in 2011; and
·  
the amortization of $4 million of Hurricane Rita storm costs in accordance with a rate order from the PUCT effective September 2012.  See Note 2 to the financial statements for discussion of the PUCT order.


 
9

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis



These increases were partially offset by:

·  
a decrease of approximately $7 million as a result of the deferral or capitalization of storm restoration costs for Hurricane Isaac, which hit the Utility's service area in August 2012; and
·  
the effect of the deferral, as approved by the FERC, and the LPSC for the Louisiana jurisdictions, of costs related to the transition and implementation of joining the MISO RTO, which reduced expenses by $10 million.

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

Interest expense increased primarily due to a revision in 2011 caused by FERC’s acceptance of a change in the treatment of funds received from independent power producers for transmission interconnection projects.  Also contributing to the increase were net debt issuances by certain of the Utility operating companies.

Entergy Wholesale Commodities

Other operation and maintenance expenses increased from $669 million for the nine months ended September 30, 2011 to $726 million for the nine months ended September 30, 2012 primarily due to:

·  
an increase of $23 million in compensation and benefits costs primarily due to decreasing discount rates and changes in certain actuarial assumptions resulting from a recent experience study.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for further discussion of benefits costs;
·  
an increase of $15 million due to the operations of the Rhode Island State Energy Center, which was acquired in December 2011; and
·  
other items, including additional material and supply costs.

The asset impairment variance is due to a $355.5 million ($223.5 million after-tax) impairment charge recorded in the first quarter 2012 to write down the carrying values of Vermont Yankee and related assets to their fair values.  See Note 11 to the financial statements for further discussion of this charge.

Taxes other than income taxes increased primarily due to increased property taxes at FitzPatrick.  Previously, FitzPatrick was granted an exemption from property taxation and paid taxes according to a payment in lieu of property taxes agreement.  This agreement expired on June 30, 2011 and FitzPatrick is now being taxed under the current property tax system.

Depreciation and amortization expense decreased primarily due to an adjustment resulting from a final court decision in the Entergy Nuclear Indian Point 2 lawsuit against the U.S. Department of Energy related to spent nuclear fuel disposal.  The effects of recording the proceeds from the judgment reduced the plant in service balance with a corresponding $19 million reduction to previously-recorded depreciation expense.  The litigation is discussed in more detail in Part II, Item 5, “Spent Nuclear Fuel.”  Partially offsetting the adjustment was an increase due to additions to plant in service, including the acquisition of the Rhode Island State Energy Center in December 2011.

Other expenses decreased primarily due to a credit to decommissioning expense of $49 million in the second quarter 2012 resulting from a reduction in the decommissioning cost liability for a plant as a result of a revised decommissioning cost study.  See “Critical Accounting Estimates – Nuclear Decommissioning Costs” below for further discussion.

Parent & Other

Interest expense increased primarily due to the issuance of $500 million of 4.7% senior notes by Entergy Corporation in January 2012 and a higher interest rate on outstanding borrowings under the Entergy Corporation credit facility.
 
 
10

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis



Income Taxes

The effective income tax rate for the nine months ended September 30, 2012 was 16.3%.  The difference in the effective income tax rate versus the statutory rate of 35% for the nine months ended September 30, 2012 is related to (1) an IRS settlement on how to treat the Louisiana Act 55 financing of the Hurricane Katrina and Hurricane Rita storm costs, as discussed further in Note 10 to the financial statements; and (2) a unanimous court decision from the U.S. Court of Appeals for the Fifth Circuit affirming an earlier decision of the U.S. Tax Court holding that Entergy was entitled to claim a credit against its U.S. tax liability for the U.K. windfall tax that it paid.  The settlement and the decision necessitated that Entergy reverse provisions for uncertain tax positions.  See Note 3 to the financial statements in the Form 10-K and Note 10 to the financial statements herein for further discussion of the settlement and tax credit.

The effective income tax rate for the nine months ended September 30, 2011 was 14%.  The difference in the effective income tax rate versus the statutory rate of 35% for the nine months ended September 30, 2011 was primarily due to a settlement with the IRS related to the mark-to-market income tax treatment of power purchase contracts, which resulted in a reduction in income tax expense of $422 million.  See Note 3 to the financial statements in the Form 10-K for further discussion of the settlement.

Plan to Spin Off the Utility’s Transmission Business

See the Form 10-K for a discussion of Entergy’s plan to spin off its transmission business and merge it with a newly formed subsidiary of ITC Holdings Corp.  Following are updates to that discussion.

Filings with Retail Regulators

In conjunction with ITC, each of the Utility operating companies, with the exception of Entergy Texas, have filed applications with their respective retail regulators seeking approval for the proposal to spin off and merge the Utility’s transmission business with ITC, including approval for change of control of the transmission assets and transaction-related steps in the spin-off and merger.  An application was filed with the LPSC on September 5, 2012, with the City Council on September 12, 2012, with the APSC on September 28, 2012, and with the MPSC on October 5, 2012.  The PUCT is required to issue an order within 180 days of a filing, so Entergy Texas plans to monitor the other Utility operating companies for further information on procedural schedules before submitting its filing.  Entergy Arkansas also expects to file an application with the Missouri Public Service Commission before the end of 2012 to obtain approval for the transfer of limited transmission facilities located in Missouri.

The ALJ in the LPSC proceeding has established a procedural schedule with a hearing set to commence on June 24, 2013 and LPSC consideration anticipated in September 2013.  The City Council has established a procedural schedule with a hearing scheduled to commence on July 23, 2013, with certification of the record to the City Council no later than August 6, 2013.

Filings with the FERC

On September 24, 2012, Entergy, ITC, and certain of their subsidiaries submitted a series of filings with the FERC to obtain regulatory approvals related to the proposed transfer to ITC subsidiaries of the transmission assets owned by the Utility operating companies.  These filings include a joint application for authorization of the acquisition and disposition of jurisdictional transmission facilities, approval of transmission service formula rates and certain jurisdictional agreements, and a petition for declaratory order on the application of Federal Power Act section 305(a).  The application seeks approval under Federal Power Act section 205 of formula rates under Attachment O of the MISO Tariff for each of the new ITC Operating Companies (which will become Transmission Owner members of MISO) and of related jurisdictional pro forma agreements.  In a separate filing, MISO sought approval of an amendment to the MISO Tariff pursuant to Federal Power Act section 205 to enable the integration of the new ITC Operating Companies’ transmission facilities into MISO prior to the Utility operating companies becoming market participants in MISO.  On September 26, 2012, ESI submitted an application under Federal Power Act section 205 requesting FERC authorization to cancel System Agreement Service Schedule MSS-2 (Transmission Equalization) effective upon closing of the transaction.  On October 10, 2012 the FERC established a comment due date of December 7, 2012 for these applications and certain other filings related to the transaction.  On October 31, 2012, Entergy, ITC, and certain subsidiaries submitted filings with the FERC to obtain regulatory approvals under Federal Power Act section 204 for the various financings being undertaken as part of the transaction.
 
 
11

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis



Other Filings

In July 2012, Entergy Corporation submitted a request to the Internal Revenue Service seeking a private letter ruling substantially to the effect that certain requirements for the tax-free treatment of the distribution of the transmission business are met.  In September 2012, Entergy submitted an application to the NRC for approval of certain nuclear plant license transfers and amendments as part of the steps to complete the spin-off and merger.

Entergy Wholesale Commodities Authorizations to Operate Its Nuclear Power Plants

In March 2011 and May 2012 the NRC renewed the operating licenses of Vermont Yankee and Pilgrim, respectively, for an additional 20 years, as a result of which each license now expires in 2032.  For additional discussion regarding activity in Vermont and the continued operation of the Vermont Yankee plant, see “Vermont Yankee” in Note 11 to the financial statements herein.  In the Vermont Yankee license renewal case, Vermont and the New England Coalition appealed the NRC’s renewal of Vermont Yankee’s license to the D.C. Circuit.  In June 2012 the D.C. Circuit denied that appeal.  The time for seeking further judicial review of the NRC’s issuance of Vermont Yankee’s renewed operating license has expired.  In the Pilgrim license renewal case, three contentions remained pending before the ASLB at the time the license was issued.  Two of those contentions were subsequently denied by the ASLB and not appealed within the applicable time.  A third remaining contention (alleging failure of the Pilgrim Environmental Impact Statement to address adequately an endangered species) was denied by the ASLB and then appealed to the NRC, where it remains pending.    The NRC has indicated that should the appeal of a contention result in voiding of the renewed license, Pilgrim could operate under the “timely renewal” doctrine in reliance on the prior, and now superseded, license until proceedings concerning the renewed license are final.  Massachusetts has appealed the NRC’s renewal of Pilgrim’s license to the United States Court of Appeals for the First Circuit.  Entergy has intervened in that appeal.  Briefing has been completed and the scheduling of oral argument is pending.

The NRC operating licenses for Indian Point 2 and Indian Point 3 expire in September 2013 and December 2015, respectively.  Under federal law, nuclear power plants may continue to operate beyond their license expiration dates while their renewal applications are pending NRC approval.  In April 2007, Entergy submitted an application to the NRC to renew the operating licenses for Indian Point 2 and 3 for an additional 20 years.  The ASLB has admitted 21 contentions raised by the State of New York or other parties, which were combined into 16 discrete issues.  A few of the issues have been resolved, but several issues remain subject to ASLB hearings.  In July 2011, the ASLB granted the State of New York’s motion for summary disposition of an admitted contention challenging the adequacy of a section of Indian Point’s environmental analysis as incorporated in the Final Supplemental Environmental Impact Statement (FSEIS) (discussed below).  That section provided cost estimates for Severe Accident Mitigation Alternatives (SAMAs), which are hardware and procedural changes that could be implemented to mitigate estimated impacts of off-site radiological releases in case of a hypothesized severe accident.  In addition to finding that the SAMA cost analysis was insufficient, the ASLB directed the NRC staff to explain why cost-beneficial SAMAs should not be required to be implemented.  Entergy appealed the ASLB’s decision to the NRC and the NRC staff supported Entergy’s appeal, while the State of New York opposed it.  In December 2011 the NRC denied Entergy’s appeal as premature, stating that the appeal could be renewed at the conclusion of the ASLB proceedings.

Pursuant to ASLB scheduling orders in the Indian Point 2 and 3 license renewal proceeding, the parties have submitted several rounds of testimony on “Track 1” contentions, which represent a majority of the contentions pending before the ASLB.   Hearings on Track 1 contentions commenced October 15, 2012.  Hearings on the remaining issues will follow the submission of additional testimony on dates yet to be set.
 
 
12

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis



The NRC staff currently is also continuing to perform its technical and environmental reviews of the Indian Point 2 and 3 license renewal application.  The NRC staff issued a Final Safety Evaluation Report (FSER) in August 2009, a supplement to the FSER in August 2011, a FSEIS in December 2010 and a supplement to the FSEIS in June 2012.  The NRC staff issued a draft supplemental FSEIS in June 2012 and has stated its intent to issue, following an opportunity for comment, another supplement to the FSEIS in December 2012.  In addition, the NRC staff has stated its intent to issue a further supplement to the FSER in early 2013.
 
The New York State Department of Environmental Conservation has taken the position that Indian Point must obtain a new state-issued Clean Water Act Section 401 water quality certification as part of the license renewal process.  In addition, the consistency of Indian Point’s operations with New York State’s coastal management policies must be resolved as required by the Coastal Zone Management Act (CZMA).  On July 24, 2012, Entergy filed a supplement to the Indian Point license renewal application currently pending before the NRC.  The supplement states that, based on applicable federal law and in light of prior reviews by the State of New York, the NRC may issue the requested renewed operating licenses for Indian Point without the need for an additional consistency review by the State of New York under the CZMA.  On July 30, 2012, Entergy filed a motion for declaratory order with the ASLB seeking confirmation of its position that no further CZMA consistency determination is required before the NRC may issue renewed licenses.  Responses to Entergy’s motion for declaratory order are due January 14, 2013, after the Track 1 ASLB hearing is scheduled to be completed.
 
The hearing process is an integral component of the NRC’s regulatory framework, and evidentiary hearings on license renewal applications are not uncommon.  Entergy intends to participate fully in the hearing process as permitted by the NRC’s hearing rules.  As noted in Entergy’s responses to the various intervenor filings, Entergy believes the contentions proposed by the intervenors are unsupported and without merit.  Entergy will continue to work with the NRC staff as it completes its technical and environmental reviews of the Indian Point 2 and 3 license renewal applications.

On June 8, 2012, the U.S. Court of Appeals for the D.C. Circuit vacated the NRC’s 2010 update to its Waste Confidence Decision, which had found generically that a permanent geologic repository to store spent nuclear fuel would be available when necessary and that spent nuclear fuel could be stored at nuclear reactor sites in the interim without significant environmental effects, and remanded the case for further proceedings.  The court concluded that the NRC had not satisfied the requirements of the National Environmental Policy Act (NEPA) when it considered environmental effects in reaching these conclusions.  The Waste Confidence Decision has been relied upon by NRC license renewal applicants to address some of the issues that NEPA requires the NRC to address before it issues a renewed license.  Certain nuclear opponents filed requests with the NRC asking it to address the issues raised by the court’s decision in the license renewal proceedings for a number of nuclear plants including Grand Gulf and Indian Point 2 and 3.  On August 7, 2012 the NRC issued an order stating that it will not issue final licenses dependent upon the Waste Confidence Decision until the D.C. Circuit’s remand is addressed, but also stating that licensing reviews and proceedings should continue to move forward.  On September 6, 2012 the NRC directed its staff to develop a revised Waste Confidence Decision within 24 months.

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.
 
 
 
13

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis


Capital Structure

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

   
September 30,
2012
 
December 31,
2011
         
Debt to capital
 
57.7 %
 
57.3 %
Effect of excluding the securitization bonds
 
(2.0)%
 
(2.3)%
Debt to capital, excluding securitization bonds (1)
 
55.7 %
 
55.0 %
Effect of subtracting cash
 
(1.6)%
 
(1.5)%
Net debt to net capital, excluding securitization bonds (1)
 
54.1 %
 
53.5 %

(1)
Calculation excludes the Arkansas, Louisiana, and Texas securitization bonds, which are non-recourse to Entergy Arkansas, Entergy Louisiana, and Entergy Texas, respectively.

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, common shareholders’ equity, and subsidiaries’ preferred stock without sinking fund.  Net capital consists of capital less cash and cash equivalents.  Entergy uses the net debt to net capital ratio and the ratios excluding securitization bonds in analyzing its financial condition and believes they provide useful information to its investors and creditors in evaluating Entergy’s financial condition.
 
Entergy Corporation has in place a credit facility that has a borrowing capacity of $3.5 billion and expires in March 2017.  Entergy Corporation has the ability to issue letters of credit against 50% of the total borrowing capacity of the facility.  Following is a summary of the borrowings outstanding and capacity available under the facility as of September 30, 2012.


 
Capacity
 
 
Borrowings
 
Letters
of Credit
 
Capacity
Available
(In Millions)
             
$3,500 
 
$1,315
 
$8
 
$2,177

A covenant in Entergy Corporation’s credit facility requires Entergy to maintain a consolidated debt ratio of 65% or less of its total capitalization.  The calculation of this debt ratio under Entergy Corporation’s credit facility is different than the calculation of the debt to capital ratio above.  Entergy is currently in compliance with the covenant.  If Entergy fails to meet this ratio, or if Entergy or one of the Utility operating companies (except Entergy New Orleans) defaults on other indebtedness or is in bankruptcy or insolvency proceedings, an acceleration of the facility’s maturity date may occur.  See Note 4 to the financial statements herein for additional discussion of the Entergy Corporation credit facility and discussion of the Registrant Subsidiaries’ credit facilities.

In September 2012, Entergy Corporation implemented a commercial paper program with a program limit of up to $500 million.  At September 30, 2012, Entergy Corporation had $154.3 million of commercial paper outstanding.  In October 2012 the Board approved increasing the limit for the commercial paper program to $1 billion.  See Note 4 to the financial statements herein for additional discussion of the Entergy Corporation commercial paper program.

Capital Expenditure Plans and Other Uses of Capital

See the table and discussion in the Form 10-K under "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources - Capital Expenditure Plans and Other Uses of Capital," that sets forth the amounts of planned construction and other capital investments by operating segment for 2012 through 2014.  Following are updates to the discussion in the Form 10-K.
 
 
 
14

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis


Capital Investment Plan Preliminary Estimate for 2013-2015

Entergy is developing its capital investment plan for 2013 through 2015 and currently anticipates that the Utility will make $5.4 billion in capital investments during that period, including approximately $2.9 billion for maintenance of existing assets, and that Entergy Wholesale Commodities will make $1.2 billion in capital investments during that period, including approximately $0.4 billion for maintenance of existing assets.  The remaining $2.5 billion of Utility investments is associated with specific investments such as the Waterford 3 steam generator replacement project, the Ninemile Point Unit 6 self-build project, and other investments.  The remaining $0.8 billion of Entergy Wholesale Commodities investments is associated with specific investments such as dry cask storage, nuclear license renewal, component replacement and identified repairs, spending in response to the Indian Point Safety Evaluation, NYPA value sharing, and wedgewire screens at Indian Point.

Grand Gulf Uprate

As discussed in more detail in the Form 10-K, the estimated capital investments for 2012-2014 include System Energy’s approximately 178 MW uprate of the Grand Gulf nuclear plant.  Grand Gulf’s spring 2012 refueling outage was completed in June 2012, and the majority of uprate-related capital improvements were made during this outage.  Based upon the uprate-related work completed during the spring 2012 refueling outage, additional information from the project's engineering, procurement and construction contractor, the costs required to install instrumentation in the steam dryer in response to evolving guidance from the NRC staff, and delays in obtaining NRC approval, System Energy now estimates the total capital investment made in the course of the implementation of the Grand Gulf uprate project is approximately $874 million, including SMEPA’s share.  Construction work was completed in June 2012 and in July 2012 the NRC approved the license amendment, which allows the plant to operate at the uprated capacity level.

Waterford 3 Steam Generator Replacement Project

See the Form 10-K for a discussion of Entergy Louisiana’s plan to replace the Waterford 3 steam generators, along with the reactor vessel closure head and control element drive mechanisms.  Entergy Louisiana’s Fall 2012 refueling outage began in October 2012, which will include the steam generator, reactor vessel head, and control element drive mechanisms replacement project.

Ninemile Point Unit 6 Self-Build Project

See the Form 10-K for a discussion of Entergy Louisiana’s Ninemile Point Unit 6 self-build project.  The Ninemile 6 capacity and energy is proposed to be allocated 55% to Entergy Louisiana, 25% to Entergy Gulf States Louisiana, and 20% to Entergy New Orleans.  In June 2011, Entergy Louisiana filed with the LPSC an application seeking certification that the public necessity and convenience would be served by Entergy Louisiana’s construction of the facility.  Entergy Gulf States Louisiana joined in the application, seeking certification of its purchase under a life-of-unit power purchase agreement of its allocated share of the capacity and energy generated by Ninemile 6.  In February 2012 the City Council passed a resolution authorizing Entergy New Orleans to purchase 20% of the Ninemile 6 energy and capacity.  In March 2012 the LPSC unanimously voted to grant the certifications requested by Entergy Louisiana and Entergy Gulf States Louisiana, and Entergy Louisiana has given the contractor a full notice to proceed with the construction. Under the terms approved by the LPSC, costs may be recovered through Entergy Louisiana’s and Entergy Gulf States Louisiana’s formula rate plans, if one is in effect when the project is placed in service; alternatively, Entergy Louisiana and Entergy Gulf States Louisiana must file rate cases approximately 12 months prior to the expected in-service date.

Hot Spring Energy Facility Purchase Agreement

See the Form 10-K for a discussion of Entergy Arkansas’s agreement to acquire the Hot Spring Energy Facility.  In July 2011, Entergy Arkansas filed its application with the APSC requesting approval of the acquisition and full cost recovery.  In July 2012 the APSC approved the acquisition and cost recovery through a capacity acquisition rider and set the level of return on equity at the level established in Entergy Arkansas’s June 2009 base rate proceeding.  The parties have satisfied their obligations under the Hart-Scott-Rodino Act.  The U.S. Department of Justice (DOJ) review of the transaction is ongoing.  Closing has been delayed while the DOJ continues its
 
 
 
15

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis

 
review.  Entergy Arkansas does not know when the DOJ will conclude its review or the extent to which its review of the transaction will be affected by the ongoing civil investigation of competitive issues concerning the Utility operating companies that is discussed in the Form 10-K.

Hinds Energy Facility Purchase Agreement

See the Form 10-K for a discussion of Entergy Mississippi’s agreement to acquire the Hinds Energy Facility.  In July 2011, Entergy Mississippi filed with the MPSC requesting approval of the acquisition and full cost recovery.  In February 2012 the MPSC granted a certificate of public convenience and necessity and approved the estimated acquisition cost.  In April 2012, facilities studies were issued indicating that long-term transmission service is available for the Hinds facility provided that supplemental transmission upgrades estimated at approximately $580,000 are made and assuming that various projects already included in the transmission construction plan are completed.  Entergy Mississippi and the Mississippi Public Utilities Staff filed a joint stipulation in the retail cost recovery proceeding that provides that the non-fuel ownership costs of the Hinds facility should be recovered through the power management rider, and the MPSC adopted the stipulation on August 7, 2012.  The parties have satisfied their obligations under the Hart-Scott-Rodino Act.  The U.S. Department of Justice (DOJ) review of the transaction is ongoing.  Closing has been delayed while the DOJ continues its review.  Entergy Mississippi does not know when the DOJ will conclude its review or the extent to which its review of the transaction will be affected by the ongoing civil investigation of competitive issues concerning the Utility operating companies that is discussed in the Form 10-K.
 
Dividends

Declarations of dividends on Entergy’s common stock are made at the discretion of the Board.  Among other things, the Board evaluates the level of Entergy’s common stock dividends based upon Entergy’s earnings, financial strength, and future investment opportunities.  At its October 2012 meeting, the Board declared a dividend of $0.83 per share, which is the same quarterly dividend per share that Entergy has paid since second quarter 2010.

Cash Flow Activity

As shown in Entergy’s Consolidated Statements of Cash Flows, cash flows for the nine months ended September 30, 2012 and 2011 were as follows:

   
2012
 
2011
   
(In Millions)
         
Cash and cash equivalents at beginning of period
 
$694 
 
$1,294 
         
Cash flow provided by (used in):
       
Operating activities
 
2,220 
 
2,130 
Investing activities
 
(2,323)
 
(2,395)
Financing activities
 
159 
 
(42)
Net increase (decrease) in cash and cash equivalents
 
56 
 
(307)
         
Cash and cash equivalents at end of period
 
$750 
 
$987 

Operating Activities

Entergy's cash flow provided by operating activities increased by $90 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to:

·  
a decrease of $167 million in pension contributions.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for a discussion of qualified pension and other postretirement benefits funding; and
·  
an increase in deferred fuel cost collections.

 
16

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis

 
These increases were partially offset by:

·  
the decrease in Entergy Wholesale Commodities net revenue that is discussed above;
·  
an increase of $42 million in income tax payments; and
·  
a refund of $30.6 million, including interest, paid to AmerenUE in June 2012.  The FERC ordered Entergy Arkansas to refund to AmerenUE the rough production cost equalization payments previously collected.  See Note 2 to the financial statements for further discussion of the FERC order.

Investing Activities

Net cash used in investing activities decreased by $72 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to:

·  
the purchase of the Acadia Unit 2 by Entergy Louisiana for approximately $300 million in April 2011;
·  
a decrease in nuclear fuel purchases because of variations from year to year in the timing and pricing of fuel reload requirements, material and services deliveries, and the timing of cash payments during the nuclear fuel cycle; and
·  
proceeds received from the U.S. Department of Energy resulting from litigation regarding the storage of spent nuclear fuel.  The litigation is discussed in more detail in Part II, Item 5, “Spent Nuclear Fuel.”

These decreases were partially offset by an increase in construction expenditures, primarily in the Utility business resulting from spending on the uprate project at Grand Gulf.  Entergy’s construction spending plans for 2012 through 2014 are discussed in the Form 10-K and are updated in the Capital Expenditure Plans and Other Uses of Capital section in this report.

Financing Activities

Entergy’s financing activities provided $159 million of cash for the nine months ended September 30, 2012 compared to using $42 million of cash for the nine months ended September 30, 2011 primarily due to Entergy repurchasing $235 million of its common stock in the nine months ended September 30, 2011, the issuance by Entergy Corporation in 2012 of $154 million of commercial paper, a net increase in 2012 of $92 million in short-term borrowings by the nuclear fuel company variable interest entities, and $51 million in proceeds from the sale to a third party in 2012 of a portion of Entergy Gulf States Louisiana’s investment in Entergy Holdings Company’s Class A preferred membership interests.  Entergy’s share repurchase programs are discussed in the Form 10-K.  This activity was partially offset by long-term debt activity providing approximately $260 million of cash in 2012 compared to $588 million of cash in 2011.  For details of Entergy's commercial paper program, the nuclear fuel company variable interest entities’ short-term borrowings, and long-term debt activity in 2012 see Note 4 to the financial statements herein.

Rate, Cost-recovery, and Other Regulation

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Rate, Cost-recovery, and Other Regulation" in the Form 10-K for discussions of rate regulation, federal regulation, and related regulatory proceedings.

State and Local Rate Regulation and Fuel-Cost Recovery

See Note 2 to the financial statements herein for updates to the discussion in the Form 10-K regarding these proceedings.

 
 
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Management's Financial Discussion and Analysis

 
Federal Regulation

Independent Coordinator of Transmission

On July 10, 2012, the LPSC approved, subject to conditions, Entergy Gulf States Louisiana’s and Entergy Louisiana’s request to extend the ICT arrangement and to transition to MISO as the provider of ICT services effective as of November 2012 (with the actual transition expected to occur December 1, 2012) and continuing until the Utility operating companies join the MISO RTO, or December 31, 2013, whichever occurs first. No other retail regulatory filings with respect to the extension of the ICT arrangement and the transition from SPP to MISO as ICT services provider are expected.  On August 2, 2012, the Utility operating companies filed an application with FERC, seeking (a) an interim extension of the ICT arrangement through and until the earlier of December 31, 2014 or the date the proposed transfer of functional control of the Utility operating companies’ transmission assets to the MISO RTO is completed and (b) the transfer from SPP to MISO as the provider of ICT services, effective December 1, 2012.  The FERC issued an order accepting the proposal in October 2012.
 
System Agreement

Entergy Arkansas and Entergy Mississippi Notices of Termination of System Agreement Participation

On February 2, 2009, Entergy Arkansas and Entergy Mississippi filed with the FERC their notices of cancellation to terminate their participation in the Entergy System Agreement, effective December 18, 2013 and November 7, 2015, respectively.  In November 2009 the FERC accepted the notices of cancellation and determined that Entergy Arkansas and Entergy Mississippi are permitted to withdraw from the System Agreement following the 96-month notice period without payment of a fee or the requirement to otherwise compensate the remaining Utility operating companies as a result of withdrawal.  In February 2011 the FERC denied the LPSC’s and the City Council’s rehearing requests.  The LPSC and City Council appealed the FERC’s decision to the U.S. Court of Appeals for the D.C. Circuit.  The D.C. Circuit denied the appeal and in September 2012 the LPSC filed a petition for rehearing and rehearing en banc with the D.C. Circuit.  On October 11, 2012, the D.C. Circuit denied the LPSC’s request for rehearing and rehearing en banc.

Entergy’s Proposal to Join the MISO RTO

See the Form 10-K for a discussion of the Utility operating companies’ proposal to join the MISO RTO.  Following are updates to that discussion.

The LPSC voted to grant Entergy Gulf States Louisiana’s and Entergy Louisiana’s application for transfer of control to MISO, subject to conditions, on May 23, 2012, and issued its order on June 28, 2012.

Staff, advisors, and intervenors have filed testimony in the Entergy Arkansas, Entergy Mississippi, Entergy New Orleans, and Entergy Texas proceedings.  Most parties were conditionally supportive of or did not oppose the requested transfer of control to MISO as in the public interest.  A number of parties, including the MPSC staff, the City Council advisors, and the PUCT staff proposed various conditions to be included in the orders granting the requested change of control.  The APSC Staff argued Entergy Arkansas has yet to provide an RTO option that is in the public interest and noted that Entergy Arkansas should maintain the standalone option until uncertainties are resolved regarding possible RTO membership.

The APSC conducted a hearing on the merits on May 30-31, 2012.  The APSC then issued an order on August 3, 2012 in which it stated that it was unable, at that time, to reach a finding that Entergy Arkansas’s application was in the public interest.  The order listed several conditions for Entergy Arkansas and MISO to meet before the APSC would approve Entergy Arkansas’s application.  Entergy Arkansas and MISO submitted filings on August 24, 2012 and August 31, 2012, respectively, explaining how they had either met each condition or met the apparent intent behind each condition.  On October 26, 2012, the APSC authorized Entergy Arkansas to sign the MISO Transmission Owners Agreement, which Entergy Arkansas has now done, and move forward with the MISO integration process.  The APSC held final approval of Entergy Arkansas’s application in abeyance, however, pending MISO filing with the APSC proof of approval by the appropriate MISO entities of certain governance enhancements.  On October 31, 2012, MISO filed with the APSC proof of approval of the governance enhancements and requested a finding of compliance and approval of Entergy Arkansas’s application.

 
18

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis


 
On July 18, 2012, the MPSC issued an order postponing its hearing on Entergy Mississippi’s change of control request, which had been scheduled for July 19-20, 2012, to allow parties additional time to conduct further analysis.  On September 17, 2012, Entergy Mississippi and the Mississippi Public Utilities Staff filed a joint stipulation indicating that they agree that Entergy Mississippi’s proposed transfer of functional control of its transmission facilities to MISO is in the public interest, subject to certain contingencies and conditions.  The MPSC is expected to issue a decision by Nov. 15, 2012.

The City Council issued a resolution on September 6, 2012 postponing the hearing on Entergy New Orleans’ change of control application, which had been scheduled for September 18, 2012, until October 23, 2012.  Discussions among the parties are still under way in the proceeding, and on October 18, 2012, the City Council adopted a resolution suspending the hearing until further notice.
 
Entergy Texas submitted its change of control filing on April 30, 2012.  On August 6, 2012, parties in the PUCT proceeding, with the exception of Southwest Power Pool, filed a non-unanimous settlement.  The substance of the settlement is that it is in the public interest for Entergy Texas to transfer functional control of its transmission facilities to MISO under certain conditions.  On October 26, 2012 the PUCT issued an order approving the transfer as in the public interest, subject to the terms and conditions in the settlement, with several additional terms and conditions requested by the PUCT and agreed to by the settling parties.

In June 2011, MISO filed with the FERC a request for a transitional waiver of provisions of its open access transmission, energy, and operating reserve markets tariff regarding allocation of transmission network upgrade costs, in order to establish a transition for the integration of the Utility operating companies.  In September 2011 the FERC issued an order denying on procedural grounds MISO’s request, further advising MISO that submitting modified tariff sheets is the appropriate method for implementing the transition that MISO seeks for the Utility operating companies.  The FERC did not address the merits of any transition arrangements that may be appropriate to integrate the Utility operating companies into MISO.  MISO worked with its stakeholders to prepare the appropriate changes to its tariff and filed the proposed tariff changes with the FERC in November 2011.  On April 19, 2012, the FERC conditionally accepted MISO’s proposal related to the allocation of transmission upgrade costs in connection with the transition and integration of the Utility operating companies into MISO.  On May 21, 2012, MISO filed a compliance filing in accordance with the provisions of the FERC’s April 19, 2012 Order.  Two parties filed requests for rehearing of the FERC’s April 19, 2012 Order that are still outstanding.

In addition, the Utility operating companies have proposed giving authority to the E-RSC, upon unanimous vote and within the first five years after the Utility operating companies join the MISO RTO, (i) to require the Utility operating companies to file with the FERC a proposed allocation of certain transmission upgrade costs among the Utility operating companies’ transmission pricing zones that would differ from the allocation that would occur under the MISO Open Access Transmission Tariff and (ii) to direct the Utility operating companies as transmission owners to add projects to MISO’s transmission expansion plan.

Market and Credit Risk Sensitive Instruments

Commodity Price Risk

Power Generation

As a wholesale generator, Entergy Wholesale Commodities’ core business is selling energy, measured in MWh, to its customers.  Entergy Wholesale Commodities enters into forward contracts with its customers and sells energy in the day ahead or spot markets.  In addition to selling the energy produced by its plants, Entergy Wholesale Commodities sells unforced capacity, which allows load-serving entities to meet specified reserve and related requirements placed on them by the ISOs in their respective areas.  Entergy Wholesale Commodities’ forward physical power contracts consist of contracts to sell energy only, contracts to sell capacity only, and bundled contracts in which it sells both capacity and energy.  While the terminology and payment mechanics vary in these contracts, each of these types of contracts requires Entergy Wholesale Commodities to deliver MWh of energy, make capacity available, or both.  In addition to its forward physical power contracts, Entergy Wholesale Commodities also uses a combination of financial contracts, including swaps, collars, put and/or call options, to manage forward commodity
 
 
19

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis

 
price risk.  Certain hedge volumes have price downside and upside relative to market price movement.  The contracted minimum, expected value, and sensitivity are provided to show potential variations.  While the sensitivity reflects the minimum, it may not reflect the total maximum upside potential from higher market prices.  The information contained in the table below represents projections at a point in time and will vary over time based on numerous factors, such as future market prices, contracting activities, and generation.  Following is a summary of Entergy Wholesale Commodities’ current forward capacity and generation contracts as well as total revenue projections based on market prices as of September 30, 2012 (2012 represents the remainder of the year):


Entergy Wholesale Commodities Nuclear Portfolio

   
2012
 
2013
 
2014
 
2015
 
2016
 
2017
                         
Energy
                       
Percent of planned generation under contract (a):
                       
Unit-contingent (b)
 
65%
 
41%
 
22%
 
12%
 
12%
 
13%
Unit-contingent with availability guarantees (c)
 
13%
 
19%
 
15%
 
 13%
 
 13%
 
 13%
Firm LD (d)
 
24%
 
24%
 
55%
 
-%
 
-%
 
-%
Offsetting positions (e)
 
(13)%
 
-%
 
(19)%
 
-%
 
-%
 
-%
Total
 
89%
 
84%
 
73%
 
25%
 
25%
 
26%
Planned generation (TWh) (f) (g)
 
11
 
40
 
41
 
41
 
40
 
41
Average revenue per MWh on contracted volumes:
                       
Minimum
 
$47
 
$45
 
$44
 
$48
 
$50
 
$51
Expected based on market prices as of September 30, 2012
 
$47
 
$45
 
$45
 
$49
 
$51
 
$52
Sensitivity: -/+ $10 per MWh market price change
 
$47
 
$45-$47
 
$44-$48
 
$48-$52
 
$50-$54
 
$51-$55
                         
Capacity (n)
                       
Percent of capacity sold forward (h):
                       
Bundled capacity and energy contracts (i)
 
16%
 
16%
 
16%
 
16%
 
16%
 
16%
Capacity contracts (j)
 
59%
 
28%
 
13%
 
 12%
 
 5%
 
 -%
Total
 
75%
 
44%
 
29%
 
28%
 
21%
 
16%
Planned net MW in operation (g) (k)
 
5,011
 
5,011
 
5,011
 
5,011
 
5,011
 
5,011
Average revenue under contract per kW per month
(applies to Capacity contracts only)
 
$2.2
 
$2.3
 
$2.9
 
$3.3
 
$3.4
 
$-
                         
Total Nuclear Energy and Capacity Revenues
                       
Expected sold and market total revenue per MWh
 
$48
 
$47
 
$45
 
$45
 
$47
 
$48
Sensitivity: -/+ $10 per MWh market price change
 
$47-$49
 
$46-$51
 
$42-$51
 
$38-$53
 
$40-$55
 
$41-$56

 
 
20

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis


Entergy Wholesale Commodities Non-Nuclear Portfolio

   
2012
 
2013
 
2014
 
2015
 
2016
 
2017
                         
Energy
                       
Percent of planned generation under contract (a):
                       
Cost-based contracts (l)
 
42%
 
39%
 
32%
 
35%
 
32%
 
32%
Firm LD (d)
 
5%
 
5%
 
5%
 
7%
 
6%
 
6%
Total
 
47%
 
44%
 
37%
 
42%
 
38%
 
38%
Planned generation (TWh) (f) (m)
 
1
 
6
 
6
 
6
 
6
 
6
                         
Capacity
                       
Percent of capacity sold forward (h):
                       
Cost-based contracts (l)
 
35%
 
29%
 
24%
 
24%
 
24%
 
24%
Bundled capacity and energy contracts (i)
 
8%
 
8%
 
8%
 
 8%
 
 8%
 
 8%
Capacity contracts (j)
 
53%
 
47%
 
47%
 
48%
 
20%
 
-%
Total
 
96%
 
84%
 
79%
 
80%
 
52%
 
32%
Planned net MW in operation (k) (m)
 
1,052
 
1,052
 
1,052
 
1,052
 
1,052
 
1,052


(a)
Percent of planned generation output sold or purchased forward under contracts, forward physical contracts, forward financial contracts, or options that mitigate price uncertainty that may require regulatory approval or approval of transmission rights
(b)
Transaction under which power is supplied from a specific generation asset; if the asset is not operating, seller is generally not liable to buyer for any damages
(c)
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.
(d)
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, defaulting party must compensate the other party as specified in the contract, a portion of which may be capped through the use of risk management products
(e)
Transactions for the purchase of energy, generally to offset a Firm LD transaction
(f)
Amount of output expected to be generated by Entergy Wholesale Commodities resources considering plant operating characteristics, outage schedules, and expected market conditions that effect dispatch
(g)
Assumes NRC license renewal for plants whose current licenses expire within five years and uninterrupted normal operation at all plants.  NRC license renewal applications are in process for two units, as follows (with current license expirations in parentheses): Indian Point 2 (September 2013) and Indian Point 3 (December 2015).  For a discussion regarding the continued operation of the Vermont Yankee plant, see “Impairment of Long-Lived Assets” in Note 1 to the financial statements in the Form 10-K and “Vermont Yankee” in Note 11 to the financial statements herein.  For a discussion regarding the license renewals for Indian Point 2 and Indian Point 3, see “Entergy Wholesale Commodities Authorizations to Operate Its Nuclear Power Plants” above.
(h)
Percent of planned qualified capacity sold to mitigate price uncertainty under physical or financial transactions
(i)
A contract for the sale of installed capacity and related energy, priced per megawatt-hour sold
(j)
A contract for the sale of an installed capacity product in a regional market
(k)
Amount of capacity to be available to generate power and/or sell capacity considering uprates planned to be completed during the year.  The increased capacity figure for the nuclear portfolio from the 10-K reflects the final testing and confirmation of a small incremental increase in output associated with equipment replacements at Palisades.
 
 
21

Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis

 
(l)
Contracts priced in accordance with cost-based rates, a ratemaking concept used for the design and development of rate schedules to ensure that the filed rate schedules recover only the cost of providing the service; these contracts are on owned non-utility resources located within Entergy’s Utility service area, which do not operate under market-based rate authority.  The percentage sold assumes approval of long-term transmission rights.  Includes sales to the Utility through 2013 of 121 MW of capacity and energy from Entergy Power sourced from Independence Steam Electric Station Unit 2.
(m)
Non-nuclear planned generation and net MW in operation include purchases from affiliated and non-affiliated counterparties under long-term contracts and exclude energy and capacity from Entergy Wholesale Commodities’ wind investment accounted for under the equity method of accounting and from the 544 MW Ritchie plant that is not planned to operate.
(n)
Reflects effect of ISO New England’s acceptance in the second quarter 2012 of Vermont Yankee’s bid to delist for the June 2015 through May 2016 forward capacity auction #6 and retroactively for the June 2013 through May 2014 forward capacity auction #4.  ISO New England has until May 2013 to consider Vermont Yankee’s delist bid for forward capacity auction #5.

Entergy estimates that a $10 per MWh change in the annual average energy price in the markets in which the Entergy Wholesale Commodities nuclear business sells power, based on September 30, 2012 market conditions, planned generation volumes, and hedged positions, would have a corresponding effect on pre-tax net income of $12 million in 2012.

Some of the agreements to sell the power produced by Entergy Wholesale Commodities’ power plants contain provisions that require an Entergy subsidiary to provide collateral to secure its obligations under the agreements.  The Entergy subsidiary is required to provide collateral based upon the difference between the current market and contracted power prices in the regions where Entergy Wholesale Commodities sells power.  The primary form of collateral to satisfy these requirements is an Entergy Corporation guaranty.  Cash and letters of credit are also acceptable forms of collateral.  At September 30, 2012, based on power prices at that time, Entergy had liquidity exposure of $185 million under the guarantees in place supporting Entergy Wholesale Commodities transactions, $20 million of guarantees that support letters of credit, and $7 million of posted cash collateral to the ISOs.  As of September 30, 2012, the liquidity exposure associated with Entergy Wholesale Commodities assurance requirements, including return of previously posted collateral from counterparties, would increase by $131 million for a $1 per MMBtu increase in gas prices in both the short-and long-term markets.  In the event of a decrease in Entergy Corporation’s credit rating to below investment grade, based on power prices as of September 30, 2012, Entergy would have been required to provide approximately $45 million of additional cash or letters of credit under some of the agreements.

As of September 30, 2012, substantially all of the counterparties or their guarantors for 100% of the planned energy output under contract for Entergy Wholesale Commodities nuclear plants through 2016 have public investment grade credit ratings.

Nuclear Matters

After the nuclear incident in Japan resulting from the March 2011 earthquake and tsunami, the NRC established a task force to conduct a review of processes and regulations relating to nuclear facilities in the United States.  The task force issued a near-term (90-day) report in July 2011 that made initial recommendations, which were subsequently refined and prioritized after input from stakeholders.  The task force then issued a second report in September 2011.  Based upon the task force’s recommendations, the NRC issued three orders effective on March 12, 2012.  The three orders require U.S. nuclear operators, including Entergy, to undertake plant modifications or perform additional analyses that will, among other things, result in increased operating and capital costs associated with operating Entergy’s nuclear plants.  The NRC, with input from the industry, is in the process of determining the specific actions required by the orders and an estimate of the increased costs cannot be made at this time.


 
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Entergy Corporation and Subsidiaries
Management's Financial Discussion and Analysis

 
With the issuance of the three orders, the NRC also provided members of the public an opportunity to request a hearing.  Two established anti-nuclear groups, Pilgrim Watch and Beyond Nuclear, filed hearing requests, focused on Pilgrim, regarding two of the three orders.  These requests sought to have the NRC impose expanded remedial requirements to address the issues raised by the NRC’s orders.  Beyond Nuclear subsequently withdrew its hearing request and the NRC’s ASLB denied Pilgrim Watch’s hearing request.  Pilgrim Watch appealed the Board’s decision to the NRC.

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 and trust fund investments, qualified pension and other postretirement benefits, and other contingencies.  Following are updates to that discussion. For updates of the impairment of long-lived assets discussions regarding Vermont Yankee see Note 11 to the financial statements herein.
 
Nuclear Decommissioning Costs

In the second quarter 2012, Entergy Louisiana recorded a revision to its estimated decommissioning cost liability for Waterford 3 as a result of a revised decommissioning cost study.  The revised estimate resulted in a $48.9 million increase in its decommissioning cost liability, along with a corresponding increase in the related asset retirement costs asset that will be depreciated over the remaining life of the unit.

 In the second quarter 2012, Entergy Wholesale Commodities recorded a reduction of $60.6 million in the estimated decommissioning cost liability for a plant as a result of a revised decommissioning cost study.  The revised estimate resulted in a credit to decommissioning expense of $49 million, reflecting the excess of the reduction in the liability over the amount of the undepreciated asset retirement costs asset.

Qualified Pension and Other Postretirement Benefits

The Moving Ahead for Progress in the 21st Century Act (MAP-21) became federal law on July 6, 2012.  Under the law, the segment rates used to calculate funding liabilities must be within a corridor of the 25-year average of prior segment rates.  The interest rate corridor applies to the determination of minimum funding requirements and benefit restrictions.  The pension funding stabilization provisions will provide for a near-term reduction in minimum funding requirements for single employer defined benefit plans in response to the current, historically low interest rates.  The law does not reduce contribution requirements over the long term.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K for further discussion of pension funding.

New Accounting Pronouncements

The accounting standard-setting process, including projects between the FASB and the International Accounting Standards Board (IASB) to converge U.S. GAAP and International Financial Reporting Standards, is ongoing and the FASB and the IASB are each currently working on several projects that have not yet resulted in final pronouncements.  Final pronouncements that result from these projects could have a material effect on Entergy’s future net income or financial position.


 

CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2012 and 2011
(Unaudited)
                         
   
Three Months Ended
   
Nine Months Ended
 
   
2012
   
2011
   
2012
   
2011
 
      (In Thousands, Except Share Data)  
                         
OPERATING REVENUES
                       
Electric
  $ 2,320,360     $ 2,733,601     $ 6,039,752     $ 6,811,538  
Natural gas
    23,557       26,439       93,444       126,453  
Competitive businesses
    619,643       635,513       1,732,624       1,802,050  
TOTAL
    2,963,560       3,395,553       7,865,820       8,740,041  
                                 
OPERATING EXPENSES
                               
Operating and Maintenance:
                               
   Fuel, fuel-related expenses, and
                               
     gas purchased for resale
    596,270       849,982       1,572,265       1,921,007  
   Purchased power
    336,552       475,335       966,816       1,289,180  
   Nuclear refueling outage expenses
    62,582       64,566       184,288       191,517  
   Asset impairment
    -       -       355,524       -  
   Other operation and maintenance
    765,242       708,821       2,259,758       2,077,066  
Decommissioning
    56,796       56,467       126,641       167,229  
Taxes other than income taxes
    149,049       152,044       424,329       406,493  
Depreciation and amortization
    281,740       283,581       836,711       812,672  
Other regulatory charges
    24,477       203,848       162,509       204,338  
TOTAL
    2,272,708       2,794,644       6,888,841       7,069,502  
                                 
OPERATING INCOME
    690,852       600,909       976,979       1,670,539  
                                 
OTHER INCOME
                               
Allowance for equity funds used during construction
    18,396       21,516       70,986       59,558  
Interest and investment income
    24,490       33,238       94,767       95,906  
Miscellaneous - net
    (10,768 )     (14,137 )     (41,794 )     (40,498 )
TOTAL
    32,118       40,617       123,959       114,966  
                                 
INTEREST EXPENSE
                               
Interest expense
    155,800       137,301       452,162       409,484  
Allowance for borrowed funds used during construction
    (8,003 )     (9,713 )     (27,877 )     (27,397 )
TOTAL
    147,797       127,588       424,285       382,087  
                                 
INCOME BEFORE INCOME TAXES
    575,173       513,938       676,653       1,403,418  
                                 
Income taxes
    232,503       (119,131 )     110,140       196,072  
                                 
CONSOLIDATED NET INCOME
    342,670       633,069       566,513       1,207,346  
                                 
Preferred dividend requirements of subsidiaries
    5,582       5,015       16,108       15,046  
                                 
NET INCOME ATTRIBUTABLE TO ENTERGY CORPORATION
  $ 337,088     $ 628,054     $ 550,405     $ 1,192,300  
                                 
                                 
Earnings per average common share:
                               
    Basic
  $ 1.90     $ 3.55     $ 3.11     $ 6.70  
    Diluted
  $ 1.89     $ 3.53     $ 3.10     $ 6.67  
Dividends declared per common share
  $ 0.83     $ 0.83     $ 2.49     $ 2.49  
                                 
Basic average number of common shares outstanding
    177,517,846       176,950,469       177,184,464       177,857,667  
Diluted average number of common shares outstanding
    177,975,075       177,723,020       177,636,549       178,805,215  
                                 
See Notes to Financial Statements.
                               


 

 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
2012
   
2011
   
2012
   
2011
 
      (In Thousands)  
                         
Net Income
  $ 342,670     $ 633,069     $ 566,513     $ 1,207,346  
                                 
Other comprehensive income (loss)
                               
   Cash flow hedges net unrealized loss
                               
     (net of tax benefit of ($57,231), ($9,041),  ($40,012) and ($50,884))
    (106,138 )     (12,598 )     (68,793 )     (84,321 )
   Pension and other postretirement liabilities
                               
     (net of tax expense of $3,643, $1,647, $17,998 and $4,704)
    6,197       2,657       29,524       9,255  
   Net unrealized investment gains (losses)
                               
     (net of tax expense (benefit) of $29,657, ($52,740), $67,046 and ($24,014))
    38,430       (53,349 )     70,512       (25,478 )
   Foreign currency translation
                               
     (net of tax expense of $170, $59, $224 and $226)
    315       109       416       419  
         Other comprehensive income (loss)
    (61,196 )     (63,181 )     31,659       (100,125 )
                                 
Comprehensive Income
    281,474       569,888       598,172       1,107,221  
                                 
Preferred dividend requirements of subsidiaries
    5,582       5,015       16,108       15,046  
                                 
Comprehensive Income Attributable to Entergy Corporation
  $ 275,892     $ 564,873     $ 582,064     $ 1,092,175  
                                 
                                 
See Notes to Financial Statements.
                               


 

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
   
2012
   
2011
 
   
(In Thousands)
 
             
OPERATING ACTIVITIES
           
Consolidated net income
  $ 566,513     $ 1,207,346  
Adjustments to reconcile consolidated net income to net cash flow
               
 provided by operating activities:
               
  Depreciation, amortization, and decommissioning, including nuclear fuel amortization
    1,293,667       1,315,730  
  Deferred income taxes, investment tax credits, and non-current taxes accrued
    111,228       (5,979 )
  Asset impairment
    355,524       -  
  Changes in working capital:
               
     Receivables
    (162,015 )     (213,524 )
     Fuel inventory
    (9,063 )     12,677  
     Accounts payable
    143,596       (238,879 )
     Prepaid taxes and taxes accrued
    44,625       245,242  
     Interest accrued
    (24,752 )     (53,307 )
     Deferred fuel costs
    (40,192 )     (119,481 )
     Other working capital accounts
    (131,374 )     (31,319 )
  Changes in provisions for estimated losses
    (17,479 )     (4,608 )
  Changes in other regulatory assets
    49,250       250,747  
  Changes in pensions and other postretirement liabilities
    (75,104 )     (275,690 )
  Other
    115,364       40,801  
Net cash flow provided by operating activities
    2,219,788       2,129,756  
                 
  INVESTING ACTIVITIES
               
Construction/capital expenditures
    (1,868,690 )     (1,460,668 )
Allowance for equity funds used during construction
    73,497       61,096  
Nuclear fuel purchases
    (412,912 )     (475,418 )
Payment for purchase of plant
    (645 )     (299,590 )
Proceeds from sale of assets and businesses
    -       6,531  
Changes in securitization account
    (2,036 )     (443 )
NYPA value sharing payment
    (72,000 )     (72,000 )
Payments to storm reserve escrow account
    (7,009 )     (5,043 )
Receipts from storm reserve escrow account
    17,884       -  
Decrease (increase) in other investments
    (69,995 )     (60,693 )
Litigation proceeds for reimbursement of spent nuclear fuel storage costs
    109,105       -  
Proceeds from nuclear decommissioning trust fund sales
    1,416,697       1,053,089  
Investment in nuclear decommissioning trust funds
    (1,507,123 )     (1,142,364 )
Net cash flow used in investing activities
    (2,323,227 )     (2,395,503 )
                 
See Notes to Financial Statements.
               
                 


 

ENTERGY CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
   
2012
   
2011
 
   
(In Thousands)
 
             
FINANCING ACTIVITIES
           
Proceeds from the issuance of:
           
  Long-term debt
    2,289,494       1,535,634  
  Preferred stock
    51,000       -  
  Treasury stock
    56,602       32,889  
Retirement of long-term debt
    (2,029,016 )     (947,401 )
Repurchase of common stock
    -       (234,632 )
Changes in credit borrowings - net
    247,845       30,036  
Dividends paid:
               
  Common stock
    (441,292 )     (443,290 )
  Preferred stock
    (15,497 )     (15,046 )
Net cash flow provided by (used in) financing activities
    159,136       (41,810 )
                 
Effect of exchange rates on cash and cash equivalents
    (416 )     225  
                 
Net increase (decrease) in cash and cash equivalents
    55,281       (307,332 )
                 
Cash and cash equivalents at beginning of period
    694,438       1,294,472  
                 
Cash and cash equivalents at end of period
  $ 749,719     $ 987,140  
                 
                 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
  Cash paid (received) during the period for:
               
    Interest - net of amount capitalized
  $ 422,142     $ 413,525  
    Income taxes
  $ 42,472     $ (11 )
                 
                 
See Notes to Financial Statements.
               
                 


 

 
CONSOLIDATED BALANCE SHEETS
 
ASSETS
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT ASSETS
           
Cash and cash equivalents:
           
  Cash
  $ 96,996     $ 81,468  
  Temporary cash investments
    652,723       612,970  
     Total cash and cash equivalents
    749,719       694,438  
Securitization recovery trust account
    52,340       50,304  
Accounts receivable:
               
  Customer
    693,022       568,558  
  Allowance for doubtful accounts
    (31,525 )     (31,159 )
  Other
    155,039       166,186  
  Accrued unbilled revenues
    330,744       298,283  
     Total accounts receivable
    1,147,280       1,001,868  
Deferred fuel costs
    92,763       209,776  
Accumulated deferred income taxes
    4,533       9,856  
Fuel inventory - at average cost
    211,195       202,132  
Materials and supplies - at average cost
    925,201       894,756  
Deferred nuclear refueling outage costs
    235,344       231,031  
System agreement cost equalization
    17,689       36,800  
Prepayments and other
    371,686       291,742  
TOTAL
    3,807,750       3,622,703  
                 
OTHER PROPERTY AND INVESTMENTS
               
Investment in affiliates - at equity
    47,758       44,876  
Decommissioning trust funds
    4,175,825       3,788,031  
Non-utility property - at cost (less accumulated depreciation)
    259,525       260,436  
Other
    409,025       416,423  
TOTAL
    4,892,133       4,509,766  
                 
PROPERTY, PLANT AND EQUIPMENT
               
Electric
    40,489,162       39,385,524  
Property under capital lease
    811,533       809,449  
Natural gas
    351,239       343,550  
Construction work in progress
    1,965,524       1,779,723  
Nuclear fuel
    1,545,263       1,546,167  
TOTAL PROPERTY, PLANT AND EQUIPMENT
    45,162,721       43,864,413  
Less - accumulated depreciation and amortization
    18,731,190       18,255,128  
PROPERTY, PLANT AND EQUIPMENT - NET
    26,431,531       25,609,285  
                 
DEFERRED DEBITS AND OTHER ASSETS
               
Regulatory assets:
               
  Regulatory asset for income taxes - net
    730,526       799,006  
  Other regulatory assets (includes securitization property of
               
     $935,517 as of September 30, 2012 and $1,009,103 as of
               
     December 31, 2011)
    4,587,122       4,636,871  
  Deferred fuel costs
    201,118       172,202  
Goodwill
    377,172       377,172  
Accumulated deferred income taxes
    30,122       19,003  
Other
    966,206       955,691  
TOTAL
    6,892,266       6,959,945  
                 
TOTAL ASSETS
  $ 42,023,680     $ 40,701,699  
                 
See Notes to Financial Statements.
               

 
 
 
ENTERGY CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
LIABILITIES AND EQUITY
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT LIABILITIES
           
Currently maturing long-term debt
  $ 787,711     $ 2,192,733  
Notes payable
    356,172       108,331  
Accounts payable
    1,362,702       1,069,096  
Customer deposits
    361,174       351,741  
Taxes accrued
    322,860       278,235  
Accumulated deferred income taxes
    73,690       99,929  
Interest accrued
    158,761       183,512  
Deferred fuel costs
    127,551       255,839  
Obligations under capital leases
    3,816       3,631  
Pension and other postretirement liabilities
    50,874       44,031  
System agreement cost equalization
    55,094       80,090  
Other
    263,863       283,531  
TOTAL
    3,924,268       4,950,699  
                 
NON-CURRENT LIABILITIES
               
Accumulated deferred income taxes and taxes accrued
    8,173,216       8,096,452  
Accumulated deferred investment tax credits
    276,413       284,747  
Obligations under capital leases
    35,531       38,421  
Other regulatory liabilities
    965,820       728,193  
Decommissioning and asset retirement cost liabilities
    3,456,685       3,296,570  
Accumulated provisions
    369,286       385,512  
Pension and other postretirement liabilities
    3,051,709       3,133,657  
Long-term debt (includes securitization bonds of $1,003,081 as of
         
   September 30, 2012 and $1,070,556 as of December 31, 2011)
    11,748,153       10,043,713  
Other
    551,567       501,954  
TOTAL
    28,628,380       26,509,219  
                 
Commitments and Contingencies
               
                 
Subsidiaries' preferred stock without sinking fund
    186,510       186,511  
                 
EQUITY
               
Common Shareholders' Equity:
               
Common stock, $.01 par value, authorized 500,000,000 shares;
               
  issued 254,752,788 shares in 2012 and in 2011
    2,548       2,548  
Paid-in capital
    5,353,519       5,360,682  
Retained earnings
    9,555,859       9,446,960  
Accumulated other comprehensive loss
    (136,793 )     (168,452 )
Less - treasury stock, at cost (77,080,297 shares in 2012 and
               
  78,396,988 shares in 2011)
    5,584,611       5,680,468  
Total common shareholders' equity
    9,190,522       8,961,270  
Subsidiaries' preferred stock without sinking fund
    94,000       94,000  
TOTAL
    9,284,522       9,055,270  
                 
TOTAL LIABILITIES AND EQUITY
  $ 42,023,680     $ 40,701,699  
                 
See Notes to Financial Statements.
               
                 


 

 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited) (In Thousands)
 
                                           
         
Common Shareholders' Equity
       
   
Subsidiaries' Preferred Stock
   
Common Stock
   
Treasury Stock
   
Paid-in Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Loss
   
Total
 
Balance at December 31, 2010
  $ 94,000     $ 2,548     $ (5,524,811 )   $ 5,367,474     $ 8,689,401     $ (38,212 )   $ 8,590,400  
                                                         
Consolidated net income (a)
    15,046       -       -       -       1,192,300       -       1,207,346  
Other comprehensive loss
    -       -       -       -       -       (100,125 )     (100,125 )
Common stock repurchases
    -       -       (234,632 )     -       -       -       (234,632 )
Common stock issuances related to stock plans
    -       -       58,635       (4,515 )     -       -       54,120  
Common stock dividends declared
    -       -       -       -       (442,701 )     -       (442,701 )
Preferred dividend requirements of subsidiaries (a)
    (15,046 )     -       -       -       -       -       (15,046 )
                                                         
Balance at September 30, 2011
  $ 94,000     $ 2,548     $ (5,700,808 )   $ 5,362,959     $ 9,439,000     $ (138,337 )   $ 9,059,362  
                                                         
                                                         
Balance at December 31, 2011
  $ 94,000     $ 2,548     $ (5,680,468 )   $ 5,360,682     $ 9,446,960     $ (168,452 )   $ 9,055,270  
                                                         
Consolidated net income (a)
    16,108       -       -       -       550,405       -       566,513  
Other comprehensive income
    -       -       -       -       -       31,659       31,659  
Common stock issuances related to stock plans
    -       -       95,857       (7,163 )     -       -       88,694  
Common stock dividends declared
    -       -       -       -       (441,506 )     -       (441,506 )
Preferred dividend requirements of subsidiaries (a)
    (16,108 )     -       -       -       -       -       (16,108 )
                                                         
Balance at September 30, 2012
  $ 94,000     $ 2,548     $ (5,584,611 )   $ 5,353,519     $ 9,555,859     $ (136,793 )   $ 9,284,522  
                                                         
See Notes to Financial Statements.
                                                       
                                                         
(a) Consolidated net income and preferred dividend requirements of subsidiaries for 2012 and 2011 include $11.1 million and $10.1 million, respectively, of preferred dividends on subsidiaries' preferred stock without sinking fund that is not presented within equity.
 


 

 
SELECTED OPERATING RESULTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
                         
   
Three Months Ended
   
Increase/
       
Description
 
2012
   
2011
   
(Decrease)
   
%
 
   
(Dollars in Millions)
       
Utility Electric Operating Revenues:
                   
  Residential
  $ 1,019     $ 1,195     $ (176 )     (15 )
  Commercial
    627       718       (91 )     (13 )
  Industrial
    536       674       (138 )     (20 )
  Governmental
    54       59       (5 )     (8 )
    Total retail
    2,236       2,646       (410 )     (15 )
  Sales for resale
    45       70       (25 )     (36 )
  Other
    39       18       21       117  
    Total
  $ 2,320     $ 2,734     $ (414 )     (15 )
                                 
Utility Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    11,605       12,376       (771 )     (6 )
  Commercial
    8,433       8,655       (222 )     (3 )
  Industrial
    10,748       11,024       (276 )     (3 )
  Governmental
    668       689       (21 )     (3 )
    Total retail
    31,454       32,744       (1,290 )     (4 )
  Sales for resale
    834       1,038       (204 )     (20 )
    Total
    32,288       33,782       (1,494 )     (4 )
                                 
                                 
Entergy Wholesale Commodities:
                               
Operating Revenues
  $ 627     $ 641     $ (14 )     (2 )
Billed Electric Energy Sales (GWh)
    12,002       11,255       747       7  
                                 
                                 
   
Nine Months Ended
   
Increase/
         
Description
    2012       2011    
(Decrease)
   
%
 
   
(Dollars in Millions)
         
Utility Electric Operating Revenues:
                         
  Residential
  $ 2,366     $ 2,703     $ (337 )     (12 )
  Commercial
    1,653       1,794       (141 )     (8 )
  Industrial
    1,531       1,742       (211 )     (12 )
  Governmental
    149       158       (9 )     (6 )
    Total retail
    5,699       6,397       (698 )     (11 )
  Sales for resale
    105       198       (93 )     (47 )
  Other
    236       217       19       9  
    Total
  $ 6,040     $ 6,812     $ (772 )     (11 )
                                 
Utility Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    27,305       29,411       (2,106 )     (7 )
  Commercial
    21,994       22,048       (54 )     -  
  Industrial
    31,114       30,681       433       1  
  Governmental
    1,852       1,875       (23 )     (1 )
    Total retail
    82,265       84,015       (1,750 )     (2 )
  Sales for resale
    2,402       3,021       (619 )     (20 )
    Total
    84,667       87,036       (2,369 )     (3 )
                                 
                                 
Entergy Wholesale Commodities:
                               
Operating Revenues
  $ 1,755     $ 1,819     $ (64 )     (4 )
Billed Electric Energy Sales (GWh)
    34,957       32,376       2,581       8  
                                 
 
 
 


ENTERGY CORPORATION AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

NOTE 1.  COMMITMENTS AND CONTINGENCIES  (Entergy Corporation, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, Entergy Texas, and System Energy)

Entergy and the Registrant Subsidiaries are involved in a number of legal, regulatory, and tax proceedings before various courts, regulatory commissions, and governmental agencies in the ordinary course of business.  While management is unable to predict the outcome of such proceedings, management does not believe that the ultimate resolution of these matters will have a material adverse effect on Entergy’s results of operations, cash flows, or financial condition, except as otherwise discussed in the Form 10-K or in this report.  Entergy discusses regulatory proceedings in Note 2 to the financial statements in the Form 10-K and herein, discusses tax proceedings in Note 3 to the financial statements in the Form 10-K and Note 10 to the financial statements herein, and discusses a judicial proceeding involving Vermont Yankee in Note 1 to the financial statements in the Form 10-K and in Note 11 to the financial statements herein.

Nuclear Insurance

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

Conventional Property Insurance

See Note 8 to the financial statements in the Form 10-K for information on Entergy’s non-nuclear property insurance program.

Employment Litigation

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

Asbestos Litigation  (Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, and Entergy Texas)

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



 
32

Entergy Corporation and Subsidiaries
Notes to Financial Statements



NOTE 2.  RATE AND REGULATORY MATTERS (Entergy Corporation, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, Entergy Texas, and System Energy)

Regulatory Assets

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

Correction of Regulatory Asset for Income Taxes

In the first quarter 2012, Entergy Gulf States Louisiana determined that its regulatory asset for income taxes was overstated because of a difference between the regulatory treatment of the income taxes associated with certain items (primarily pension expense) and the financial accounting treatment of those taxes.  Beginning with Louisiana retail rate filings using the 1994 test year, retail rates were developed using the normalization method of accounting for income taxes.  With respect to these items, however, the financial accounting for income taxes was computed using the flow-through method of accounting.  As a result, over the years Entergy Gulf States Louisiana accumulated a regulatory asset representing the expected future recovery of tax expense for the affected items even though the tax expense was being collected currently in rates from customers and would not be recovered in the future.

The effect was immaterial to the consolidated balance sheets, results of operations, and cash flows of Entergy for all prior reporting periods and on a cumulative basis.  Therefore, a cumulative adjustment was recorded in the first quarter 2012 to remove the regulatory asset previously recorded.  This adjustment increased 2012 income tax expense by $46.3 million, decreased the regulatory asset for income taxes by $75.3 million, and decreased accumulated deferred income taxes by $29 million.

The effect was also immaterial to the balance sheets, results of operations, and cash flows of Entergy Gulf States Louisiana for all prior reporting periods.  Correcting the cumulative effect of the error in the first quarter 2012 could have been material to the 2012 results of operations of Entergy Gulf States Louisiana and, therefore, Entergy Gulf States Louisiana is revising its prior period financial statements to correct the errors.  The corrections affect the prior period financial statements as shown in the tables below:

 
Three Months Ended
September 30, 2011
 
As
previously
reported
 
 
As
corrected
 
(In Thousands)
       
Income Statement
     
Income taxes
$38,429 
 
$37,205 
Net income
$51,946 
 
$53,170 
Earnings applicable to common equity
$51,740 
 
$52,964 
       


 
33

Entergy Corporation and Subsidiaries
Notes to Financial Statements



 
Nine Months Ended
September 30, 2011
 
As
previously
reported
 
 
As
corrected
 
(In Thousands)
       
Income Statement
     
Income taxes
$95,352 
 
$92,083 
Net income
$146,928 
 
$150,197 
Earnings applicable to common equity
$146,309 
 
$149,578 
       
Statement of Cash Flows
     
Net income
$146,928 
 
$150,197 
Deferred income taxes, investment tax credits,
  and non-current taxes accrued
 
($21,223)
 
 
($24,492)
Changes in other regulatory assets
$27,171 
 
$21,858  
Other operating activities
$1,814 
 
$7,127  

 
December 31, 2011
 
As
previously
reported
 
 
As
corrected
 
(In Thousands)
       
Balance Sheet
     
Regulatory asset for income taxes - net
$249,058 
 
$173,724 
Accumulated deferred income taxes - current
$5,427 
 
$5,107 
Accumulated deferred income taxes and taxes accrued
$1,397,230 
 
$1,368,563 
Member’s equity
$1,439,733 
 
$1,393,386 

 
Nine Months Ended
September 30, 2011
 
Member’s Equity
 
Total Equity
 
As
previously
reported
 
 
As
corrected
 
As
previously
reported
 
 
As
corrected
 
(In Thousands)
               
Statement of Changes in Equity
     
Balance at December 31, 2010
$1,539,517
 
$1,494,593
 
$1,509,213
 
$1,464,289
Net income
$146,928
 
$150,197
 
$146,928
 
$150,197
Balance at September 30, 2011
$1,403,857
 
$1,362,202
 
$1,375,268
 
$1,333,613

Hurricane Isaac

In August 2012, Hurricane Isaac caused extensive damage to portions of Entergy's service area in Louisiana, and to a lesser extent in Mississippi and Arkansas.  The storm resulted in widespread power outages, significant damage primarily to distribution infrastructure, and the loss of sales during the power outages.  Total restoration costs for the repair and/or replacement of Entergy's electric facilities in areas with damage from Hurricane Isaac are currently estimated to be in the range of $400 million to $500 million, as follows:

 
34

Entergy Corporation and Subsidiaries
Notes to Financial Statements




 
Company
 
Hurricane Isaac
Restoration Costs
   
(In Millions)
     
Entergy Arkansas
 
$10
Entergy Gulf States Louisiana
 
70-90
Entergy Louisiana
 
240-300
Entergy Mississippi
 
30-40
Entergy New Orleans
 
50-60
Total
 
$400-500

The Utility operating companies are considering all reasonable avenues to recover storm-related costs from Hurricane Isaac, including, but not limited to, accessing funded storm reserves; securitization or other alternative financing; and traditional retail recovery on an interim and permanent basis.  Each Utility operating company is responsible for its restoration cost obligations and for recovering or financing its storm-related costs.  Storm cost recovery or financing may be subject to review by applicable regulatory authorities.

Entergy has recorded accounts payable for the estimated costs incurred that were necessary to return customers to service.  Entergy recorded corresponding regulatory assets of approximately $130 million and construction work in progress of approximately $270 million.  Entergy recorded the regulatory assets in accordance with its accounting policies and based on the historic treatment of such costs in its service area because management believes that recovery through some form of regulatory mechanism is probable.  Because Entergy has not gone through the regulatory process regarding these storm costs, however, there is an element of risk, and Entergy is unable to predict with certainty the degree of success it may have in its recovery initiatives, the amount of restoration costs that it may ultimately recover, or the timing of such recovery.

Fuel and Purchased Power Cost Recovery

Entergy Texas

In December 2011, Entergy Texas filed with the PUCT a request to refund approximately $43 million, including interest, of fuel cost recovery over-collections through October 2011.  Entergy Texas and the parties to the proceeding reached an agreement that Entergy Texas would refund $67 million, including interest and additional over-recoveries through December 2011, over a three-month period.  Entergy Texas and the parties requested that interim rates consistent with the settlement be approved effective with the March 2012 billing month, and the PUCT approved the application in March 2012.  Entergy Texas completed this refund to customers in May 2012.

In October 2012, Entergy Texas filed with the PUCT a request to refund approximately $78 million, including interest, of fuel cost recovery over-collections through September 2012.  Entergy Texas requested that the refund be implemented over a six-month period effective with the January 2013 billing month.

In July 2012, Entergy Texas filed with the PUCT an application to credit its customers approximately $37.5 million, including interest, resulting from the FERC’s October 2011 order in the System Agreement rough production cost equalization proceeding.  See the Form 10-K for a discussion of the FERC’s October 2011 order.  In September 2012 the parties submitted a stipulation resolving the proceeding.  The stipulation provides that Entergy Texas customers will be credited over a four-month period beginning October 2012.  The credits were initiated with the October 2012 billing month on an interim basis, and the PUCT subsequently approved the stipulation, also in October 2012.


 
35

Entergy Corporation and Subsidiaries
Notes to Financial Statements


Retail Rate Proceedings

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

Filings with the LPSC

(Entergy Gulf States Louisiana)

In January 2012, Entergy Gulf States Louisiana filed with the LPSC its gas rate stabilization plan for the test year ended September 30, 2011.  The filing showed an earned return on common equity of 10.48%, which is within the earnings bandwidth of 10.5%, plus or minus fifty basis points.  In April 2012, the LPSC Staff filed its findings, suggesting adjustments that produced an 11.54% earned return on common equity for the test year and a $0.1 million rate reduction.  Entergy Gulf States Louisiana accepted the LPSC Staff’s recommendations, and the rate reduction was effective with the first billing cycle of May 2012. Related to the annual gas rate stabilization plan proceedings, the LPSC directed its staff to initiate an evaluation of the 10.5% allowed return on common equity for the Entergy Gulf States Louisiana gas rate stabilization plan.  The LPSC directed that its staff should provide an analysis of the current return on equity and justification for any proposed changes to the return on equity.  In August 2012 the LPSC staff filed direct testimony recommending a midpoint return on equity of 9.3%.  Entergy Gulf States Louisiana filed responsive testimony recommending that the 10.5% return on equity remain unchanged.  The hearing in this proceeding is currently scheduled for November 8-9, 2012.

In May 2012, Entergy Gulf States Louisiana made its formula rate plan filing with the LPSC for the 2011 test year.  The filing reflected an 11.94% earned return on common equity, which is above the earnings bandwidth and would indicate a $6.5 million cost of service rate change was necessary under the formula rate plan.  The filing also reflected a $22.9 million rate decrease for incremental capacity costs.  Subsequently, in August 2012, Entergy Gulf States Louisiana submitted a revised filing that reflects an earned return on common equity of 11.86% indicating a $5.7 million cost of service rate decrease is necessary under the formula rate plan.  The revised filing also indicates that a reduction of $20.3 million should be reflected in the incremental capacity rider.  The rate reductions were implemented, subject to refund, effective for bills rendered the first billing cycle of September 2012.  The filing remains subject to LPSC review.  The September 2012 rate change reduced Entergy Gulf States Louisiana’s revenues by approximately $2.2 million in the third quarter 2012.

(Entergy Louisiana)

In May 2012, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2011 test year.  The filing reflected a 9.63% earned return on common equity, which is within the earnings bandwidth and results in no cost of service rate change under the formula rate plan.  The filing also reflected an $18.1 million rate increase for incremental capacity costs.  Subsequently, in June 2012, Entergy Louisiana supplemented the filing to estimate at $101 million the first-year revenue requirement associated with the Waterford 3 replacement steam generator project when it is placed into service.  In August 2012, Entergy Louisiana submitted a revised filing that reflects an earned return on common equity of 10.38%, which is still within the earnings bandwidth, resulting in no cost of service rate change.  The revised filing also indicates that an increase of $15.9 million should be reflected in the incremental capacity rider.  The rate change was implemented, subject to refund, effective for bills rendered the first billing cycle of September 2012.  The filing remains subject to LPSC review.  The September 2012 rate change contributed approximately $1.3 million to Entergy Louisiana’s revenues in the third quarter 2012.

Filings with the MPSC

In March 2012, Entergy Mississippi submitted its formula rate plan filing for the 2011 test year.  The filing shows an earned return on common equity of 10.92% for the test year, which is within the earnings bandwidth and results in no change in rates.  The filing is currently subject to MPSC review.


 
36

Entergy Corporation and Subsidiaries
Notes to Financial Statements


Filings with the City Council

In May 2012, Entergy New Orleans filed its electric and gas formula rate plan evaluation reports for the 2011 test year.  Subsequent adjustments agreed upon with the City Council Advisors indicate a $4.9 million electric base revenue increase and a $0.05 million gas base revenue increase as necessary under the formula rate plan.  As part of the original filing, Entergy New Orleans is also requesting to increase annual funding for its storm reserve by approximately $5.7 million for the next five years.  On September 26, 2012, Entergy New Orleans made a filing with the City Council that implemented the $4.9 million electric formula rate plan rate increase and the $0.05 million gas formula rate plan rate increase.  The new rates were effective with the first billing cycle in October 2012.  In October 2012 the City Council approved a procedural schedule to resolve disputed items that includes a hearing in April 2013.  The rates implemented in October 2012 are subject to retroactive adjustments depending on the outcome of the proceeding.  The City Council has not yet acted on Entergy New Orleans’s request for an increase in storm reserve funding.

Filings with the PUCT and Texas Cities

See the Form 10-K for a discussion of the rate case that Entergy Texas filed in November 2011 requesting a $112 million base rate increase reflecting a 10.6% return on common equity based on an adjusted June 2011 test year. In April 2012 the PUCT Staff filed direct testimony recommending a base rate increase of $66 million and a 9.6% return on common equity.  The PUCT Staff, however, subsequently filed a statement of position in the proceeding indicating that it was still evaluating the position it would ultimately take in the case regarding Entergy Texas’s recovery of purchased power capacity costs and Entergy Texas’s proposal to defer its MISO transition expenses.  In April 2012, Entergy Texas filed rebuttal testimony indicating a revised request for a $105 million base rate increase.  A hearing was held in late-April through early-May 2012.  During the hearing and in its post-hearing brief the PUCT Staff revised its recommendation to a base rate increase of $27 million.

In September 2012 the PUCT issued an order approving a $28 million rate increase, effective July 2012.  The order includes a finding that “a return on common equity (ROE) of 9.80 percent will allow [Entergy Texas] a reasonable opportunity to earn a reasonable return on invested capital.”  The order also provides for increases in depreciation rates and the annual storm reserve accrual.  The order also reduced Entergy Texas’s proposed purchased power capacity costs, stating that they are not known and measureable; reduced Entergy Texas’s regulatory assets associated with Hurricane Rita; excluded from rate recovery capitalized financially-based incentive compensation; included $1.6 million of MISO transition expense in base rates, and reduced Entergy’s Texas’s fuel reconciliation recovery by $4.0 million because it disagreed with the line-loss factor used in the calculation.  After considering the progress of the proceeding in light of the PUCT order, Entergy Texas recorded in the third quarter 2012 an approximate $24 million charge to recognize that assets associated with Hurricane Rita, financially-based incentive compensation, and fuel recovery are no longer probable of recovery.  Entergy Texas continues to believe that it is entitled to recover these prudently incurred costs, however, and it filed a motion for rehearing regarding these and several other issues in the PUCT’s order on October 4, 2012.  Several other parties have also filed motions for rehearing of the PUCT’s order.  The PUCT subsequently denied rehearing of substantive issues.

System Agreement Cost Equalization Proceedings

See the Form 10-K for a discussion of the proceedings regarding the System Agreement, including the FERC’s October 2011 order, Entergy’s December 2011 compliance filing in response to that order, and Entergy Arkansas’s February 2012 filing for an interim adjustment to its production cost allocation rider requesting that the $156 million payment be collected from customers over the 22-month period from March 2012 through December 2013.  In March 2012 the APSC issued an order stating that the payment can be recovered from retail customers through the production cost allocation rider, subject to refund.  The LPSC and the APSC have requested rehearing of the FERC’s October 2011 order.  The APSC, the LPSC, the PUCT, and other parties intervened in the December 2011 compliance filing proceeding, and the APSC and the LPSC also filed protests.


 
37

Entergy Corporation and Subsidiaries
Notes to Financial Statements


On May 7, 2012, the FERC issued orders in several System Agreement proceedings, including an order on rehearing in the 2007 rate filing based on 2006 production costs proceeding, an order on the ALJ’s initial decision in the 2009 rate filing based on 2008 production costs proceeding, and orders in other proceedings regarding the method of calculating the production costs used in the determination of the rough production cost equalization payments and receipts.  The May 7, 2012 FERC orders may result in the reallocation of costs among the Utility operating companies, although there are still FERC decisions pending in other System Agreement proceedings that could affect the rough production cost equalization payments and receipts, including for the 2007 rate filing.  The FERC directed Entergy, within 45 days of the issuance of a pending FERC order on rehearing regarding the functionalization of costs in the 2007 rate filing, to file a comprehensive bandwidth recalculation report showing updated payments and receipts in the 2007 rate filing proceeding.  In the order in the 2007 rate filing proceeding, the FERC also denied Entergy’s request for rehearing regarding the AmerenUE contract and ordered Entergy Arkansas to refund to AmerenUE the rough production cost equalization payments collected from AmerenUE.  Under the terms of the FERC’s order the refund of $30.6 million, including interest, was made in June 2012.  Entergy Arkansas had previously recorded a regulatory provision for the potential refund to AmerenUE.  Entergy has appealed the FERC’s decision to the U.S. Court of Appeals for the D.C. Circuit.

Rough Production Cost Equalization Rates

2012 Rate Filing Based on Calendar Year 2011 Production Costs

In May 2012, Entergy filed with the FERC the 2012 rates in accordance with the FERC’s orders in the System Agreement proceeding.  The filing shows the following payments/receipts among the Utility operating companies for 2012, based on calendar year 2011 production costs, commencing for service in June 2012, are necessary to achieve rough production cost equalization under the FERC’s orders:


 
 Payments or
(Receipts)
 
(In Millions)
   
Entergy Arkansas
$41
Entergy Gulf States Louisiana
$-
Entergy Louisiana
($41)
Entergy Mississippi
$-
Entergy New Orleans
$-
Entergy Texas
$-

Several parties intervened in the proceeding at the FERC, including the LPSC, which filed a protest as well. In August 2012, the FERC accepted Entergy's proposed rates for filing, effective June 2012, subject to refund, set the proceeding for hearing procedures, and then held those procedures in abeyance pending FERC decisions in prior production cost proceedings currently before the FERC on review.

Interruptible Load Proceeding

See the Form 10-K for a discussion of the proceeding regarding the treatment under the System Agreement of the Utility operating companies’ interruptible loads.  Entergy Arkansas filed an application in November 2010 with the APSC for recovery of the refund that it paid.  The APSC denied Entergy Arkansas’s application, and also denied Entergy Arkansas’s petition for rehearing.  If the FERC were to order Entergy Arkansas to pay refunds on rehearing in the interruptible load proceeding the APSC’s decision would trap FERC-approved costs at Entergy Arkansas with no regulatory-approved mechanism to recover them.  In August 2011, Entergy Arkansas filed a complaint in the United States District Court for the Eastern District of Arkansas asking for a declaratory judgment that the rejection of Entergy Arkansas’s application by the APSC is preempted by the Federal Power Act.  The APSC filed a motion to dismiss the complaint.  In April 2012 the United States district court dismissed Entergy Arkansas’s complaint without prejudice stating that Entergy Arkansas’s claim is not ripe for adjudication and that Entergy Arkansas did not have standing to bring suit at this time.
 
 
38

Entergy Corporation and Subsidiaries
Notes to Financial Statements



Entergy Arkansas Opportunity Sales Proceeding

In June 2009, the LPSC filed a complaint requesting that the FERC determine that certain of Entergy Arkansas’s sales of electric energy to third parties: (a) violated the provisions of the System Agreement that allocate the energy generated by Entergy System resources, (b) imprudently denied the Entergy System and its ultimate consumers the benefits of low-cost Entergy System generating capacity, and (c) violated the provision of the System Agreement that prohibits sales to third parties by individual companies absent an offer of a right-of-first-refusal to other Utility operating companies.   The LPSC’s complaint challenged sales made beginning in 2002 and requested refunds.  In their response to the complaint, the Utility operating companies explained that the System Agreement clearly contemplates that the Utility operating companies may make sales to third parties for their own account, subject to the requirement that those sales be included in the load (or load shape) for the applicable Utility operating company.  The response further explained that the FERC already has determined that Entergy Arkansas’s short-term wholesale sales did not trigger the “right-of-first-refusal” provision of the System Agreement.  In addition the response argued that while the D.C. Circuit had determined that the “right-of-first-refusal” issue was not properly before the FERC at the time of its earlier decision on the issue, the LPSC raised no additional claims or facts that would warrant the FERC reaching a different conclusion.

In December 2010 the ALJ issued an initial decision.  The ALJ found that the System Agreement allowed for Entergy Arkansas to make the sales to third parties but concluded that the sales should be accounted for in the same manner as joint account sales.  The ALJ concluded that “shareholders” should make refunds of the damages to the Utility operating companies, along with interest.  Entergy disagreed with several aspects of the ALJ’s initial decision and in January 2011 filed with the FERC exceptions to the decision.

The FERC issued a decision in June 2012 and held that, while the System Agreement is ambiguous, it does provide authority for individual Utility operating companies to make opportunity sales for their own account and Entergy Arkansas made and priced these sales in good faith.  The FERC found, however, that the System Agreement does not provide authority for an individual Utility operating company to allocate the energy associated with such opportunity sales as part of its load, but provides a different allocation authority.  The FERC further found that the after-the-fact accounting methodology used to allocate the energy used to supply the sales was inconsistent with the System Agreement.  Quantifying the effect of the FERC’s decision will require re-running intra-system bills for a ten-year period, and the FERC in its decision established further hearing procedures to determine the calculation of the effects.

As required by the procedural schedule established in the calculation proceeding, Entergy filed its direct testimony that included a proposed illustrative re-run, consistent with the directives in FERC’s order, of intra-system bills for 2003, 2004, and 2006, the three years with the highest volume of opportunity sales.  Entergy’s proposed illustrative re-run of intra-system bills shows that the potential cost for Entergy Arkansas would be up to $12 million for the years 2003, 2004, and 2006, and the potential benefit would be significantly less than that for each of the other Utility operating companies.  Entergy’s proposed illustrative rerun of the intra-system bills also shows an offsetting potential benefit to Entergy Arkansas for the years 2003, 2004, and 2006 resulting from the effects of the FERC’s order on System Agreement Service Schedules MSS-1, MSS-2, and MSS-3, and the potential offsetting cost would be significantly less than that for each of the other Utility operating companies.  The LPSC had previously filed direct testimony in the proceeding alleging that over the period 2000 - 2009 the sales caused harm to the Utility operating companies’ customers of $144 million.  In subsequent testimony, however, the LPSC modified its original damages claim in favor of quantifying damages by re-running intra-system bills.  Entergy provided to the LPSC an illustrative intra-system bill recalculation as specified by the LPSC for the years 2003, 2004, and 2006, and the LPSC’s answering testimony is due in December 2012.  The FERC staff’s and intervenors’ direct and answering testimony is due in February 2013, a hearing is scheduled for May 2013, and the ALJ’s initial decision on the calculation of the effects is due by August 28, 2013.

On July 23, 2012, Entergy and the LPSC filed requests for rehearing of the FERC’s June 2012 decision, which are pending with the FERC.


 
39

Entergy Corporation and Subsidiaries
Notes to Financial Statements


Storm Cost Recovery Filings with Retail Regulators

Entergy Gulf States Louisiana

Hurricane Katrina and Hurricane Rita

See the Form 10-K for a discussion of Entergy Gulf States Louisiana’s Act 55 financing of its Hurricane Katrina and Hurricane Rita storm costs.  In February 2012, Entergy Gulf States Louisiana sold 500,000 of its Class A preferred membership units in Entergy Holdings Company LLC, a wholly-owned Entergy subsidiary, to a third party in exchange for $51 million plus accrued but unpaid distributions on the units.  The 500,000 preferred membership units are mandatorily redeemable in January 2112.

New Nuclear Generation Development Costs (Entergy Gulf States and Entergy Louisiana)

Entergy Gulf States Louisiana and Entergy Louisiana are developing a project option for new nuclear generation at River Bend.  In March 2010, Entergy Gulf States Louisiana and Entergy Louisiana filed with the LPSC seeking approval to continue the limited development activities necessary to preserve an option to construct a new unit at River Bend.  The testimony and legal briefs of the LPSC staff generally support the request of Entergy Gulf States Louisiana and Entergy Louisiana, although other parties filed briefs, without supporting testimony, in opposition to the request.  At an evidentiary hearing in October 2011, Entergy Gulf States Louisiana, Entergy Louisiana, and the LPSC staff presented testimony in support of certification of activities to preserve an option for a new nuclear plant at River Bend.  The ALJ recommended, however, that the LPSC decline the request of Entergy Gulf States Louisiana and Entergy Louisiana on the basis that the LPSC’s rule on new nuclear development does not apply to activities to preserve an option to develop and on the further grounds that the companies improperly engaged in advanced preparation activities prior to certification.  There has been no suggestion that the planning activities or costs incurred were imprudent.  At its June 28, 2012 meeting the LPSC voted to uphold the ALJ’s decision and directed that Entergy Gulf States Louisiana and Entergy Louisiana be permitted to seek recovery of these costs in the rate case filings that are anticipated in January 2013, fully reserving the LPSC’s right to determine the recoverability of such costs in rates.  On September 10, 2012, Entergy Gulf States Louisiana and Entergy Louisiana filed a petition for appeal and judicial review of the LPSC’s order with the Louisiana Nineteenth Judicial District Court.  A schedule for the appeal has not been established.

Texas Power Price Lawsuit

In August 2003, a lawsuit was filed in the district court of Chambers County, Texas by Texas residents on behalf of a purported class of the Texas retail customers of Entergy Gulf States, Inc. who were billed and paid for electric power from January 1, 1994 to the present.  The named defendants include Entergy Corporation, Entergy Services, Entergy Power, Entergy Power Marketing Corp., and Entergy Arkansas.  Entergy Gulf States, Inc. was not a named defendant, but was alleged to be a co-conspirator.  The court granted the request of Entergy Gulf States, Inc. to intervene in the lawsuit to protect its interests.

Plaintiffs allege that the defendants implemented a “price gouging accounting scheme” to sell to plaintiffs and similarly situated utility customers higher priced power generated by the defendants while rejecting less expensive power offered from off-system suppliers.  In particular, plaintiffs allege that the defendants manipulated and continue to manipulate the dispatch of generation so that power is purchased from affiliated expensive resources instead of buying cheaper off-system power.

Plaintiffs stated in their pleadings that customers in Texas were charged at least $57 million above prevailing market prices for power.  Plaintiffs seek actual, consequential and exemplary damages, costs and attorneys’ fees, and disgorgement of profits.  The plaintiffs’ experts have tendered a report calculating damages in a large range, from $153 million to $972 million in present value, under various scenarios.  The Entergy defendants have tendered expert reports challenging the assumptions, methodologies, and conclusions of the plaintiffs’ expert reports.



 
40

Entergy Corporation and Subsidiaries
Notes to Financial Statements


The case is pending in state district court, and in March 2012 the court found that the case met the requirements to be maintained as a class action under Texas law.  On April 30, 2012, the court entered an order certifying the class.  The defendants have appealed the order to the Texas Court of Appeals – First District.  The appeal is pending and proceedings in district court are stayed until the appeal is resolved.


NOTE 3.  EQUITY  (Entergy Corporation, Entergy Gulf States Louisiana, and Entergy Louisiana)

Common Stock

Earnings per Share

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

   
For the Three Months Ended September 30,
   
2012
 
2011
   
(In Millions, Except Per Share Data)
                         
Basic earnings per share
 
Income
 
Shares
 
$/share
 
Income
 
Shares
 
$/share
                         
Net income attributable to
Entergy Corporation
 
 
$337.1
 
 
177.5
 
 
$1.90 
 
 
$628.1
 
 
177.0
 
 
$3.55 
Average dilutive effect of:
                       
Stock options
     
0.4
 
(0.01)
     
0.7
 
(0.02)
Other equity plans
 
  
 
0.1
 
 
 
 
-
 
 - 
                         
Diluted earnings per share
 
$337.1
 
178.0
 
$1.89 
 
$628.1
 
177.7
 
$3.53 


   
For the Nine Months Ended September 30,
   
2012
 
2011
   
(In Millions, Except Per Share Data)
                         
Basic earnings per share
 
Income
 
Shares
 
$/share
 
Income
 
Shares
 
$/share
                         
Net income attributable to
Entergy Corporation
 
 
$550.4
 
 
177.2
 
 
$3.11 
 
 
$1,192.3
 
 
177.9
 
 
$6.70 
Average dilutive effect of:
                       
Stock options
 
  
 
0.3
 
(0.01)
 
 
 
0.9
 
(0.03)
Other equity plans
 
  
 
0.1
 
 
 
 
-
 
 - 
                         
Diluted earnings per share
 
$550.4
 
177.6
 
$3.10 
 
$1,192.3
 
178.8
 
$6.67 

Entergy’s stock options and other equity compensation plans are discussed in Note 5 herein and in Note 12 to the financial statements in the Form 10-K.


 
41

Entergy Corporation and Subsidiaries
Notes to Financial Statements


Treasury Stock

During the nine months ended September 30, 2012, Entergy Corporation issued 1,316,691 shares of its previously repurchased common stock to satisfy stock option exercises and other stock-based awards.  Entergy Corporation did not repurchase any of its common stock during the nine months ended September 30, 2012.

Retained Earnings

On October 26, 2012, Entergy Corporation’s Board of Directors declared a common stock dividend of $0.83 per share, payable on December 3, 2012 to holders of record as of November 8, 2012.

Comprehensive Income

Accumulated other comprehensive loss is included in the equity section of the balance sheets of Entergy, Entergy Gulf States Louisiana, and Entergy Louisiana.  Accumulated other comprehensive loss in the balance sheets included the following components:

   
 
Entergy
 
Entergy
Gulf States Louisiana
 
Entergy
Louisiana
   
September 30,
2012
 
December 31,
2011
 
September 30,
2012
 
December 31,
2011
 
September 30,
2012
 
December 31,
2011
   
(In Thousands)
                         
Cash flow hedges net
 unrealized gain
 
 
$108,704 
 
 
$177,497 
 
 
$- 
 
 
$- 
 
 
$- 
 
 
$- 
Pension and other
 postretirement liabilities
 
 
(470,032)
 
 
(499,556)
 
 
(57,213)
 
 
(69,610)
 
 
(37,617)
 
 
(39,507)
Net unrealized investment
 gains
 
 
221,450 
 
 
150,939 
 
 
 
 
 
 
 
 
Foreign currency translation
 
3,085 
 
2,668 
 
 
 
 
Total
 
($136,793)
 
($168,452)
 
($57,213)
 
($69,610)
 
($37,617)
 
($39,507)

Other comprehensive income (loss) and total comprehensive income for the three and nine months ended September 30, 2012 and 2011 are presented in Entergy’s, Entergy Gulf States Louisiana’s, and Entergy Louisiana’s Statements of Comprehensive Income.



 
42

Entergy Corporation and Subsidiaries
Notes to Financial Statements



NOTE 4.  REVOLVING CREDIT FACILITIES, LINES OF CREDIT, SHORT-TERM BORROWINGS, AND LONG-TERM DEBT (Entergy Corporation, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, Entergy Texas, and System Energy)

Entergy Corporation has in place a credit facility that has a borrowing capacity of $3.5 billion and expires in March 2017.  Entergy Corporation also has the ability to issue letters of credit against 50% of the total borrowing capacity of the credit facility.  The commitment fee is currently 0.275% of the commitment amount.  Commitment fees and interest rates on loans under the credit facility can fluctuate depending on the senior unsecured debt ratings of Entergy Corporation.  The weighted average interest rate for the nine months ended September 30, 2012 was 2.07% on the drawn portion of the facility.  Following is a summary of the borrowings outstanding and capacity available under the facility as of September 30, 2012.

 
Capacity
 
 
Borrowings
 
Letters
of Credit
 
Capacity
Available
(In Millions)
             
$3,500 
 
$1,315
 
$8
 
$2,177

Entergy Corporation’s facility requires it to maintain a consolidated debt ratio of 65% or less of its total capitalization.  Entergy is in compliance with this covenant.  If Entergy fails to meet this ratio, or if Entergy Corporation or one of the Utility operating companies (except Entergy New Orleans) defaults on other indebtedness or is in bankruptcy or insolvency proceedings, an acceleration of the facility maturity date may occur.

In September 2012, Entergy Corporation implemented a commercial paper program with a program limit of up to $500 million.  At September 30, 2012, Entergy Corporation had $154.3 million of commercial paper outstanding.  The weighted-average interest rate for the period ended September 30, 2012 was 0.80%.  In October 2012 the Board approved increasing the limit for the commercial paper program to $1 billion.

Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, and Entergy Texas each had credit facilities available as of September 30, 2012 as follows:

 
 
 
Company
 



Expiration Date
 
 
 
Amount of
Facility
 
 
 
 
Interest Rate (a)
 
Amount Drawn
as of
September 30,
2012
                 
Entergy Arkansas
 
April 2013
 
$20 million (b)
 
1.86%
 
-
Entergy Arkansas
 
March 2017
 
$150 million (c)
 
1.72%
 
-
Entergy Gulf States Louisiana
 
March 2017
 
$150 million (d)
 
1.72%
 
-
Entergy Louisiana
 
March 2017
 
$200 million (e)
 
1.72%
 
-
Entergy Mississippi
 
May 2013
 
$35 million (f)
 
1.97%
 
-
Entergy Mississippi
 
May 2013
 
$25 million (f)
 
1.97%
 
-
Entergy Mississippi
 
May 2013
 
$10 million (f)
 
1.97%
 
-
Entergy Texas
 
March 2017
 
$150 million (g)
 
1.97%
 
-
 
 
(a)
The interest rate is the rate as of September 30, 2012 that would be applied to outstanding borrowings under the facility.
(b)
The credit facility requires Entergy Arkansas to maintain a debt ratio of 65% or less of its total capitalization.  Borrowings under the Entergy Arkansas credit facility may be secured by a security interest in its accounts receivable.
(c)
The credit facility allows Entergy Arkansas to issue letters of credit against 50% of the borrowing capacity of the facility.  As of September 30, 2012, no letters of credit were outstanding.  The credit facility requires Entergy Arkansas to maintain a consolidated debt ratio of 65% or less of its total capitalization.
(d)
The credit facility allows Entergy Gulf States Louisiana to issue letters of credit against 50% of the borrowing capacity of the facility.  As of September 30, 2012, no letters of credit were outstanding.  The credit facility requires Entergy Gulf States Louisiana to maintain a consolidated debt ratio of 65% or less of its total capitalization.
 
 
43

Entergy Corporation and Subsidiaries
Notes to Financial Statements


(e)
The credit facility allows Entergy Louisiana to issue letters of credit against 50% of the borrowing capacity of the facility.  As of September 30, 2012, no letters of credit were outstanding.  The credit facility requires Entergy Louisiana to maintain a consolidated debt ratio of 65% or less of its total capitalization.
(f)
Borrowings under the Entergy Mississippi credit facilities may be secured by a security interest in its accounts receivable.  Entergy Mississippi is required to maintain a consolidated debt ratio of 65% or less of its total capitalization.
(g)
The credit facility allows Entergy Texas to issue letters of credit against 50% of the borrowing capacity of the facility.  As of September 30, 2012, no letters of credit were outstanding.  The credit facility requires Entergy Texas to maintain a consolidated debt ratio of 65% or less of its total capitalization.

The facility fees on the credit facilities range from 0.125% to 0.275% of the commitment amount.

The short-term borrowings of the Registrant Subsidiaries are limited to amounts authorized by the FERC.  The current FERC-authorized limits are effective through October 31, 2013.  In addition to borrowings from commercial banks, these companies are authorized under a FERC order to borrow from the Entergy System money pool.  The money pool is an inter-company borrowing arrangement designed to reduce the Utility subsidiaries’ dependence on external short-term borrowings.  Borrowings from the money pool and external borrowings combined may not exceed the FERC-authorized limits.  The following are the FERC-authorized limits for short-term borrowings and the outstanding short-term borrowings as of September 30, 2012 (aggregating both money pool and external short-term borrowings) for the Registrant Subsidiaries:


   
Authorized
 
Borrowings
   
(In Millions)
         
Entergy Arkansas
 
$250
 
-
Entergy Gulf States Louisiana
 
$200
 
-
Entergy Louisiana
 
$250
 
-
Entergy Mississippi
 
$175
 
-
Entergy New Orleans
 
$100
 
$16
Entergy Texas
 
$200
 
-
System Energy
 
$200
 
-

Variable Interest Entities (Entergy Corporation, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, and System Energy)

See Note 18 to the financial statements in the Form 10-K for a discussion of the consolidation of the nuclear fuel company variable interest entities (VIE).  The nuclear fuel company variable interest entities have credit facilities and also issue commercial paper to finance the acquisition and ownership of nuclear fuel as follows as of September 30, 2012:

 
 
 
 
 
Company
 
 
 
 
 
Expiration
Date
 
 
 
 
Amount
of
Facility
 
Weighted
Average
Interest
Rate on
Borrowings
(a)
 
 
Amount
Outstanding
as of
September 30,
2012
   
(Dollars in Millions)
                 
Entergy Arkansas VIE
 
July 2013
 
$85
 
2.30%
 
$52.7
Entergy Gulf States Louisiana VIE
 
July 2013
 
$85
 
n/a
 
$-
Entergy Louisiana VIE
 
July 2013
 
$90
 
2.32%
 
$56.5
System Energy VIE
 
July 2013
 
$100
 
2.36%
 
$62.8

 
44

Entergy Corporation and Subsidiaries
Notes to Financial Statements




(a)
Includes letter of credit fees and bank fronting fees on commercial paper issuances by the nuclear fuel company variable interest entities for Entergy Arkansas, Entergy Louisiana, and System Energy.  The nuclear fuel company variable interest entity for Entergy Gulf States Louisiana does not issue commercial paper, but borrows directly on its bank credit facility.

Amounts outstanding on the Entergy Gulf States Louisiana nuclear fuel company variable interest entity’s credit facility are included in long-term debt on its balance sheet and commercial paper outstanding for the other nuclear fuel company variable interest entities is classified as a current liability on the respective balance sheets.  The commitment fees on the credit facilities are 0.20% of the undrawn commitment amount.  Each credit facility requires the respective lessee of nuclear fuel (Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, or Entergy Corporation as guarantor for System Energy) to maintain a consolidated debt ratio of 70% or less of its total capitalization.

The nuclear fuel company variable interest entities had notes payable that are included in debt on the respective balance sheets as of September 30, 2012 as follows:

Company
 
Description
 
Amount
         
Entergy Arkansas VIE
 
9% Series H due June 2013
 
$30 million
Entergy Arkansas VIE
 
5.69% Series I due July 2014
 
$70 million
Entergy Arkansas VIE
 
3.23% Series J due July 2016
 
$55 million
Entergy Gulf States Louisiana VIE
 
5.56% Series N due May 2013
 
$75 million
Entergy Gulf States Louisiana VIE
 
3.25% Series Q due July 2017
 
$75 million
Entergy Louisiana VIE
 
5.69% Series E due July 2014
 
$50 million
Entergy Louisiana VIE
 
3.30% Series F due March 2016
 
$20 million
Entergy Louisiana VIE
 
3.25% Series G due July 2017
 
$25 million
System Energy VIE
 
6.29% Series F due September 2013
 
$70 million
System Energy VIE
 
5.33% Series G due April 2015
 
$60 million
System Energy VIE
 
4.02% Series H due February 2017
 
$50 million

In accordance with regulatory treatment, interest on the nuclear fuel company variable interest entities’ credit facilities, commercial paper, and long-term notes payable is reported in fuel expense.

Debt Issuances and Redemptions

(Entergy Corporation)

In January 2012, Entergy Corporation issued $500 million of 4.70% senior notes due January 2017.  Entergy Corporation used the proceeds to repay borrowings under its $3.5 billion credit facility.  The net repayment of Entergy’s credit facility during the first quarter 2012 was $455 million.

(Entergy Gulf States)

In April 2012, Entergy Gulf States Louisiana redeemed, prior to maturity, its $10.84 million 5.8% Series pollution control revenue bonds due April 2016.

In July 2012 the Entergy Gulf States Louisiana nuclear fuel company variable interest entity issued $75 million of 3.25% Series Q notes due July 2017.  The Entergy Gulf States Louisiana nuclear fuel company variable interest entity used the proceeds to pay, at maturity, its $60 million 5.41% Series O notes due July 2012 and to repay borrowings of $3.5 million under its $85 million nuclear fuel company variable interest entity credit facility.


 
45

Entergy Corporation and Subsidiaries
Notes to Financial Statements


(Entergy Louisiana)

In January 2012, Entergy Louisiana issued $250 million of 1.875% Series first mortgage bonds due December 2014.  Entergy Louisiana used a portion of the proceeds to repay short-term borrowings under the Entergy System money pool.

In July 2012, Entergy Louisiana issued $200 million of 5.25% Series first mortgage bonds due July 2052.  Entergy Louisiana used the proceeds for general corporate purposes.

In August 2012 the Entergy Louisiana nuclear fuel company variable interest entity issued $25 million of 3.25% Series G notes due July 2017.  The Entergy Louisiana nuclear fuel company variable interest entity used the proceeds to purchase additional nuclear fuel.

(System Energy)

In February 2012 the System Energy nuclear fuel company variable interest entity issued $50 million of 4.02% Series H notes due February 2017.  The System Energy nuclear fuel company variable interest entity used the proceeds to purchase additional nuclear fuel.

In September 2012, System Energy issued $250 million of 4.10% Series first mortgage bonds due April 2023.  System Energy used a portion of the proceeds to pay, at maturity, its $70 million 6.2% Series first mortgage bonds due October 2012 and to pay, prior to maturity, its $102.975 million 5.9% Series pollution control revenue bonds due May 2022 and its $50 million 6.2% Series pollution control revenue bonds due February 2026.

Fair Value

The book value and the fair value of long-term debt for Entergy Corporation and the Registrant Subsidiaries as of September 30, 2012 are as follows:

   
Book Value
of Long-Term Debt
 
Fair Value
of Long-Term Debt (a) (b)
   
(In Thousands)
         
Entergy
 
$12,535,864
 
$12,946,166
Entergy Arkansas
 
$1,870,076
 
$1,776,893
Entergy Gulf States Louisiana
 
$1,517,369
 
$1,670,740
Entergy Louisiana
 
$2,639,714
 
$2,781,584
Entergy Mississippi
 
$920,484
 
$998,493
Entergy New Orleans
 
$166,322
 
$172,182
Entergy Texas
 
$1,628,270
 
$1,887,539
System Energy
 
$853,771
 
$735,626

(a)
The values exclude lease obligations of $163 million at Entergy Louisiana and $139 million at System Energy, long-term DOE obligations of $181 million at Entergy Arkansas, and the note payable to NYPA of $126 million at Entergy, and include debt due within one year.
(b)
Fair values are classified as Level 2 in the fair value hierarchy discussed in Note 8 to the financial statements and are based on prices derived from inputs such as benchmark yields and reported trades.


 
46

Entergy Corporation and Subsidiaries
Notes to Financial Statements



The book value and the fair value of long-term debt for Entergy Corporation and the Registrant Subsidiaries as of December 31, 2011 were as follows:

   
Book Value
of Long-Term Debt
 
Fair Value
of Long-Term Debt (a) (b)
   
(In Thousands)
         
Entergy
 
$12,236,446
 
$12,176,251
Entergy Arkansas
 
$1,875,921
 
$1,756,361
Entergy Gulf States Louisiana
 
$1,542,430
 
$1,642,388
Entergy Louisiana
 
$2,252,312
 
$2,211,355
Entergy Mississippi
 
$920,439
 
$985,600
Entergy New Orleans
 
$166,537
 
$169,270
Entergy Texas
 
$1,677,127
 
$1,906,081
System Energy
 
$747,048
 
$582,952

(a)
The values exclude lease obligations of $188 million at Entergy Louisiana and $179 million at System Energy, long-term DOE obligations of $181 million at Entergy Arkansas, and the note payable to NYPA of $133 million at Entergy, and include debt due within one year.
(b)
Fair values are classified as Level 2 in the fair value hierarchy discussed in Note 8 to the financial statements and are based on prices derived from inputs such as benchmark yields and reported trades.


NOTE 5.  STOCK-BASED COMPENSATION (Entergy Corporation)

Entergy grants stock awards, which are described more fully in Note 12 to the financial statements in the Form 10-K.  Awards under Entergy’s plans generally vest over three years.

Stock Options

Entergy granted 552,400 stock options during the first quarter 2012 with a weighted-average fair value of $9.42 per option.  At September 30, 2012, there are 9,639,169 stock options outstanding with a weighted-average exercise price of $79.16.  The intrinsic value, which has no effect on net income, of the outstanding stock options is calculated by the difference in the weighted average exercise price of the stock options granted and Entergy Corporation’s common stock price as of September 30, 2012.  Because Entergy’s stock price at September 30, 2012 is less than the weighted average exercise price, the aggregate intrinsic value of the stock options outstanding as of September 30, 2012 is zero.  The intrinsic value of “in the money” stock options is $17.2 million as of September 30, 2012.

The following table includes financial information for stock options for the third quarters of 2012 and 2011:

 
2012
 
2011
 
(In Millions)
       
Compensation expense included in Entergy’s net income
$1.9
 
$2.5
Tax benefit recognized in Entergy’s net income
$0.7
 
$0.9
Compensation cost capitalized as part of fixed assets and inventory
$0.3
 
$0.5


 
47

Entergy Corporation and Subsidiaries
Notes to Financial Statements


The following table includes financial information for stock options for the nine months ended September 30, 2012 and 2011:

 
2012
 
2011
 
(In Millions)
       
       
Compensation expense included in Entergy’s net income
$5.8
 
$8.0
Tax benefit recognized in Entergy’s net income
$2.2
 
$3.1
Compensation cost capitalized as part of fixed assets and inventory
$1.1
 
$1.5

Other Equity Plans

In January 2012, the Board approved and Entergy granted 339,700 restricted stock awards and 176,742 Long-term Incentive Plan (LTIP) awards under the 2011 Equity Ownership and Long-term Cash Incentive Plan.  The restricted stock awards were made effective as of January 26, 2012 and were valued at $71.30 per share, which was the closing price of Entergy’s common stock on that date.  One-third of the restricted stock awards will vest upon each anniversary of the grant date.  Beginning with the 2012 – 2014 performance period, upon vesting, the performance units granted under the LTIP will be settled in shares of Entergy common stock rather than cash.  The LTIP stock awards were made effective as of January 27, 2012 and were valued at $67.11 per share.  Entergy considers various factors, primarily market conditions, in determining the value of the LTIP stock awards.  Shares of the stock awards have the same dividend and voting rights as other common stock, are considered issued and outstanding shares of Entergy upon vesting, and are expensed ratably over the three-year vesting period.

The following table includes financial information for other equity plans for the third quarters of 2012 and 2011:

 
2012
 
2011
 
(In Millions)
       
Compensation expense included in Entergy’s net income
$3.7
 
$1.0
Tax benefit recognized in Entergy’s net income
$1.4
 
$0.4
Compensation cost capitalized as part of fixed assets and inventory
$0.6
 
$0.2

The following table includes financial information for other equity plans for the nine months ended September 30, 2012 and 2011:

 
2012
 
2011
 
(In Millions)
       
Compensation expense included in Entergy’s net income
$11.0
 
$2.9
Tax benefit recognized in Entergy’s net income
$4.2
 
$1.1
Compensation cost capitalized as part of fixed assets and inventory
$1.9
 
$0.5

 
48

Entergy Corporation and Subsidiaries
Notes to Financial Statements



NOTE 6.  RETIREMENT AND OTHER POSTRETIREMENT BENEFITS (Entergy Corporation, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, Entergy Texas, and System Energy)

Components of Net Pension Cost

Entergy’s qualified pension cost, including amounts capitalized, for the third quarters of 2012 and 2011, included the following components:

   
2012
 
2011
   
(In Thousands)
         
Service cost - benefits earned during the period
 
$37,691 
 
$30,490 
Interest cost on projected benefit obligation
 
65,232 
 
59,248 
Expected return on assets
 
(79,356)
 
(75,319)
Amortization of prior service cost
 
683 
 
838 
Amortization of loss
 
41,820 
 
23,244 
Net pension costs
 
$66,070 
 
$38,501 

Entergy’s qualified pension cost, including amounts capitalized, for the nine months ended September 30, 2012 and 2011, included the following components:

   
2012
 
2011
   
(In Thousands)
         
Service cost - benefits earned during the period
 
$113,073 
 
$91,470 
Interest cost on projected benefit obligation
 
195,696 
 
177,744 
Expected return on assets
 
(238,068)
 
(225,957)
Amortization of prior service cost
 
2,049 
 
2,514 
Amortization of loss
 
125,460 
 
69,732 
Net pension costs
 
$198,210 
 
$115,503 

The Registrant Subsidiaries’ qualified pension cost, including amounts capitalized, for the third quarters of 2012 and 2011, included the following components:

 
 
2012
 
 
Entergy
Arkansas
 
Entergy
Gulf States
Louisiana
 
 
Entergy
Louisiana
 
 
Entergy
 Mississippi
 
 
Entergy
New Orleans
 
 
Entergy
Texas
 
 
System
Energy
   
(In Thousands)
Service cost - benefits earned
                           
  during the period
 
$5,542 
 
$3,068 
 
$3,669 
 
$1,602 
 
$706 
 
$1,421 
 
$1,480 
Interest cost on projected
                           
  benefit obligation
 
13,922 
 
6,420 
 
8,800 
 
4,070 
 
1,902
 
4,206 
 
3,247 
Expected return on assets
 
(16,441)
 
(8,593)
 
(10,209)
 
(5,236)
 
(2,215)
 
(5,581)
 
(4,109)
Amortization of prior service
                           
  cost
 
50 
 
 
52 
 
 
 
 
Amortization of loss
 
10,193 
 
4,043 
 
7,050 
 
2,633 
 
1,719 
 
2,544 
 
2,251 
Net pension cost
 
$13,266 
 
$4,943 
 
$9,362 
 
$3,076 
 
$2,114 
 
$2,594 
 
$2,872 


 
49

Entergy Corporation and Subsidiaries
Notes to Financial Statements




 
 
2011
 
 
Entergy
Arkansas
 
Entergy
Gulf States
Louisiana
 
 
Entergy
Louisiana
 
 
Entergy
 Mississippi
 
 
Entergy
New Orleans
 
 
Entergy
Texas
 
 
System
Energy
   
(In Thousands)
Service cost - benefits earned
                           
  during the period
 
$4,518 
 
$2,462 
 
$2,886 
 
$1,327 
 
$561 
 
$1,197 
 
$1,235 
Interest cost on projected
                           
  benefit obligation
 
12,991 
 
5,928 
 
8,159 
 
3,909 
 
1,762
 
3,993 
 
2,939 
Expected return on assets
 
(15,609)
 
(8,339)
 
(9,716)
 
(5,038)
 
(2,114)
 
(5,501)
 
(3,784)
Amortization of prior service
                           
  cost
 
115 
 
20 
 
70 
 
38 
 
 
16 
 
Amortization of loss
 
6,421 
 
2,279 
 
4,497 
 
1,680 
 
1,166 
 
1,394 
 
1,321 
Net pension cost
 
$8,436 
 
$2,350 
 
$5,896 
 
$1,916 
 
$1,384 
 
$1,099 
 
$1,715 

The Registrant Subsidiaries’ qualified pension cost, including amounts capitalized, for the nine months ended September 30, 2012 and 2011, included the following components:

 
 
2012
 
 
Entergy
Arkansas
 
Entergy
Gulf States
Louisiana
 
 
Entergy
Louisiana
 
 
Entergy
 Mississippi
 
 
Entergy
New Orleans
 
 
Entergy
Texas
 
 
System
Energy
   
(In Thousands)
Service cost - benefits earned
                           
  during the period
 
$16,626 
 
$9,204 
 
$11,007 
 
$4,806 
 
$2,118 
 
$4,263 
 
$4,440 
Interest cost on projected
                           
  benefit obligation
 
41,766 
 
19,260 
 
26,400 
 
12,210 
 
5,706
 
12,618 
 
9,741 
Expected return on assets
 
(49,323)
 
(25,779)
 
(30,627)
 
(15,708)
 
(6,645)
 
(16,743)
 
(12,327)
Amortization of prior service
                           
  cost
 
150 
 
15 
 
156 
 
21 
 
 
12 
 
Amortization of loss
 
30,579 
 
12,129 
 
21,150 
 
7,899 
 
5,157 
 
7,632 
 
6,753 
Net pension cost
 
$39,798 
 
$14,829 
 
$28,086 
 
$9,228 
 
$6,342 
 
$7,782 
 
$8,616 

 
 
2011
 
 
Entergy
Arkansas
 
Entergy
Gulf States
Louisiana
 
 
Entergy
Louisiana
 
 
Entergy
 Mississippi
 
 
Entergy
New Orleans
 
 
Entergy
Texas
 
 
System
Energy
   
(In Thousands)
Service cost - benefits earned
                           
  during the period
 
$13,554 
 
$7,386 
 
$8,658 
 
$3,981 
 
$1,683 
 
$3,591 
 
$3,705 
Interest cost on projected
                           
  benefit obligation
 
38,973 
 
17,784 
 
24,477 
 
11,727 
 
5,286
 
11,979 
 
8,817 
Expected return on assets
 
(46,827)
 
(25,017)
 
(29,148)
 
(15,114)
 
(6,342)
 
(16,503)
 
(11,352)
Amortization of prior service
                           
  cost
 
345 
 
60 
 
210 
 
114 
 
27 
 
48 
 
12 
Amortization of loss
 
19,263 
 
6,837 
 
13,491 
 
5,040 
 
3,498 
 
4,182 
 
3,963 
Net pension cost
 
$25,308 
 
$7,050 
 
$17,688 
 
$5,748 
 
$4,152 
 
$3,297 
 
$5,145 


 
50

Entergy Corporation and Subsidiaries
Notes to Financial Statements



Entergy recognized $5.1 million and $4.9 million in pension cost for its non-qualified pension plans in the third quarters of 2012 and 2011, respectively.  Entergy recognized $15.3 million and $14.6 million in pension cost for its non-qualified pension plans for the nine months ended September 30, 2012 and 2011, respectively.

The Registrant Subsidiaries recognized the following pension cost for their non-qualified pension plans in the third quarters of 2012 and 2011:

   
 
Entergy
Arkansas
 
Entergy
Gulf States
Louisiana
 
 
Entergy
Louisiana
 
 
Entergy
Mississippi
 
 
Entergy
New Orleans
 
 
Entergy
Texas
   
(In Thousands)
Non-qualified pension cost
  third quarter 2012
 
 
$107 
 
 
$39 
 
 
$3 
 
 
$46 
 
 
$19 
 
 
$163 
Non-qualified pension cost
  third quarter 2011
 
 
$115 
 
 
$42 
 
 
$4 
 
 
$48 
 
 
$16 
 
 
$192 

The Registrant Subsidiaries recognized the following pension cost for their non-qualified pension plans for the nine months ended September 30, 2012 and 2011:

   
 
Entergy
Arkansas
 
Entergy
Gulf States
Louisiana
 
 
Entergy
Louisiana
 
 
Entergy
Mississippi
 
 
Entergy
New Orleans
 
 
Entergy
Texas
   
(In Thousands)
Non-qualified pension cost
  nine months ended
  September 30, 2012
 
 
 
$321 
 
 
 
$117 
 
 
 
$9 
 
 
 
$138 
 
 
 
$57 
 
 
 
$489 
Non-qualified pension cost
  nine months ended
  September 30, 2011
 
 
 
$345 
 
 
 
$126 
 
 
 
$12 
 
 
 
$144 
 
 
 
$48 
 
 
 
$576 

Components of Net Other Postretirement Benefit Cost

Entergy’s other postretirement benefit cost, including amounts capitalized, for the third quarters of 2012 and 2011, included the following components:

   
2012
 
2011
   
(In Thousands)
         
Service cost - benefits earned during the period
 
$17,221 
 
$14,835 
Interest cost on accumulated postretirement benefit
     obligation (APBO)
 
 
20,640 
 
 
18,631 
Expected return on assets
 
(8,626)
 
(7,369)
Amortization of transition obligation
 
794 
 
796 
Amortization of prior service cost
 
(4,541)
 
(3,518)
Amortization of loss
 
9,113 
 
5,298 
Net other postretirement benefit cost
 
$34,601 
 
$28,673 


 
51

Entergy Corporation and Subsidiaries
Notes to Financial Statements



Entergy’s other postretirement benefit cost, including amounts capitalized, for the nine months ended September 30, 2012 and 2011, included the following components:

   
2012
 
2011
   
(In Thousands)
         
Service cost - benefits earned during the period
 
$51,663 
 
$44,505 
Interest cost on APBO
 
61,920 
 
55,893 
Expected return on assets
 
(25,878)
 
(22,107)
Amortization of transition obligation
 
2,382 
 
2,388 
Amortization of prior service cost
 
(13,623)
 
(10,554)
Amortization of loss
 
27,339 
 
15,894 
Net other postretirement benefit cost
 
$103,803 
 
$86,019 

The Registrant Subsidiaries’ other postretirement benefit cost, including amounts capitalized, for the third quarters of 2012 and 2011, included the following components:

 
 
2012
 
 
Entergy
Arkansas
 
Entergy
Gulf States
Louisiana
 
 
Entergy
Louisiana
 
 
Entergy
Mississippi
 
 
Entergy
New Orleans
 
 
Entergy
Texas
 
 
System
Energy
   
(In Thousands)
Service cost - benefits earned
                           
  during the period
 
$2,272 
 
$1,880 
 
$1,949 
 
$773 
 
$422 
 
$913 
 
$823 
Interest cost on APBO
 
3,613 
 
2,398 
 
2,445 
 
1,179 
 
856 
 
1,663 
 
757 
Expected return on assets
 
(3,507)
 
 
 
(1,130)
 
(928)
 
(2,104)
 
(650)
Amortization of transition
                           
  obligation
 
205 
 
60 
 
96 
 
88 
 
297 
 
47 
 
Amortization of prior service
                           
  cost
 
(133)
 
(206)
 
(62)
 
(35)
 
10 
 
(107)
 
(16)
Amortization of loss
 
2,077 
 
1,184 
 
1,090 
 
730 
 
390 
 
1,079 
 
493 
Net other postretirement
                           
  benefit cost
 
$4,527 
 
$5,316 
 
$5,518 
 
$1,605 
 
$1,047 
 
$1,491 
 
$1,409 

 
 
2011
 
 
Entergy
Arkansas
 
Entergy
Gulf States
Louisiana
 
 
Entergy
Louisiana
 
 
Entergy
Mississippi
 
 
Entergy
New Orleans
 
 
Entergy
Texas
 
 
System
Energy
   
(In Thousands)
Service cost - benefits earned
                           
  during the period
 
$2,013 
 
$1,540 
 
$1,635 
 
$658 
 
$362 
 
$769 
 
$661 
Interest cost on APBO
 
3,436 
 
2,075 
 
2,192 
 
1,093 
 
806 
 
1,486 
 
667 
Expected return on assets
 
(2,882)
 
 
 
(977)
 
(800)
 
(1,874)
 
(529)
Amortization of transition
                           
  obligation
 
205 
 
60 
 
96 
 
88 
 
298 
 
47 
 
Amortization of prior service
                           
  cost
 
(133)
 
(206)
 
(62)
 
(35)
 
10 
 
(107)
 
(147)
Amortization of loss
 
1,610 
 
723 
 
698 
 
540 
 
241 
 
700 
 
369 
Net other postretirement
                           
  benefit cost
 
$4,249 
 
$4,192 
 
$4,559 
 
$1,367 
 
$917 
 
$1,021 
 
$1,023 

 
52

Entergy Corporation and Subsidiaries
Notes to Financial Statements


The Registrant Subsidiaries’ other postretirement benefit cost, including amounts capitalized, for the nine months ended September 30, 2012 and 2011, included the following components:

 
 
2012
 
 
Entergy
Arkansas
 
Entergy
Gulf States
Louisiana
 
 
Entergy
Louisiana
 
 
Entergy
Mississippi
 
 
Entergy
New Orleans
 
 
Entergy
Texas
 
 
System
Energy
   
(In Thousands)
Service cost - benefits earned
                           
  during the period
 
$6,816 
 
$5,640 
 
$5,847 
 
$2,319 
 
$1,266 
 
$2,739 
 
$2,469 
Interest cost on APBO
 
10,839 
 
7,194 
 
7,335 
 
3,537 
 
2,568 
 
4,989 
 
2,271 
Expected return on assets
 
(10,521)
 
 
 
(3,390)
 
(2,784)
 
(6,312)
 
(1,950)
Amortization of transition
                           
  obligation
 
615 
 
180 
 
288 
 
264 
 
891 
 
141 
 
Amortization of prior service
                           
  cost
 
(399)
 
(618)
 
(186)
 
(105)
 
30 
 
(321)
 
(48)
Amortization of loss
 
6,231 
 
3,552 
 
3,270 
 
2,190 
 
1,170 
 
3,237 
 
1,479 
Net other postretirement
                           
  benefit cost
 
$13,581 
 
$15,948 
 
$16,554 
 
$4,815 
 
$3,141 
 
$4,473 
 
$4,227 

 
 
2011
 
 
Entergy
Arkansas
 
Entergy
Gulf States
Louisiana
 
 
Entergy
Louisiana
 
 
Entergy
Mississippi
 
 
Entergy
New Orleans
 
 
Entergy
Texas
 
 
System
Energy
   
(In Thousands)
Service cost - benefits earned
                           
  during the period
 
$6,039 
 
$4,620 
 
$4,905 
 
$1,974 
 
$1,086 
 
$2,307 
 
$1,983 
Interest cost on APBO
 
10,308 
 
6,225 
 
6,576 
 
3,279 
 
2,418 
 
4,458 
 
2,001 
Expected return on assets
 
(8,646)
 
 
 
(2,931)
 
(2,400)
 
(5,622)
 
(1,587)
Amortization of transition
                           
  obligation
 
615 
 
180 
 
288 
 
264 
 
894 
 
141 
 
Amortization of prior service
                           
  cost
 
(399)
 
(618)
 
(186)
 
(105)
 
30 
 
(321)
 
(441)
Amortization of loss
 
4,830 
 
2,169 
 
2,094 
 
1,620 
 
723 
 
2,100 
 
1,107 
Net other postretirement
                           
  benefit cost
 
$12,747 
 
$12,576 
 
$13,677 
 
$4,101 
 
$2,751 
 
$3,063 
 
$3,069 

Employer Contributions

Based on current assumptions, Entergy expects to contribute $170.5 million to its qualified pension plans in 2012.  As of the end of September 2012, Entergy had contributed $170.5 million to its pension plans.  Currently, Entergy does not anticipate making additional contributions to fund its qualified pension plans in 2012.


 
53

Entergy Corporation and Subsidiaries
Notes to Financial Statements


Based on current assumptions, the Registrant Subsidiaries expect to contribute the following to qualified pension plans in 2012:

   
 
Entergy
Arkansas
 
Entergy
Gulf States
Louisiana
 
 
Entergy
Louisiana
 
 
Entergy
Mississippi
 
 
Entergy
New Orleans
 
 
Entergy
Texas
 
 
System
Energy
   
(In Thousands)
Expected 2012 pension
  contributions
 
 
$37,163
 
 
$13,569
 
 
$28,816
 
 
$9,665
 
 
$5,811
 
 
$9,091
 
 
$9,771
Pension contributions made
  through September 2012
 
 
$37,163
 
 
$13,569
 
 
$28,816
 
 
$9,665
 
 
$5,811
 
 
$9,091
 
 
$9,771
Remaining estimated pension
  contributions to be made in 2012
 
 
$ -
 
 
$ -
 
 
$ -
 
 
$ -
 
 
$ -
 
 
$ -
 
 
$ -


NOTE 7.  BUSINESS SEGMENT INFORMATION (Entergy Corporation, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, Entergy Texas, and System Energy)

Entergy Corporation

Entergy’s reportable segments as of September 30, 2012 are Utility and Entergy Wholesale Commodities.  Utility includes the generation, transmission, distribution, and sale of electric power in portions of Arkansas, Louisiana, Mississippi, and Texas, and natural gas utility service in portions of Louisiana.  Entergy Wholesale Commodities includes the ownership and operation of six nuclear power plants located in the northern United States and the sale of the electric power produced by those plants to wholesale customers.  Entergy Wholesale Commodities also includes the ownership of interests in non-nuclear power plants that sell the electric power produced by those plants to wholesale customers.  “All Other” includes the parent company, Entergy Corporation, and other business activity, including the earnings on the proceeds of sales of previously-owned businesses.

Entergy’s segment financial information for the third quarters of 2012 and 2011 is as follows:

 
 
 
Utility
 
Entergy
Wholesale
Commodities*
 
 
 
All Other
 
 
 
Eliminations
 
 
 
Entergy
 
(In Thousands)
2012
                 
Operating revenues
$2,344,885 
 
$626,849 
 
$1,060 
 
($9,234)
 
$2,963,560 
Income taxes
$187,668 
 
$34,153 
 
$10,682 
 
$- 
 
$232,503 
Consolidated net income (loss)
$300,506 
 
$118,766 
 
($50,207)
 
($26,395)
 
$342,670 
                   
2011
                 
Operating revenues
$2,760,631 
 
$641,216
 
$1,015  
 
($7,309)
 
$3,395,553 
Income taxes
($158,673)
 
$64,079
 
($24,537)
 
$- 
 
($119,131)
Consolidated net income
$528,459 
 
$130,862
 
$1,393 
 
($27,645)
 
$633,069 



 
54

Entergy Corporation and Subsidiaries
Notes to Financial Statements


Entergy’s segment financial information for the nine months ended September 30, 2012 and 2011 is as follows:

 
 
 
Utility
 
Entergy
Wholesale
Commodities*
 
 
 
All Other
 
 
 
Eliminations
 
 
 
Consolidated
 
(In Thousands)
2012
                 
Operating revenues
$6,136,101 
 
$1,754,774
 
$3,027 
 
($28,082)
 
$7,865,820 
Income taxes
$162,914 
 
($10,036)
 
($42,738)
 
$- 
 
$110,140 
Consolidated net income (loss)
$676,244 
 
$31,570 
 
($61,477)
 
($79,824)
 
$566,513 
                   
2011
                 
Operating revenues
$6,939,724 
 
$1,819,439
 
$3,153 
 
($22,275)
 
$8,740,041 
Income taxes
$70,567 
 
$213,344
 
($87,839)
 
$- 
 
$196,072 
Consolidated net income
$949,854 
 
$319,651
 
$20,776 
 
($82,935)
 
$1,207,346 

Businesses marked with * are sometimes referred to as the “competitive businesses.”  Eliminations are primarily intersegment activity.

Registrant Subsidiaries

Each of the Registrant Subsidiaries has one reportable segment, which is an integrated utility business, except for System Energy, which is an electricity generation business.  Each of the Registrant Subsidiaries’ operations is managed on an integrated basis by that company because of the substantial effect of cost-based rates and regulatory oversight on the business process, cost structures, and operating results.


NOTE 8.  RISK MANAGEMENT AND FAIR VALUES (Entergy Corporation, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, Entergy Texas, and System Energy)

Market and Commodity Risks

In the normal course of business, Entergy is exposed to a number of market and commodity risks.  Market risk is the potential loss that Entergy may incur as a result of changes in the market or fair value of a particular instrument or commodity.  All financial and commodity-related instruments, including derivatives, are subject to market risk.  Entergy is subject to a number of commodity and market risks, including:

Type of Risk
 
Affected Businesses
     
Power price risk
 
Utility, Entergy Wholesale Commodities
Fuel price risk
 
Utility, Entergy Wholesale Commodities
Equity price and interest rate risk - investments
 
Utility, Entergy Wholesale Commodities



 
55

Entergy Corporation and Subsidiaries
Notes to Financial Statements


Entergy manages a portion of these risks using derivative instruments, some of which are classified as cash flow hedges due to their financial settlement provisions while others are classified as normal purchase/normal sale transactions due to their physical settlement provisions.  Normal purchase/normal sale risk management tools include power purchase and sales agreements, fuel purchase agreements, capacity contracts, and tolling agreements.  Financially-settled cash flow hedges can include natural gas and electricity swaps and options, and interest rate swaps.  Entergy will occasionally enter into financially settled swap and option contracts to manage market risk under certain hedging transactions which may or may not be designated as hedging instruments. Entergy enters into derivatives only to manage natural risks inherent in its physical or financial assets or liabilities.

Entergy manages fuel price volatility for its Louisiana jurisdictions (Entergy Gulf States Louisiana and Entergy Louisiana) and Entergy Mississippi primarily through the purchase of short-term natural gas swaps.  These swaps are marked-to-market with offsetting regulatory assets or liabilities.  The notional volumes of these swaps are based on a portion of projected annual exposure to gas for electric generation and projected winter purchases for gas distribution at Entergy Gulf States Louisiana.

Entergy’s exposure to market risk is determined by a number of factors, including the size, term, composition, and diversification of positions held, as well as market volatility and liquidity.  For instruments such as options, the time period during which the option may be exercised and the relationship between the current market price of the underlying instrument and the option’s contractual strike or exercise price also affects the level of market risk.  A significant factor influencing the overall level of market risk to which Entergy is exposed is its use of hedging techniques to mitigate such risk.  Entergy manages market risk by actively monitoring compliance with stated risk management policies as well as monitoring the effectiveness of its hedging policies and strategies.  Entergy’s risk management policies limit the amount of total net exposure and rolling net exposure during the stated periods.  These policies, including related risk limits, are regularly assessed to ensure their appropriateness given Entergy’s objectives.

Derivatives

The fair values of Entergy’s derivative instruments in the consolidated balance sheet as of September 30, 2012 are as follows:

Instrument
 
Balance Sheet Location
 
Fair Value (a)
 
Offset (a)
 
Business
                 
Derivatives designated as hedging instruments
               
                 
Assets:
               
Electricity swaps and options
 
Prepayments and other (current portion)
 
$140 million
 
($9) million
 
Entergy Wholesale Commodities
Electricity swaps and options
 
Other deferred debits and other assets (non-current portion)
 
$69 million
 
($13) million
 
Entergy Wholesale Commodities
                 
Liabilities:
               
Electricity swaps and options
 
Other non-current liabilities (non-current portion)
 
$12 million
 
($10) million
 
Entergy Wholesale Commodities
                 

 
56

Entergy Corporation and Subsidiaries
Notes to Financial Statements



Derivatives not designated as hedging instruments
               
                 
Assets:
               
Electricity swaps and options
 
Prepayments and other (current portion)
 
$25 million
 
($2) million
 
Entergy Wholesale Commodities
Electricity swaps and options
 
Other deferred debits and other assets (non-current portion)
 
$23 million
 
($11) million
 
Entergy Wholesale Commodities
Natural gas swaps
 
Prepayments and other (current portion)
 
$10 million
 
($-)
 
Utility
                 
Liabilities:
               
Electricity swaps and options
 
Other current liabilities (current portion)
 
$11 million
 
($11) million
 
Entergy Wholesale Commodities
Electricity swaps and options
 
Other non-current liabilities (non-current portion)
 
$15 million
 
($13) million
 
Entergy Wholesale Commodities

The fair values of Entergy’s derivative instruments in the consolidated balance sheet as of December 31, 2011 are as follows:

Instrument
 
Balance Sheet Location
 
Fair Value (a)
 
Offset (a)
 
Business
                 
Derivatives designated as hedging instruments
               
                 
Assets:
               
Electricity swaps and options
 
Prepayments and other (current portion)
 
$197 million
 
($25) million
 
Entergy Wholesale Commodities
Electricity swaps and options
 
Other deferred debits and other assets (non-current portion)
 
$112 million
 
($1) million
 
Entergy Wholesale Commodities
                 
Liabilities:
               
Electricity swaps and options
 
Other non-current liabilities (non-current portion)
 
$1 million
 
($1) million
 
Entergy Wholesale Commodities

Derivatives not designated as hedging instruments
               
                 
Assets:
               
Electricity swaps and options
 
Prepayments and other (current portion)
 
$37 million
 
($8) million
 
Entergy Wholesale Commodities
                 
Liabilities:
               
Electricity swaps and options
 
Other current liabilities (current portion)
 
$33 million
 
($33) million
 
Entergy Wholesale Commodities
Natural gas swaps
 
Other current liabilities
 
$30 million
 
($-)
 
Utility

(a)
The balances of derivative assets and liabilities in these tables are presented gross.  Certain investments, including those not designated as hedging instruments, are subject to master netting agreements and are presented on the Entergy Consolidated Balance Sheets on a net basis in accordance with accounting guidance for Derivatives and Hedging.
 
 
57

Entergy Corporation and Subsidiaries
Notes to Financial Statements



The effect of Entergy’s derivative instruments designated as cash flow hedges on the consolidated income statements for the three months ended September 30, 2012 and 2011 are as follows:

 
 
 
Instrument
 
Amount of gain (loss)
recognized in other
comprehensive income
(effective portion)
 
 
 
 
Income Statement location
 
Amount of gain
 reclassified from
AOCI into
income (effective portion)
             
2012
           
Electricity swaps and options
 
($108) million
 
Competitive businesses operating revenues
 
$61 million
             
2011
           
Electricity swaps and options
 
$40 million
 
Competitive businesses operating revenues
 
$48 million

The effect of Entergy’s derivative instruments designated as cash flow hedges on the consolidated income statements for the nine months ended September 30, 2012 and 2011 are as follows:

 
 
 
Instrument
 
Amount of gain (loss)
recognized in other
comprehensive income
(effective portion)
 
 
 
 
Income Statement location
 
Amount of gain
 reclassified from
AOCI into
income (effective portion)
             
2012
           
Electricity swaps and options
 
$120 million
 
Competitive businesses operating revenues
 
$232 million
             
2011
           
Electricity swaps and options
 
($14) million
 
Competitive businesses operating revenues
 
$109 million

Electricity over-the-counter instruments that financially settle against day-ahead power pool prices are used to manage price exposure for Entergy Wholesale Commodities generation.  Based on market prices as of September 30, 2012, cash flow hedges relating to power sales totaled $196 million of net unrealized gains.  Approximately $140 million is expected to be reclassified from accumulated other comprehensive income (AOCI) to operating revenues in the next twelve months.  The actual amount reclassified from AOCI, however, could vary due to future changes in market prices.  Gains totaling approximately $61 million and $48 million were realized on the maturity of cash flow hedges, before taxes of $21 million and $17 million, for the three months ended September 30, 2012 and 2011, respectively.  Gains totaling approximately $232 million and $109 million were realized on the maturity of cash flow hedges, before taxes of $81 million and $38 million, for the nine months ended September 30, 2012 and 2011, respectively.  Unrealized gains or losses recorded in other comprehensive income result from hedging power output at the Entergy Wholesale Commodities power plants.  The related gains or losses from hedging power are included in operating revenues when realized.  The maximum length of time over which Entergy is currently hedging the variability in future cash flows with derivatives for forecasted power transactions at September 30, 2012 is approximately 2.25 years.  Planned generation currently under contract from Entergy Wholesale Commodities nuclear power plants is 89% for the remaining one quarter of 2012, of which approximately 48% is sold under financial derivatives and the remainder under normal purchase/normal sale contracts.  The change in fair value of Entergy’s cash flow hedges due to ineffectiveness was $4.5 million and $5.1 million for the three and nine months ended September 30, 2012, respectively.  The change in fair value of Entergy’s cash flow hedges due to ineffectiveness was $6.2 million and $8.4 million for the three and nine months ended September 30, 2011, respectively. The ineffective portion of cash flow hedges is recorded in competitive business operating revenues.  Certain of the agreements to sell the power produced by Entergy Wholesale Commodities power plants contain provisions that require an Entergy subsidiary to provide collateral to secure its obligations when the current market prices exceed the contracted power prices.  The primary form of collateral to satisfy these requirements is an Entergy Corporation guaranty.  As of September 30, 2012, hedge contracts with one counterparty were in a liability position (approximately $2 million total), but were significantly below
 
 
 
58

Entergy Corporation and Subsidiaries
Notes to Financial Statements


the amount of the guarantee provided under the contract and no cash collateral was required. If the Entergy Corporation credit rating falls below investment grade, the effect of the corporate guarantee is ignored and Entergy would have to post collateral equal to the estimated outstanding liability under the contract at the applicable date.   Entergy may effectively liquidate a cash flow hedge instrument by entering into a contract offsetting the original hedge, and then de-designating the original hedge in this situation.  Gains or losses accumulated in other comprehensive income prior to de-designation continue to be deferred in other comprehensive income until they are included in income as the original hedged transaction occurs. From the point of de-designation, the gains or losses on the original hedge and the offsetting contract are recorded as assets or liabilities on the balance sheet and offset as they flow through to earnings.

Natural gas over-the-counter swaps that financially settle against NYMEX futures are used to manage fuel price volatility for the Utility’s Louisiana and Mississippi customers.  All benefits or costs of the program are recorded in fuel costs.  The total volume of natural gas swaps outstanding as of September 30, 2012 is 30,900,000 MMBtu for Entergy, 9,140,000 MMBtu for Entergy Gulf States Louisiana, 14,800,000 MMBtu for Entergy Louisiana, and 6,960,000 MMBtu for Entergy Mississippi.  Credit support for these natural gas swaps is covered by master agreements that do not require collateralization based on mark-to-market value, but do carry adequate assurance language that may lead to collateralization requests.

The effect of Entergy’s derivative instruments not designated as hedging instruments on the consolidated income statements for the three months ended September 30, 2012 and 2011 is as follows:

 
Instrument
 
Amount of gain (loss)
recognized in AOCI
 
Income Statement
location
 
Amount of gain (loss)
recorded in income
             
2012
           
Natural gas swaps
 
$-
 
Fuel, fuel-related expenses, and gas purchased for resale
 
$7 million
Electricity swaps and options de-designated as hedged items
 
$3 million
 
Competitive business operating revenues
 
($2) million
             
2011
           
Natural gas swaps
 
$-
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($19) million
Electricity swaps and options de-designated as hedged items
 
($2) million
 
Competitive business operating revenues
 
$2 million


 
59

Entergy Corporation and Subsidiaries
Notes to Financial Statements



The effect of Entergy’s derivative instruments not designated as hedging instruments on the consolidated income statements for the nine months ended September 30, 2012 and 2011 is as follows:

 
Instrument
 
Amount of gain
recognized in AOCI
 
Income Statement
location
 
Amount of gain (loss)
recorded in income
             
2012
           
Natural gas swaps
 
$-
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($28) million
Electricity swaps and options de-designated as hedged items
 
$2 million
 
Competitive business operating revenues
 
($1) million
             
2011
           
Natural gas swaps
 
$-
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($31) million
Electricity swaps and options de-designated as hedged items
 
$4 million
 
Competitive business operating revenues
 
$8 million

Due to regulatory treatment, the natural gas swaps are marked-to-market through fuel, fuel-related expenses, and gas purchased for resale and then such amounts are simultaneously reversed and recorded as an offsetting regulatory asset or liability.  The gains or losses recorded as fuel expenses when the swaps are settled are recovered or refunded through fuel cost recovery mechanisms.

The fair values of the Registrant Subsidiaries’ derivative instruments on their balance sheets as of September 30, 2012 are as follows:

Instrument
 
Balance Sheet Location
 
Fair Value
 
Registrant
             
Derivatives not designated as hedging instruments
       
             
Assets:
           
Natural gas swaps
 
Gas hedge contracts
 
$3.0 million
 
Entergy Gulf States Louisiana
Natural gas swaps
 
Prepayments and other
 
$4.8 million
 
Entergy Louisiana
Natural gas swaps
 
Prepayments and other
 
$2.3 million
 
Entergy Mississippi

The fair values of the Registrant Subsidiaries’ derivative instruments on their balance sheets as of December 31, 2011 are as follows:

Instrument
 
Balance Sheet Location
 
Fair Value
 
Registrant
             
Derivatives not designated as hedging instruments
       
             
Liabilities:
           
Natural gas swaps
 
Gas hedge contracts
 
$8.6 million
 
Entergy Gulf States Louisiana
Natural gas swaps
 
Gas hedge contracts
 
$12.4 million
 
Entergy Louisiana
Natural gas swaps
 
Other current liabilities
 
$7.8 million
 
Entergy Mississippi
Natural gas swaps
 
Other current liabilities
 
$1.5 million
 
Entergy New Orleans
 
 
60

Entergy Corporation and Subsidiaries
Notes to Financial Statements



The effects of the Registrant Subsidiaries’ derivative instruments not designated as hedging instruments on their income statements for the three months ended September 30, 2012 and 2011 are as follows:

 
 
Instrument
 
 
 
Statement of Income Location
 
Amount of gain
(loss) recorded
in income
 
 
 
Registrant
             
2012
           
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
$2.0 million
 
Entergy Gulf States Louisiana
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
$3.8 million
 
Entergy Louisiana
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
$1.4 million
 
Entergy Mississippi
             
2011
           
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($5.0) million
 
Entergy Gulf States Louisiana
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($7.5) million
 
Entergy Louisiana
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($4.4) million
 
Entergy Mississippi
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($1.1) million
 
Entergy New Orleans

The effects of the Registrant Subsidiaries’ derivative instruments not designated as hedging instruments on their income statements for the nine months ended September 30, 2012 and 2011 are as follows:

 
 
Instrument
 
 
 
Statement of Income Location
 
Amount of loss
recorded
in income
 
 
 
Registrant
             
2012
           
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($8.3) million
 
Entergy Gulf States Louisiana
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($10.4) million
 
Entergy Louisiana
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($7.5) million
 
Entergy Mississippi
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($1.5) million
 
Entergy New Orleans
             
2011
           
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($9.2) million
 
Entergy Gulf States Louisiana
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($12.5) million
 
Entergy Louisiana
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($6.9) million
 
Entergy Mississippi
Natural gas swaps
 
Fuel, fuel-related expenses, and gas purchased for resale
 
($2.0) million
 
Entergy New Orleans


 
61

Entergy Corporation and Subsidiaries
Notes to Financial Statements



Fair Values

The estimated fair values of Entergy’s financial instruments and derivatives are determined using bid prices, market quotes, and financial modeling.  Considerable judgment is required in developing the estimates of fair value.  Therefore, estimates are not necessarily indicative of the amounts that Entergy could realize in a current market exchange.  Gains or losses realized on financial instruments other than those instruments held by the Entergy Wholesale Commodities business are reflected in future rates and therefore do not accrue to the benefit or detriment of shareholders.  Entergy considers the carrying amounts of most financial instruments classified as current assets and liabilities to be a reasonable estimate of their fair value because of the short maturity of these instruments.

Accounting standards define fair value as an exit price, or the price that would be received to sell an asset or the amount that would be paid to transfer a liability in an orderly transaction between knowledgeable market participants at the date of measurement.  Entergy and the Registrant Subsidiaries use assumptions or market input data that market participants would use in pricing assets or liabilities at fair value.  The inputs can be readily observable, corroborated by market data, or generally unobservable.  Entergy and the Registrant Subsidiaries endeavor to use the best available information to determine fair value.

Accounting standards establish a fair value hierarchy that prioritizes the inputs used to measure fair value.  The hierarchy establishes the highest priority for unadjusted market quotes in an active market for the identical asset or liability and the lowest priority for unobservable inputs.  The three levels of the fair value hierarchy are:

·  
Level 1 - Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.  Level 1 primarily consists of individually owned common stocks, cash equivalents, debt instruments, and gas hedge contracts.

·  
Level 2 - Level 2 inputs are inputs other than quoted prices included in Level 1 that are, either directly or indirectly, observable for the asset or liability at the measurement date.  Assets are valued based on prices derived by independent third parties that use inputs such as benchmark yields, reported trades, broker/dealer quotes, and issuer spreads.  Prices are reviewed and can be challenged with the independent parties and/or overridden by Entergy if it is believed such would be more reflective of fair value.  Level 2 inputs include the following:

-  
quoted prices for similar assets or liabilities in active markets;
-  
quoted prices for identical assets or liabilities in inactive markets;
-  
inputs other than quoted prices that are observable for the asset or liability; or
-  
inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 2 consists primarily of individually owned debt instruments or shares in common trusts.  Common trust funds are stated at estimated fair value based on the fair market value of the underlying investments.

·  
Level 3 - Level 3 inputs are pricing inputs that are generally less observable or unobservable from objective sources.  These inputs are used with internally developed methodologies to produce management’s best estimate of fair value for the asset or liability.  Level 3 consists primarily of derivative power contracts used as cash flow hedges of power sales at merchant power plants.

The values for power contract assets or liabilities are based on both observable inputs including public market prices and interest rates, and unobservable inputs such as implied volatilities, unit contingent discounts, expected basis differences, and credit adjusted counterparty interest rates.  They are classified as Level 3 assets and liabilities.  The valuations of these assets and liabilities are performed by the Entergy Wholesale Commodities Risk Control group and sent to the Entergy Wholesale Commodities Back Office and Entergy Nuclear Finance groups for evaluation.  The primary functions of the Entergy Wholesale Commodities Risk Control Group include: gathering, validating and reporting market data, providing market and credit risk analyses and valuations in support of Entergy Wholesale Commodities’ commercial transactions, developing and administering protocols for the management of market and credit risks, implementing and maintaining controls around changes to market data in the energy trading and risk management system, reviewing creditworthiness of counterparties, supporting contract negotiations with
 
 
62

Entergy Corporation and Subsidiaries
Notes to Financial Statements


new counterparties, administering credit support for contracts, and managing the daily margining process.  The primary functions of the Entergy Wholesale Commodities Back Office are managing the energy trading and risk management system, forecasting revenues, forward positions and analysis, performing contract administration, market and counterparty settlements and revenue reporting and analysis along with maintaining related controls for Entergy Wholesale Commodities.  Both Entergy Wholesale Commodities Risk Control and Entergy Wholesale Commodities Back Office report to the Entergy Wholesale Commodities VP, Finance & Risk Group.  Entergy Nuclear Finance is primarily responsible for the financial planning of Entergy’s utility and non-utility nuclear businesses and has a significant role in accounting for the activities and transactions of the associated companies.  The VP, Chief Financial Officer – Nuclear Operations within Entergy Nuclear Finance reports to the Chief Accounting Officer.

The amounts reflected as the fair value of electricity swaps are based on the estimated amount that the contracts are in-the-money at the balance sheet date (treated as an asset) or out-of-the-money at the balance sheet date (treated as a liability) and would equal the estimated amount receivable or payable by Entergy if the contracts were settled at that date.  These derivative contracts include cash flow hedges that swap fixed for floating cash flows for sales of the output from the Entergy Wholesale Commodities business.  The fair values are based on the mark-to-market comparison between the fixed contract prices and the floating prices determined each period from quoted forward power market prices.  The differences between the fixed price in the swap contract and these market-related prices multiplied by the volume specified in the contract and discounted at the counterparties’ credit adjusted risk free rate are recorded as derivative contract assets or liabilities.  For contracts that have unit contingent terms, a further discount is applied based on the historical relationship between contract and market prices for similar contract terms.

The amounts reflected as the fair values of electricity options are valued based on a Black Scholes model, and are calculated at the end of each month for accounting purposes.  Inputs to the valuation  include end of day forward market prices for the period when the transactions will settle, implied volatilities based on market volatilities provided by a third party data aggregator, and US Treasury rates for a risk-free return rate.  As described further below, prices and implied volatilities are reviewed and can be adjusted if it is determined that there is a better representation of fair value.  As of September 30, 2012, Entergy had in-the-money derivative contracts with a fair value of $218 million with counterparties or their guarantor who are all currently investment grade.  $2 million of the derivative contracts as of September 30, 2012 are out-of-the-money contracts supported by corporate guarantees, which would require additional cash or letters of credit in the event of a decrease in Entergy Corporation’s credit rating to below investment grade.

On a daily basis, Entergy Wholesale Commodities calculates the mark-to-market for all derivative transactions.  Entergy Wholesale Commodities Risk Control Group also validates forward market prices by comparing them to settlement prices of actual market transactions.  Significant differences are analyzed and potentially adjusted based on actual transaction clearing prices, or a methodology that considers natural gas prices and market heat rates.  Implied volatilities used to value options are also validated using actual counterparty quotes for Entergy Wholesale Commodities transactions.  Moreover, on at least a monthly basis the Office of Corporate Risk Oversight confirms the mark to market calculations and prepares price scenarios and credit downgrade scenario analysis.  The scenario analysis is communicated to senior management within Entergy and within Entergy Wholesale Commodities.  Finally, for all proposed derivative transactions an analysis is completed to assess the risk of adding the proposed derivative to Entergy Wholesale Commodities’ portfolio.  In particular, the credit, liquidity and financial metrics impacts are calculated for this analysis.  This analysis is communicated to senior management within Entergy and Entergy Wholesale Commodities.

The following tables set forth, by level within the fair value hierarchy, Entergy’s assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2012 and December 31, 2011.  The assessment of the significance of a particular input to a fair value measurement requires judgment and may affect their placement within the fair value hierarchy levels.
 
 
63

Entergy Corporation and Subsidiaries
Notes to Financial Statements



2012
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Temporary cash investments
 
$653
 
$-
 
$-
 
$653
Decommissioning trust funds (a):
               
Equity securities
 
421
 
2,032
 
-
 
2,453
Debt securities
 
707
 
1,016
 
-
 
1,723
Power contracts
 
-
 
-
 
218
 
218
Securitization recovery trust account
 
52
 
-
 
-
 
52
Storm reserve escrow account
 
324
 
-
 
-
 
324
Gas hedge contracts
 
10
 
-
 
-
 
10
   
$2,167
 
$3,048
 
$218
 
$5,433


2011
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Temporary cash investments
 
$613
 
$-
 
$-
 
$613
Decommissioning trust funds (a):
               
Equity securities
 
397
 
1,732
 
-
 
2,129
Debt securities
 
639
 
1,020
 
-
 
1,659
Power contracts
 
-
 
-
 
312
 
312
Securitization recovery trust account
 
50
 
-
 
-
 
50
Storm reserve escrow account
 
335
 
-
 
-
 
335
   
$2,034
 
$2,752
 
$312
 
$5,098
                 
Liabilities:
               
Gas hedge contracts
 
$30
 
$-
 
$-
 
$30

(a)
The decommissioning trust funds hold equity and fixed income securities. Equity securities are invested to approximate the returns of major market indexes.  Fixed income securities are held in various governmental and corporate securities.  See Note 9 for additional information on the investment portfolios.

The following table sets forth a reconciliation of changes in the net assets for the fair value of derivatives classified as Level 3 in the fair value hierarchy for the three months ended September 30, 2012 and 2011:

   
2012
 
2011
   
(In Millions)
         
Balance as of beginning of period,
 
$375 
 
$98 
         
Unrealized gains/(losses) from price changes
 
(96)
 
Unrealized gains on originations
 
 
17 
Realized gains on settlements
 
(61)
 
(48)
         
Balance as of September 30,
 
$218 
 
$70 


 
64

Entergy Corporation and Subsidiaries
Notes to Financial Statements


The following table sets forth a reconciliation of changes in the net assets for the fair value of derivatives classified as Level 3 in the fair value hierarchy for the nine months ended September 30, 2012 and 2011:

   
2012
 
2011
   
(In Millions)
         
Balance as of January 1,
 
$312 
 
$197 
         
Unrealized gains/(losses) from price changes
 
131 
 
(33)
Unrealized gains on originations
 
 
15 
Realized gains on settlements
 
(232)
 
(109)
         
Balance as of September 30,
 
$218 
 
$70 

The following table sets forth a description of the types of transactions classified as Level 3 in the fair value hierarchy, and the valuation techniques and significant unobservable inputs to each which cause that classification, as of September 30, 2012:

 
 
 
 
 
Transaction Type
 
 
 
Fair Value
as of
September 30,
2012
 
 
 
 
 
Significant
Unobservable Inputs
 
 
 
Range
from
Average
%
 
 
 
 
 
Effect on
Fair Value
                 
Electricity swaps
 
$140 million
 
Unit contingent discount
 
+/-3%
 
$7 million
Electricity options
 
$78 million
 
Implied volatility
 
+/-9%
 
$39 million

The following table sets forth an analysis of each of the types of unobservable inputs impacting the fair value of items classified as Level 3 within the fair value hierarchy, and the sensitivity to changes to those inputs:

 
Significant
Unobservable
Input
 
 
 
 
Transaction Type
 
 
 
 
Position
 
 
 
 
Change to Input
 
 
 
Effect on
Fair Value
                 
Unit contingent
discount
 
 
Electricity swaps
 
 
Sell
 
 
Increase (Decrease)
 
 
Decrease (Increase)
Implied volatility
 
Electricity options
 
Sell
 
Increase (Decrease)
 
Increase (Decrease)
Implied volatility
 
Electricity options
 
Buy
 
Increase (Decrease)
 
Increase (Decrease)

The following table sets forth, by level within the fair value hierarchy, the Registrant Subsidiaries’ assets that are accounted for at fair value on a recurring basis as of September 30, 2012 and December 31, 2011.  The assessment of the significance of a particular input to a fair value measurement requires judgment and may affect its placement within the fair value hierarchy levels.


 
65

Entergy Corporation and Subsidiaries
Notes to Financial Statements


Entergy Arkansas

2012
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Temporary cash investments
 
$36.2
 
$-
 
$-
 
$36.2
Decommissioning trust funds (a):
               
Equity securities
 
5.0
 
373.8
 
-
 
378.8
Debt securities
 
95.6
 
125.5
 
-
 
221.1
Securitization recovery trust account
 
8.4
 
-
 
-
 
8.4
   
$145.2
 
$499.3
 
$-
 
$644.5

2011
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Temporary cash investments
 
$17.9
 
$-
 
$-
 
$17.9
Decommissioning trust funds (a):
               
Equity securities
 
6.3
 
323.1
 
-
 
329.4
Debt securities
 
82.8
 
129.5
 
-
 
212.3
Securitization recovery trust account
 
3.9
 
-
 
-
 
3.9
   
$110.9
 
$452.6
 
$-
 
$563.5

Entergy Gulf States Louisiana

2012
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Temporary cash investments
 
$156.3
 
$-
 
$-
 
$156.3
Decommissioning trust funds (a):
               
Equity securities
 
7.8
 
281.6
 
-
 
289.4
Debt securities
 
39.7
 
145.9
 
-
 
185.6
Storm reserve escrow account
 
87.0
 
-
 
-
 
87.0
Gas hedge contracts
 
3.0
 
-
 
-
 
3.0
   
$293.8
 
$427.5
 
$-
 
$721.3

2011
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Temporary cash investments
 
$24.6
 
$-
 
$-
 
$24.6
Decommissioning trust funds (a):
               
Equity securities
 
5.1
 
233.6
 
-
 
238.7
Debt securities
 
39.5
 
142.7
 
-
 
182.2
Storm reserve escrow account
 
90.2
 
-
 
-
 
90.2
   
$159.4
 
$376.3
 
$-
 
$535.7
                 
Liabilities:
               
   Gas hedge contracts
 
$8.6
 
$-
 
$-
 
$8.6
 
 

 
66

Entergy Corporation and Subsidiaries
Notes to Financial Statements


Entergy Louisiana

2012
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Temporary cash investments
 
$148.5
 
$-
 
$-
 
$148.5
Decommissioning trust funds (a):
               
Equity securities
 
1.3
 
172.7
 
-
 
174.0
Debt securities
 
52.9
 
58.6
 
-
 
111.5
Securitization recovery trust account
 
11.8
 
-
 
-
 
11.8
Storm reserve escrow account
 
186.9
 
-
 
-
 
186.9
Gas hedge contracts
 
4.8
 
-
 
-
 
4.8
   
$406.2
 
$231.3
 
$-
 
$637.5

2011
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Decommissioning trust funds (a):
               
Equity securities
 
$2.9
 
$146.3
 
$-
 
$149.2
Debt securities
 
51.6
 
53.2
 
-
 
104.8
Securitization recovery trust account
 
5.2
 
-
 
-
 
5.2
Storm reserve escrow account
 
201.2
 
-
 
-
 
201.2
   
$260.9
 
$199.5
 
$-
 
$460.4
                 
Liabilities:
               
Gas hedge contracts
 
$12.4
 
$-
 
$-
 
$12.4

Entergy Mississippi

2012
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Temporary cash investments
 
$26.6
 
$-
 
$-
 
$26.6
Storm reserve escrow account
 
31.8
 
-
 
-
 
31.8
Gas hedge contracts
 
2.3
 
-
 
-
 
2.3
   
$60.7
 
$-
 
$-
 
$60.7

2011
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Storm reserve escrow account
 
$31.8
 
$-
 
$-
 
$31.8
                 
Liabilities:
               
        Gas hedge contracts
 
$7.8
 
$-
 
$-
 
$7.8


 
67

Entergy Corporation and Subsidiaries
Notes to Financial Statements



Entergy New Orleans

2012
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Storm reserve escrow account
 
$18.8
 
$-
 
$-
 
$18.8

2011
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Temporary cash investments
 
$9.3
 
$-
 
$-
 
$9.3
Storm reserve escrow account
 
12.0
 
-
 
-
 
12.0
   
$21.3
 
$-
 
$-
 
$21.3
                 
Liabilities:
               
        Gas hedge contracts
 
$1.5
 
$-
 
$-
 
$1.5

Entergy Texas

2012
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Temporary cash investments
 
$62.8
 
$-
 
$-
 
$62.8
Securitization recovery trust account
 
32.1
 
-
 
-
 
32.1
   
$94.9
 
$-
 
$-
 
$94.9

2011
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Temporary cash investments
 
$65.1
 
$-
 
$-
 
$65.1
Securitization recovery trust account
 
41.2
 
-
 
-
 
41.2
   
$106.3
 
$-
 
$-
 
$106.3

System Energy

2012
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Temporary cash investments
 
$19.8
 
$-
 
$-
 
$19.8
Decommissioning trust funds (a):
               
Equity securities
 
0.5
 
279.5
 
-
 
280.0
Debt securities
 
138.5
 
65.7
 
-
 
204.2
   
$158.8
 
$345.2
 
$-
 
$504.0


 
68

Entergy Corporation and Subsidiaries
Notes to Financial Statements



2011
 
Level 1
 
Level 2
 
Level 3
 
Total
   
(In Millions)
Assets:
               
Temporary cash investments
 
$154.2
 
$-
 
$-
 
$154.2
Decommissioning trust funds (a):
               
Equity securities
 
2.7
 
234.5
 
-
 
237.2
Debt securities
 
123.2
 
63.0
 
-
 
186.2
   
$280.1
 
$297.5
 
$-
 
$577.6

(a)
The decommissioning trust funds hold equity and fixed income securities. Equity securities are invested to approximate the returns of major market indices.  Fixed income securities are held in various governmental and corporate securities.  See Note 9 for additional information on the investment portfolios.


NOTE 9.  DECOMMISSIONING TRUST FUNDS (Entergy Corporation, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, and System Energy)

Entergy holds debt and equity securities, classified as available-for-sale, in nuclear decommissioning trust accounts.  The NRC requires Entergy subsidiaries to maintain trusts to fund the costs of decommissioning ANO 1, ANO 2, River Bend, Waterford 3, Grand Gulf, Pilgrim, Indian Point 1 and 2, Vermont Yankee, and Palisades (NYPA currently retains the decommissioning trusts and liabilities for Indian Point 3 and FitzPatrick).  The funds are invested primarily in equity securities, fixed-rate fixed-income securities, and cash and cash equivalents.

Entergy records decommissioning trust funds on the balance sheet at their fair value.  Because of the ability of the Registrant Subsidiaries to recover decommissioning costs in rates and in accordance with the regulatory treatment for decommissioning trust funds, the Registrant Subsidiaries have recorded an offsetting amount of unrealized gains/(losses) on investment securities in other regulatory liabilities/assets.  For the nonregulated portion of River Bend, Entergy Gulf States Louisiana has recorded an offsetting amount of unrealized gains/(losses) in other deferred credits.  Decommissioning trust funds for Pilgrim, Indian Point 1 and 2, Vermont Yankee, and Palisades do not meet the criteria for regulatory accounting treatment.  Accordingly, unrealized gains recorded on the assets in these trust funds are recognized in the accumulated other comprehensive income component of shareholders’ equity because these assets are classified as available for sale.  Unrealized losses (where cost exceeds fair market value) on the assets in these trust funds are also recorded in the accumulated other comprehensive income component of shareholders’ equity unless the unrealized loss is other than temporary and therefore recorded in earnings.  Generally, Entergy records realized gains and losses on its debt and equity securities using the specific identification method to determine the cost basis of its securities.

The securities held as of September 30, 2012 and December 31, 2011 is summarized as follows:

   
 
Fair
Value
 
Total
Unrealized
Gains
 
Total
Unrealized
Losses
   
(In Millions)
2012
           
Equity Securities
 
$2,453
 
$673
 
$2
Debt Securities
 
1,723
 
126
 
4
  Total
 
$4,176
 
$799
 
$6
             
2011
           
Equity Securities
 
$2,129
 
$423
 
$14
Debt Securities
 
1,659
 
115
 
5
  Total
 
$3,788
 
$538
 
$19
 
 
69

Entergy Corporation and Subsidiaries
Notes to Financial Statements



Deferred taxes on unrealized gains/(losses) are recorded in other comprehensive income for the decommissioning trusts which do not meet the criteria for regulatory accounting treatment as described above.  Unrealized gains/(losses) above are reported before deferred taxes of $217 million and $149 million as of September 30, 2012 and December 31, 2011, respectively.  The amortized cost of debt securities was $1,612 million as of September 30, 2012 and $1,530 million as of December 31, 2011.  As of September 30, 2012, the debt securities have an average coupon rate of approximately 3.88%, an average duration of approximately 5.53 years, and an average maturity of approximately 8.55 years.  The equity securities are generally held in funds that are designed to approximate or somewhat exceed the return of the Standard & Poor’s 500 Index.  A relatively small percentage of the securities are held in funds intended to replicate the return of the Wilshire 4500 Index or the Russell 3000 Index.

The fair value and gross unrealized losses of available-for-sale equity and debt securities, summarized by investment type and length of time that the securities have been in a continuous loss position, are as follows as of September 30, 2012:

   
Equity Securities
 
Debt Securities
   
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
Gross
Unrealized
Losses
   
(In Millions)
                 
Less than 12 months
 
$24
 
$2
 
$81
 
$1
More than 12 months
 
13
 
-
 
50
 
3
  Total
 
$37
 
$2
 
$131
 
$4

The fair value and gross unrealized losses of available-for-sale equity and debt securities, summarized by investment type and length of time that the securities have been in a continuous loss position, are as follows as of December 31, 2011:

   
Equity Securities
 
Debt Securities
   
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
Gross
Unrealized
Losses
   
(In Millions)
                 
Less than 12 months
 
$130
 
$9
 
$123
 
$3
More than 12 months
 
43
 
5
 
60
 
2
  Total
 
$173
 
$14
 
$183
 
$5

The unrealized losses in excess of twelve months on equity securities above relate to Entergy’s Utility operating companies and System Energy.


 
70

Entergy Corporation and Subsidiaries
Notes to Financial Statements



The fair value of debt securities, summarized by contractual maturities, as of September 30, 2012 and December 31, 2011 are as follows:

   
2012
 
2011
   
(In Millions)
Less than 1 year
 
$46
 
$69
1 year - 5 years
 
666
 
566
5 years - 10 years
 
557
 
583
10 years - 15 years
 
188
 
187
15 years - 20 years
 
53
 
42
20 years+
 
213
 
212
  Total
 
$1,723
 
$1,659

During the three months ended September 30, 2012 and 2011, proceeds from the dispositions of securities amounted to $472 million and $417 million, respectively.  During the three months ended September 30, 2012 and 2011, gross gains of $8 million and $12 million, respectively, and gross losses of $212 thousand and $3 million, respectively, were reclassified out of other comprehensive income into earnings.

During the nine months ended September 30, 2012 and 2011, proceeds from the dispositions of securities amounted to $1,417 million and $1,053 million, respectively.  During the nine months ended September 30, 2012 and 2011, gross gains of $32 million and $21 million, respectively, and gross losses of $5 million and $9 million, respectively, were reclassified out of other comprehensive income into earnings.

Entergy Arkansas

Entergy Arkansas holds debt and equity securities, classified as available-for-sale, in nuclear decommissioning trust accounts.  The securities held as of September 30, 2012 and December 31, 2011 is summarized as follows:

   
 
Fair
Value
 
Total
Unrealized
Gains
 
Total
Unrealized
Losses
   
(In Millions)
2012
           
Equity Securities
 
$378.8
 
$117.2
 
$-
Debt Securities
 
221.1
 
16.2
 
0.1
Total
 
$599.9
 
$133.4
 
$0.1
             
2011
           
Equity Securities
 
$329.4
 
$70.9
 
$0.4
Debt Securities
 
212.3
 
15.2
 
0.4
Total
 
$541.7
 
$86.1
 
$0.8

The amortized cost of debt securities was $205 million as of September 30, 2012 and $197.5 million as of December 31, 2011.  As of September 30, 2012, the debt securities have an average coupon rate of approximately 3.35%, an average duration of approximately 5.12 years, and an average maturity of approximately 5.82 years.  The equity securities are generally held in funds that are designed to approximate the return of the Standard & Poor’s 500 Index.  A relatively small percentage of the securities are held in funds intended to replicate the return of the Wilshire 4500 Index.


 
71

Entergy Corporation and Subsidiaries
Notes to Financial Statements



The fair value and gross unrealized losses of available-for-sale equity and debt securities, summarized by investment type and length of time that the securities have been in a continuous loss position, are as follows as of September 30, 2012:

   
Equity Securities
 
Debt Securities
   
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
Gross
Unrealized
Losses
   
(In Millions)
                 
Less than 12 months
 
$0.1
 
$-
 
$10.1
 
$0.1
More than 12 months
 
-
 
-
 
1.0
 
-
Total
 
$0.1
 
$-
 
$11.1
 
$0.1

The fair value and gross unrealized losses of available-for-sale equity and debt securities, summarized by investment type and length of time that the securities have been in a continuous loss position, are as follows as of December 31, 2011:

   
Equity Securities
 
Debt Securities
   
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
Gross
Unrealized
Losses
   
(In Millions)
                 
Less than 12 months
 
$13.7
 
$0.4
 
$14.3
 
$0.4
More than 12 months
 
-
 
-
 
1.0
 
-
Total
 
$13.7
 
$0.4
 
$15.3
 
$0.4

The fair value of debt securities, summarized by contractual maturities, as of September 30, 2012 and December 31, 2011 are as follows:

   
2012
 
2011
   
(In Millions)
         
Less than 1 year
 
$12.6
 
$7.8
1 year - 5 years
 
101.0
 
86.5
5 years - 10 years
 
95.7
 
109.1
10 years - 15 years
 
4.8
 
2.7
20 years+
 
7.0
 
6.2
Total
 
$221.1
 
$212.3

During the three months ended September 30, 2012 and 2011, proceeds from the dispositions of securities amounted to $15 million and $36.5 million, respectively.  During the three months ended September 30, 2012 and 2011, gross gains of $0.1 million and $2.2 million, respectively, and gross losses of $0.01 million and $0.1 million, respectively, were reclassified out of other comprehensive income into earnings.

During the nine months ended September 30, 2012 and 2011, proceeds from the dispositions of securities amounted to $103.4 million and $82.7 million, respectively.  During the nine months ended September 30, 2012 and 2011, gross gains of $2.8 million and $3.5 million, respectively, and gross losses of $0.05 million and $0.1 million, respectively, were reclassified out of other comprehensive income into earnings.


 
72

Entergy Corporation and Subsidiaries
Notes to Financial Statements



Entergy Gulf States Louisiana

Entergy Gulf States Louisiana holds debt and equity securities, classified as available-for-sale, in nuclear decommissioning trust accounts.  The securities held as of September 30, 2012 and December 31, 2011 is summarized as follows:

   
 
Fair
Value
 
Total
Unrealized
Gains
 
Total
Unrealized
Losses
   
(In Millions)
2012
           
Equity Securities
 
$289.4
 
$71.4
 
$-
Debt Securities
 
185.6
 
16.8
 
-
Total
 
$475.0
 
$88.2
 
$-
             
2011
           
Equity Securities
 
$238.7
 
$40.9
 
$0.8
Debt Securities
 
182.2
 
15.2
 
0.3
Total
 
$420.9
 
$56.1
 
$1.1

The amortized cost of debt securities was $169.1 million as of September 30, 2012 and $166.9 million as of December 31, 2011.  As of September 30, 2012, the debt securities have an average coupon rate of approximately 4.68%, an average duration of approximately 5.59 years, and an average maturity of approximately 8.64 years.  The equity securities are generally held in funds that are designed to approximate the return of the Standard & Poor’s 500 Index.  A relatively small percentage of the securities are held in funds intended to replicate the return of the Wilshire 4500 Index.

The fair value and gross unrealized losses of available-for-sale equity and debt securities, summarized by investment type and length of time that the securities have been in a continuous loss position, are as follows as of September 30, 2012:

   
Equity Securities
 
Debt Securities
   
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
Gross
Unrealized
Losses
   
(In Millions)
                 
Less than 12 months
 
$0.1
 
$-
 
$1.8
 
$-
More than 12 months
 
0.5
 
-
 
-
 
-
  Total
 
$0.6
 
$-
 
$1.8
 
$-


 
73

Entergy Corporation and Subsidiaries
Notes to Financial Statements



The fair value and gross unrealized losses of available-for-sale equity and debt securities, summarized by investment type and length of time that the securities have been in a continuous loss position, are as follows as of December 31, 2011:

   
Equity Securities
 
Debt Securities
   
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
Gross
Unrealized
Losses
   
(In Millions)
                 
Less than 12 months
 
$14.0
 
$0.5
 
$9.3
 
$0.2
More than 12 months
 
2.7
 
0.3
 
1.1
 
0.1
  Total
 
$16.7
 
$0.8
 
$10.4
 
$0.3

The fair value of debt securities, summarized by contractual maturities, as of September 30, 2012 and December 31, 2011 are as follows:

   
2012
 
2011
   
(In Millions)
         
Less than 1 year
 
$6.3
 
$7.1
1 year - 5 years
 
42.1
 
40.8
5 years - 10 years
 
56.3
 
53.5
10 years - 15 years
 
65.6
 
62.9
15 years - 20 years
 
6.0
 
3.2
20 years+
 
9.3
 
14.7
  Total
 
$185.6
 
$182.2

During the three months ended September 30, 2012 and 2011, proceeds from the dispositions of securities amounted to $35.9 million and $35.9 million, respectively.  During the three months ended September 30, 2012 and 2011, gross gains of $3.9 million and $0.8 million, respectively, and gross losses of $0.7 thousand and $0.4 million, respectively, were reclassified out of other comprehensive income into earnings.

During the nine months ended September 30, 2012 and 2011, proceeds from the dispositions of securities amounted to $96.7 million and $56.5 million, respectively.  During the nine months ended September 30, 2012 and 2011, gross gains of $6.4 million and $1.3 million, respectively, and gross losses of $0.03 million and $0.5 million, respectively, were reclassified out of other comprehensive income into earnings.


 
74

Entergy Corporation and Subsidiaries
Notes to Financial Statements


Entergy Louisiana

Entergy Louisiana holds debt and equity securities, classified as available-for-sale, in nuclear decommissioning trust accounts.  The securities held as of September 30, 2012 and December 31, 2011 is summarized as follows:

   
 
Fair
Value
 
Total
Unrealized
Gains
 
Total
Unrealized
Losses
   
(In Millions)
2012
           
Equity Securities
 
$174.0
 
$49.3
 
$-
Debt Securities
 
111.5
 
10.1
 
0.1
Total
 
$285.5
 
$59.4
 
$0.1
             
2011
           
Equity Securities
 
$149.2
 
$29.7
 
$1.6
Debt Securities
 
104.8
 
8.8
 
0.2
Total
 
$254.0
 
$38.5
 
$1.8

The amortized cost of debt securities was $101.6 million as of September 30, 2012 and $91.9 million as of December 31, 2011.  As of September 30, 2012, the debt securities have an average coupon rate of approximately 3.74%, an average duration of approximately 5.45 years, and an average maturity of approximately 9.69 years.  The equity securities are generally held in funds that are designed to approximate the return of the Standard & Poor’s 500 Index.  A relatively small percentage of the securities are held in funds intended to replicate the return of the Wilshire 4500 Index.

The fair value and gross unrealized losses of available-for-sale equity and debt securities, summarized by investment type and length of time that the securities have been in a continuous loss position, are as follows as of September 30, 2012:

   
Equity Securities
 
Debt Securities
   
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
Gross
Unrealized
Losses
   
(In Millions)
                 
Less than 12 months
 
$0.1
 
$-
 
$1.4
 
$-
More than 12 months
 
2.8
 
-
 
0.6
 
0.1
  Total
 
$2.9
 
$-
 
$2.0
 
$0.1


 
75

Entergy Corporation and Subsidiaries
Notes to Financial Statements


The fair value and gross unrealized losses of available-for-sale equity and debt securities, summarized by investment type and length of time that the securities have been in a continuous loss position, are as follows as of December 31, 2011:

   
Equity Securities
 
Debt Securities
   
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
Gross
Unrealized
Losses
   
(In Millions)
                 
Less than 12 months
 
$11.6
 
$0.3
 
$5.5
 
$0.2
More than 12 months
 
10.0
 
1.3
 
0.2
 
-
  Total
 
$21.6
 
$1.6
 
$5.7
 
$0.2

The fair value of debt securities, summarized by contractual maturities, as of September 30, 2012 and December 31, 2011 are as follows:

   
2012
 
2011
   
(In Millions)
         
Less than 1 year
 
$2.6
 
$3.9
1 year - 5 years
 
40.6
 
39.8
5 years - 10 years
 
24.9
 
22.2
10 years - 15 years
 
19.7
 
18.9
15 years - 20 years
 
1.0
 
2.2
20 years+
 
22.7
 
17.8
  Total
 
$111.5
 
$104.8

During the three months ended September 30, 2012 and 2011, proceeds from the dispositions of securities amounted to $9.5 million and $3.7 million, respectively.  During the three months ended September 30, 2012 and 2011, gross gains of $0.1 million and $0 million, respectively, and gross losses of $0.5 thousand and $0.04 million, respectively, were reclassified out of other comprehensive income into earnings.

During the nine months ended September 30, 2012 and 2011, proceeds from the dispositions of securities amounted to $19.8 million and $11.5 million, respectively.  During the nine months ended September 30, 2012 and 2011, gross gains of $0.2 million and $0.09 million, respectively, and gross losses of $0.03 million and $0.07 million, respectively, were reclassified out of other comprehensive income into earnings.


 
76

Entergy Corporation and Subsidiaries
Notes to Financial Statements


System Energy

System Energy holds debt and equity securities, classified as available-for-sale, in nuclear decommissioning trust accounts.  The securities held as of September 30, 2012 and December 31, 2011 is summarized as follows:

   
 
Fair
Value
 
Total
Unrealized
Gains
 
Total
Unrealized
Losses
   
(In Millions)
2012
           
Equity Securities
 
$280.0
 
$64.5
 
$0.1
Debt Securities
 
204.2
 
9.9
 
-
Total
 
$484.2
 
$74.4
 
$0.1
             
2011
           
Equity Securities
 
$237.2
 
$35.4
 
$5.4
Debt Securities
 
186.2
 
9.5
 
0.1
Total
 
$423.4
 
$44.9
 
$5.5

The amortized cost of debt securities was $194.3 million as of September 30, 2012 and $175.1 million as of December 31, 2011.  As of September 30, 2012, the debt securities have an average coupon rate of approximately 2.67%, an average duration of approximately 4.74 years, and an average maturity of approximately 6.35 years.  The equity securities are generally held in funds that are designed to approximate the return of the Standard & Poor’s 500 Index.  A relatively small percentage of the securities are held in funds intended to replicate the return of the Wilshire 4500 Index.

The fair value and gross unrealized losses of available-for-sale equity and debt securities, summarized by investment type and length of time that the securities have been in a continuous loss position, are as follows as of September 30, 2012:

   
Equity Securities
 
Debt Securities
   
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
Gross
Unrealized
Losses
   
(In Millions)
                 
Less than 12 months
 
$0.7
 
$-
 
$11.6
 
$-
More than 12 months
 
8.3
 
0.1
 
-
 
-
  Total
 
$9.0
 
$0.1
 
$11.6
 
$-


 
77

Entergy Corporation and Subsidiaries
Notes to Financial Statements


The fair value and gross unrealized losses of available-for-sale equity and debt securities, summarized by investment type and length of time that the securities have been in a continuous loss position, are as follows as of December 31, 2011:

   
Equity Securities
 
Debt Securities
   
 
Fair
Value
 
Gross
Unrealized
Losses
 
 
Fair
Value
 
Gross
Unrealized
Losses
   
(In Millions)
                 
Less than 12 months
 
$41.3
 
$1.8
 
$10.5
 
$0.1
More than 12 months
 
30.0
 
3.6
 
-
 
-
  Total
 
$71.3
 
$5.4
 
$10.5
 
$0.1
 
 
The fair value of debt securities, summarized by contractual maturities, as of September 30, 2012 and December 31, 2011 are as follows:

   
2012
 
2011
   
(In Millions)
         
Less than 1 year
 
$5.5
 
$10.2
1 year - 5 years
 
121.0
 
94.6
5 years - 10 years
 
53.8
 
57.9
10 years - 15 years
 
1.6
 
2.6
15 years - 20 years
 
2.2
 
2.9
20 years+
 
20.1
 
18.0
  Total
 
$204.2
 
$186.2

During the three months ended September 30, 2012 and 2011, proceeds from the dispositions of securities amounted to $91.8 million and $60.4 million, respectively.  During the three months ended September 30, 2012 and 2011, gross gains of $0.5 million and $1.6 million, respectively, and gross losses of $0.05 million and $0.04 million, respectively, were reclassified out of other comprehensive income into earnings.

During the nine months ended September 30, 2012 and 2011, proceeds from the dispositions of securities amounted to $315.0 million and $166.9 million, respectively.  During the nine months ended September 30, 2012 and 2011, gross gains of $3.5 million and $2.1 million, respectively, and gross losses of $0.2 million and $1 million, respectively, were reclassified out of other comprehensive income into earnings.

Other-than-temporary impairments and unrealized gains and losses

Entergy, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, and System Energy evaluate unrealized losses at the end of each period to determine whether an other-than-temporary impairment has occurred.  The assessment of whether an investment in a debt security has suffered an other-than-temporary impairment is based on whether Entergy has the intent to sell or more likely than not will be required to sell the debt security before recovery of its amortized costs.  Further, if Entergy does not expect to recover the entire amortized cost basis of the debt security, an other-than-temporary impairment is considered to have occurred and it is measured by the present value of cash flows expected to be collected less the amortized cost basis (credit loss).  Entergy did not have any material other-than-temporary impairments relating to credit losses on debt securities for the three and nine months ended September 30, 2012 and 2011.  The assessment of whether an investment in an equity security has suffered an other-than-temporary impairment continues to be based on a number of factors including, first, whether Entergy has the ability and intent to hold the investment to recover its value, the duration and severity of any losses, and, then, whether it is expected that the investment will recover its value within a reasonable period of time.  Entergy’s trusts are managed by third parties who operate in accordance with agreements that define investment guidelines and place restrictions on the purchases and sales of investments.  Entergy did not record material
 
 
 
78

Entergy Corporation and Subsidiaries
Notes to Financial Statements


charges to other income in the three and nine months ended September 30, 2012 and 2011, respectively, resulting from the recognition of the other-than-temporary impairment of certain equity securities held in its decommissioning trust funds.


NOTE 10.  INCOME TAXES (Entergy Corporation, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, Entergy Texas, and System Energy)

See Income Tax Litigation, Income Tax Audits, and Other Tax Matters in Note 3 to the financial statements in the Form 10-K for a discussion of income tax proceedings, income tax audits, and other income tax matters involving Entergy.  Following are updates to that discussion.

Income Tax Litigation

As discussed in the Form 10-K, in October 2010 the United States Tax Court entered a decision in favor of Entergy for tax years 1997 and 1998 regarding Entergy's entitlement to a tax credit for its U.K. Windfall Taxes paid in those years.  In June 2012, the U.S. Court of Appeals for the Fifth Circuit unanimously affirmed the U.S. Tax Court decision.  As a result of this decision, Entergy reversed its liability for uncertain tax positions associated with this issue.  On September 4, 2012, the U.S. Solicitor General, on behalf of the Commissioner of Internal Revenue, petitioned the U.S. Supreme Court for a writ of certiorari to review the Fifth Circuit judgment.  PPL Corp. had previously petitioned the U.S. Supreme Court for a writ of certiorari to review the U.S. Court of Appeals for the Third Circuit decision in PPL Corp. v. Commissioner, in which the Third Circuit held that the same U.K. tax was not a creditable tax.  On October 29, 2012, the U.S. Supreme Court granted PPL Corp.’s petition for certiorari.  The outcome in Entergy's case will be determined by the U.S. Supreme Court's decision in the PPL Corp. proceeding.

Income Tax Audits

2008-2009 IRS Audit
 
In the third quarter 2008, Entergy Louisiana and Entergy Gulf States Louisiana received $679 million and $274.7 million, respectively, from the Louisiana Utilities Restoration Corporation (“LURC”).  These receipts from LURC were from the proceeds of a Louisiana Act 55 financing of the costs incurred to restore service following Hurricane Katrina and Hurricane Rita.  See Note 2 to the financial statements in the Form 10-K for further details regarding the financings.

In June 2012, Entergy effectively settled the tax treatment of the receipt of these funds, which resulted in an income tax benefit of $172 million for Entergy, including $143 million for Entergy Louisiana and $20 million for Entergy Gulf States Louisiana, which includes the effect of reversing liabilities for uncertain tax positions. Under the terms of an LPSC-approved settlement related to the benefits associated with Louisiana Act 55 financings, Entergy Louisiana and Entergy Gulf States Louisiana recorded, respectively, a $137 million ($84 million net-of-tax) and a $28 million ($17 million net-of-tax) regulatory charge and a corresponding regulatory liability to reflect their obligations to share the benefits with customers.


NOTE 11.  PROPERTY, PLANT, AND EQUIPMENT (Entergy Corporation, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, Entergy Texas, and System Energy)

Construction Expenditures in Accounts Payable

Construction expenditures included in accounts payable at September 30, 2012 are $315.1 million for Entergy, $12.4 million for Entergy Arkansas, $47.2 million for Entergy Gulf States Louisiana, $159.5 million for Entergy Louisiana, $15 million for Entergy Mississippi, $15.3 million for Entergy New Orleans, $3.5 million for Entergy Texas, and $24.8 million for System Energy. Construction expenditures included in accounts payable at December 31, 2011 are $171.2 million for Entergy, $14.1 million for Entergy Arkansas, $13.7 million for Entergy Gulf States Louisiana, $27 million for Entergy Louisiana, $4.3 million for Entergy Mississippi, $3.6 million for Entergy New Orleans, $4.3 million for Entergy Texas, and $32.9 million for System Energy.
 
 
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Entergy Corporation and Subsidiaries
Notes to Financial Statements



Vermont Yankee

In March 2011 the NRC renewed Vermont Yankee’s operating license for an additional 20 years.  The renewed operating license expires in March 2032.  In May 2011 the Vermont Department of Public Service and the New England Coalition petitioned the United States Court of Appeals for the D.C. Circuit seeking judicial review of the NRC’s issuance of the renewed operating license, alleging that the license had been issued without a valid and effective water quality certification under Section 401 of the Clean Water Act.  Entergy Nuclear Vermont Yankee and Entergy Nuclear Operations, Inc. intervened in the proceeding. In June 2012 the Court of Appeals denied the appeal on the ground that the petitioners had failed to exhaust their administrative remedies before the NRC.  The time for seeking further judicial review of the NRC’s issuance of Vermont Yankee’s renewed operating license has expired.

Vermont Yankee also is operating under a Certificate of Public Good from the State of Vermont that was scheduled to expire in March 2012, but has an application pending before the Vermont Public Service Board (VPSB) for a new Certificate of Public Good for operation until March 2032.  In April 2011, Entergy Nuclear Vermont Yankee and Entergy Nuclear Operations, the owner and operator respectively of Vermont Yankee, filed suit in the United States District Court for the District of Vermont.  The suit challenged certain conditions imposed by Vermont upon Vermont Yankee’s continued operation and storage of spent nuclear fuel, including the requirement to obtain not only a new Certificate of Public Good, but also approval by Vermont’s General Assembly.  In January 2012 the court entered judgment in Entergy’s favor and specifically:

·  
Declared that Vermont’s laws requiring Vermont Yankee to cease operation in March 2012 and prohibiting the storage of spent nuclear fuel from operation after that date, absent approval by the General Assembly, were based on radiological safety concerns and are preempted by the Atomic Energy Act;
·  
Permanently enjoined Vermont from enforcing these preempted requirements of the state’s laws; and
·  
Permanently enjoined Vermont under the Commerce Clause of the United States Constitution from conditioning the issuance of a new Certificate of Public Good upon the existence of a below wholesale market power sale agreement with Vermont utilities or Vermont Yankee’s selling power to Vermont utilities at rates below those available to wholesale customers in other states.

In February 2012 the Vermont defendants appealed the decision to the United States Court of Appeals for the Second Circuit. Vermont Yankee cross-appealed on two grounds: (1) the Federal Power Act alternatively preempts conditioning the issuance of a new Certificate of Public Good upon the existence of a below wholesale market power sale agreement with Vermont utilities or Vermont Yankee’s selling power to Vermont utilities at rates below those available to wholesale customers in other states (an issue the District Court found unnecessary to decide in light of its ruling under the Commerce Clause); and (2) a request to make permanent the injunction pending appeal that the District Court entered on March 19, 2012 which prohibits Vermont from enforcing a statutory provision to compel Vermont Yankee to shut down because the cumulative total amount of spent fuel stored at the site exceeds the amount derived from the operation of the facility up to, but not beyond, March 21, 2012 (a provision the enforcement of which the January 2012 decision had not enjoined).  The appeal and cross-appeal remain pending.

In January 2012, Entergy filed a motion requesting that the VPSB grant, based on the existing record in its proceeding, Vermont Yankee’s pending application for a new Certificate of Public Good.  Entergy subsequently filed another motion asking the VPSB to declare that title 3, section 814(b) of the Vermont statutes (3 V.S.A. § 814(b)) authorized Vermont Yankee to operate while the Certificate of Public Good proceeding was pending because Entergy had timely filed a petition for a new Certificate of Public Good that had not yet been decided.  In March 2012, the VPSB issued orders denying Entergy’s motion with respect to 3 V.S.A. § 814(b) but stating that the order did not require Vermont Yankee to cease operations, denying Entergy’s motion to issue a new Certificate of Public Good based on the existing record, determining to open a new docket and to create a new record to decide Vermont Yankee’s request
for a new Certificate of Public Good (without prejudice to any rights that Entergy might have under 3 V.S.A. § 814(b)), and directing Entergy to file an amended Certificate of Public Good petition that identified the specific approvals it was seeking in light of the district court’s decision.  In April 2012, Entergy filed its amended Certificate of Public Good petition and in June 2012 filed its initial testimony in support of that petition.  The VPSB’s current schedule provides for proceedings concerning that petition to continue until August 2013.

 
 
 
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Entergy Corporation and Subsidiaries
Notes to Financial Statements


In September 2012, Entergy filed a petition asking the VPSB to issue a Certificate of Public Good allowing construction at Vermont Yankee for a diesel generator to provide power in the event of a station blackout.  Vermont Yankee currently can obtain such power from the Vernon Dam.  Due to changes instituted by ISO-New England, Vermont Yankee will no longer be able to rely upon the Vernon Dam in the event of a station blackout after August 31, 2013 and therefore plans to install a new diesel generator as a replacement power source.  The VPSB requested and received comments on Entergy’s September 2012 petition and its relationship to Entergy’s other petition for a Certificate of Public Good, but has not yet provided a schedule for its consideration of the September 2012 petition.

Impairment

Because of the uncertainty regarding the continued operation of Vermont Yankee, Entergy has tested the recoverability of the plant and related assets each quarter since the first quarter 2010.  The determination of recoverability is based on the probability-weighted undiscounted net cash flows expected to be generated by the plant and related assets.  Projected net cash flows primarily depend on the status of the pending legal and state regulatory matters, as well as projections of future revenues and expenses over the remaining life of the plant.  Prior to the first quarter 2012, the probability-weighted undiscounted net cash flows exceeded the carrying value of the Vermont Yankee plant and related assets.  The decline, however, in the overall energy market and the projected forward prices of power as of March 31, 2012, which are significant inputs in the determination of net cash flows, resulted in the probability-weighted undiscounted future cash flows being less than the asset group’s carrying value.  Entergy performed a fair value analysis based on the income approach, a discounted cash flow method, to determine the amount of impairment. The estimated fair value of the plant and related assets at March 31, 2012 was $162.0 million, while the carrying value was $517.5 million.  Therefore, the assets were written down to their fair value and an impairment charge of $355.5 million ($223.5 million after-tax) was recognized.  The impairment charge is recorded as a separate line item in Entergy’s consolidated statement of income for the nine months ended September 30, 2012, and is included within the results of the Entergy Wholesale Commodities segment.

The estimate of fair value was based on the price that Entergy would expect to receive in a hypothetical sale of the Vermont Yankee plant and related assets to a market participant on March 31, 2012.  In order to determine this price, Entergy used significant observable inputs, including quoted forward power and gas prices, where available.  Significant unobservable inputs, such as projected long-term pre-tax operating margins (cash basis), and estimated weighted average costs of capital were also used in the estimation of fair value.  In addition, Entergy made certain assumptions regarding future tax deductions associated with the plant and related assets.  Based on the use of significant unobservable inputs, the fair value measurement for the entirety of the asset group, and for each type of asset within the asset group, is classified as Level 3 in the fair value hierarchy discussed in Note 8 to the financial statements.

The following table sets forth a description of significant unobservable inputs used in the valuation of the Vermont Yankee plant and related assets as of March 31, 2012:

 
Significant Unobservable Inputs
 
Range
Weighted Average
     
Weighted average cost of capital
7.5%-8.0%
7.8%
Long-term pre-tax operating margin (cash basis)
6.1%-7.8%
7.2%

Entergy’s Accounting Policy group, which reports to the Chief Accounting Officer, was primarily responsible for determining the valuation of the Vermont Yankee plant and related assets, in consultation with external advisors.  Accounting Policy obtained and reviewed information from other Entergy departments with expertise on the various inputs and assumptions that were necessary to calculate the fair value of the asset group.
 
 
 
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Entergy Corporation and Subsidiaries
Notes to Financial Statements




NOTE 12.  VARIABLE INTEREST ENTITIES (Entergy Corporation, Entergy Arkansas, Entergy Gulf States, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, Entergy Texas, System Energy)

See Note 18 to the financial statements in the Form 10-K for a discussion of variable interest entities.  See Note 4 to the financial statements herein for details of the nuclear fuel companies’ credit facility and commercial paper borrowings and long-term debt.

Entergy Louisiana and System Energy are each considered to hold a variable interest in the lessors from which they lease, respectively, undivided interests representing approximately 9.3% of the Waterford 3 and 11.5% of the Grand Gulf nuclear plants.  Entergy Louisiana and System Energy are the lessees under these arrangements, which are described in more detail in Note 10 to the financial statements in the Form 10-K.  Entergy Louisiana made payments on its lease, including interest, of $12.3 million and $12.8 million in the three months ended September 30, 2012 and 2011, respectively.  Entergy Louisiana made payments on its lease, including interest, of $39.1 million and $50.4 million in the nine months ended September 30, 2012 and 2011, respectively.  System Energy made payments on its lease, including interest, of $1.8 million and $2.0 million in the three months ended September 30, 2012 and 2011, respectively.  System Energy made payments on its lease, including interest, of $50.0 million and $49.4 million in the nine months ended September 30, 2012 and 2011, respectively.


NOTE 13.  ASSET RETIREMENT OBLIGATIONS  (Entergy Corporation, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, Entergy Texas, System Energy)

See Note 9 to the financial statements in the Form 10-K for a discussion of asset retirement obligations.  Following is an update to that discussion.

In the second quarter 2012, Entergy Louisiana recorded a revision to its estimated decommissioning cost liability for Waterford 3 as a result of a revised decommissioning cost study.  The revised estimate resulted in a $48.9 million increase in its decommissioning cost liability, along with a corresponding increase in the related asset retirement costs asset that will be depreciated over the remaining life of the unit.

 In the second quarter 2012, Entergy Wholesale Commodities recorded a reduction of $60.6 million in the estimated decommissioning cost liability for a plant as a result of a revised decommissioning cost study.  The revised estimate resulted in a credit to decommissioning expense of $49 million, reflecting the excess of the reduction in the liability over the amount of the undepreciated asset retirement costs asset.

__________________________________

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


Part I, Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of September 30, 2012, evaluations were performed under the supervision and with the participation of Entergy Corporation, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans, Entergy Texas, and System Energy (individually "Registrant" and collectively the "Registrants") management, including their respective Principal Executive Officers (PEO) and Principal Financial Officers (PFO).  The evaluations assessed the effectiveness of the Registrants' disclosure controls and procedures.  Based on the evaluations, each PEO and PFO has concluded that, as to the Registrant or Registrants for which they serve as PEO or PFO, 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 PEOs and PFOs, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

Under the supervision and with the participation of the Registrants’ management, including their respective PEOs and PFOs, the Registrants evaluated changes in internal control over financial reporting that occurred during the quarter ended September 30, 2012 and found no change that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.




ENTERGY ARKANSAS, INC. AND SUBSIDIARIES

MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS


Plan to Spin Off the Utility’s Transmission Business

See the “Plan to Spin Off the Utility’s Transmission Business” section of Entergy Corporation and Subsidiaries Management’s Financial Discussion and Analysis in the Form 10-K and herein for a discussion of Entergy’s plan to spin off its transmission business and merge it with a newly formed subsidiary of ITC Holdings Corp., including the planned retirement of debt and preferred securities.

Results of Operations

Net Income

Third Quarter 2012 Compared to Third Quarter 2011

Net income increased $1.6 million primarily due to a lower effective income tax rate, partially offset by higher other operation and maintenance expenses.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net income decreased $14.7 million primarily due to higher other operation and maintenance expenses, higher taxes other than income taxes, and higher nuclear refueling outage expenses, partially offset by a lower effective income tax rate.

Net Revenue

Third Quarter 2012 Compared to Third Quarter 2011

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory credits.  Following is an analysis of the change in net revenue comparing the third quarter 2012 to the third quarter 2011.

  
 
Amount
   
(In Millions)
     
2011 net revenue
 
$394.4 
Retail electric price
 
8.9 
Reserve equalization
 
(2.3)
Net wholesale revenue
 
(2.6)
Volume/weather
 
(6.3)
Other
 
5.3 
2012 net revenue
 
$397.4 

The retail electric price variance is primarily due to an increase in the energy efficiency rider, as approved by the APSC, effective July 2012.  Energy efficiency revenues are offset by costs included in other operation and maintenance expenses and have no effect on net income.

The reserve equalization variance is primarily due to increased reserve equalization expenses as a result of changes in the Entergy Arkansas and Entergy System generation capacity mix as compared to the same period in 2011.

 
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Entergy Arkansas, Inc. and Subsidiaries
Management's Financial Discussion and Analysis


The net wholesale revenue variance is primarily due to lower margins on co-owner contracts, somewhat offset by lower wholesale energy costs.

The volume/weather variance is primarily due to the effects of milder weather, as compared to the prior period, primarily on residential and commercial sales.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory credits.  Following is an analysis of the change in net revenue comparing the nine months ended September 30, 2012 to the nine months ended September 30, 2011.

  
 
Amount
   
(In Millions)
     
2011 net revenue
 
$985.6 
Volume/weather
 
(16.0)
Reserve equalization
 
(8.0)
Energy cost recovery
 
3.4 
Retail electric price
 
15.7 
Other
 
6.8 
2012 net revenue
 
$987.5 

The volume/weather variance is primarily due to the effect of milder weather, as compared to the prior period, primarily on residential sales.

The reserve equalization variance is primarily due to increased reserve equalization expenses as a result of changes in the Entergy Arkansas and Entergy System generation capacity mix as compared to the same period in 2011.  The variance is also due to a one-time credit recorded in 2011 related to the interruptible load proceeding.  See Note 2 to the financial statements herein and in the Form 10-K for further discussion of the interruptible load proceeding.

The energy cost recovery variance resulted primarily from the annual adjustment to deferred fuel costs provided for in the energy cost recovery rider.

The retail electric price variance is primarily due to an increase in the energy efficiency rider, as approved by the APSC, effective July 2012.  The increase is also related to higher residential price due to the effect of block rates, and higher industrial average price due to the customer mix.  The energy efficiency rider revenues are offset by costs included in other operation and maintenance expenses and have no effect on net income.

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

Gross operating revenues increased primarily due to an increase of $30.1 million in rider revenues related to higher System Agreement production cost equalization payments and an increase of $10.9 million in rider revenues due to an increase in the energy efficiency rider effective July 2012.  The increase was partially offset by the June 2012 refund to AmerenUE of $30.6 million, including interest, of rough production cost equalization payments collected from AmerenUE.  Entergy Arkansas had previously recorded a regulatory provision for the potential refund to AmerenUE.  The result of the refund is a decrease in gross revenues with an offsetting increase in other regulatory credits.  See Note 2 to the financial statements herein for a discussion of the FERC order in the System Agreement production cost equalization proceedings.  


 
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Entergy Arkansas, Inc. and Subsidiaries
Management's Financial Discussion and Analysis



Fuel and purchased power expenses increased primarily due to an increase in the recovery from customers of deferred fuel costs, partially offset by a decrease in the average market price of purchased power.

Other regulatory credits increased primarily due to the June 2012 refund to AmerenUE, as discussed above.

Other Income Statement Variances

Third Quarter 2012 Compared to Third Quarter 2011

Other operation and maintenance expenses increased primarily due to:

·  
an increase of $7.0 million in energy efficiency costs.  These costs are recovered through the energy efficiency rider and have no effect on net income;
·  
$3.8 million of costs incurred in 2012 related to the planned spin-off and merger of the Utility’s transmission business;
·  
an increase of $2.4 million in compensation and benefits costs resulting from a decrease in the discount rate and changes in certain actuarial assumptions resulting from a recent experience study.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for further discussion of benefits costs; and
·  
an increase of $4.3 million in nuclear generation expenses primarily due to higher contract costs.

The increase was somewhat offset by a decrease of $1.5 million in fossil-fueled generation expenses primarily due to higher plant outage costs in 2011 due to a greater scope of work.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Other operation and maintenance expenses increased primarily due to:

·  
an increase of $11.4 million in compensation and benefits costs resulting from a decrease in the discount rate and changes in certain actuarial assumptions resulting from a recent experience study.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for further discussion of benefits costs;
·  
$9.5 million of costs incurred in 2012 related to the planned spin-off and merger of the Utility’s transmission business;
·  
an increase of $9 million in energy efficiency costs.  These costs are recovered through the energy efficiency rider and have no effect on net income;
·  
an increase of $7.8 million in nuclear generation expenses primarily due to higher contract costs; and
·  
nuclear insurance refunds of $2.4 million received in 2011.

The increase was somewhat offset by a decrease of $5.4 million in fossil-fueled generation expenses primarily due to higher plant outage costs in 2011 due to a greater scope of work.

Nuclear refueling outage expenses increased primarily due to higher costs associated with the most recent outage as compared to the previous outages.

Taxes other than income taxes increased primarily due to an increase in ad valorem taxes resulting from higher assessments and an increase in local franchise taxes resulting from higher commercial electric revenues, as compared with the same period in 2011.  Franchise taxes have no effect on net income as these taxes are recovered through the franchise tax rider.


 
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Entergy Arkansas, Inc. and Subsidiaries
Management's Financial Discussion and Analysis



Income Taxes

The effective income tax rates for the third quarter 2012 and the nine months ended September 30, 2012 were 40.4% and 39.5%, respectively.  The difference in the effective income tax rate for the third quarter 2012 versus the federal statutory rate of 35% is due to state income taxes and certain book and tax differences related to utility plant items.  The difference in the effective income tax rate for the nine months ended September 30, 2012 versus the federal statutory rate of 35% is due to state income taxes and certain book and tax differences related to utility plant items, partially offset by the provision for uncertain tax positions.

The effective income tax rates for the third quarter 2011 and the nine months ended September 30, 2011 were 45.9% and 43.8%, respectively.  The differences in the effective income tax rates for the third quarter 2011 and the nine months ended September 30, 2011 versus the federal statutory rate of 35% were due to state income taxes, the provision for uncertain tax positions, and certain book and tax differences related to utility plant items.

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2012 and 2011 were as follows:

   
2012
 
2011
   
(In Thousands)
         
Cash and cash equivalents at beginning of period
 
$22,599 
 
$106,102 
         
Cash flow provided by (used in):
       
 
Operating activities
 
337,920 
 
334,762 
 
Investing activities
 
(324,656)
 
(359,111)
 
Financing activities
 
6,759 
 
(78,971)
Net increase (decrease) in cash and cash equivalents
 
20,023 
 
(103,320)
         
Cash and cash equivalents at end of period
 
$42,622 
 
$2,782 

Operating Activities

           Net cash flow provided by operating activities increased $3.2 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to a decrease of $67.1 million in pension contributions and the increased recovery of fuel and purchased power costs, including partial recovery of the System Agreement bandwidth remedy payment made in January 2012.  These increases were substantially offset by the $156 million System Agreement bandwidth remedy payment made in January 2012 as a result of the payment required to implement the FERC’s remedy for the period June – December 2005 and the $30.6 million refund, including interest, to AmerenUE as discussed above.  See Note 2 to the financial statements herein and in the Form 10-K for a discussion of the System Agreement bandwidth remedy payment.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for a discussion of qualified pension and other postretirement benefits funding.

Investing Activities

Net cash flow used in investing activities decreased $34.5 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to fluctuations in nuclear fuel activity because of variations from year to year in the timing and pricing of fuel reload requirements in the Utility business, material and services deliveries, and the timing of cash payments during the nuclear fuel cycle.  The decrease was partially offset by money pool activity and the repayment in 2011 by System Fuels of Entergy Arkansas’s $11 million investment in System Fuels.


 
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Entergy Arkansas, Inc. and Subsidiaries
Management's Financial Discussion and Analysis



Decreases in Entergy Arkansas’s receivable from the money pool are a source of cash flow, and Entergy Arkansas’s receivable from the money pool decreased by $9.9 million for the nine months ended September 30, 2012, compared to decreasing by $41.5 million for the nine months ended September 30, 2011.  The money pool is an inter-company borrowing arrangement designed to reduce the Utility subsidiaries’ need for external short-term borrowings.

Financing Activities

Entergy Arkansas’s financing activities provided $6.8 million of cash for the nine months ended September 30, 2012 compared to using $79 million of cash for the nine months ended September 30, 2011 primarily due to:

·  
$117.1 million in dividends paid on common stock in 2011;
·  
the repayment, at maturity, of a $35 million 5.60% Series G note by the nuclear fuel company variable interest entity in September 2011; and
·  
an increase of borrowings of $16.8 million on the nuclear fuel company variable interest entity’s credit facility in 2012 compared to a decrease in borrowings of $2.5 million on the nuclear fuel company variable interest entity’s credit facility in 2011.

Partially offsetting the increases in cash from financing activities was the issuance in June 2011 of $55 million of Series J notes by the nuclear fuel company variable interest entity and money pool activity.

Increases in Entergy Arkansas’s payable to the money pool are a source of cash flow, and Entergy Arkansas’s payable to the money pool increased by $32.1 million for the nine months ended September 30, 2011.

Capital Structure

Entergy Arkansas’s capitalization is balanced between equity and debt, as shown in the following table.  The decrease in the debt to capital ratio is due to the increase in retained earnings in 2012, in part because Entergy Arkansas has not declared common dividends in 2012.

   
September 30,
 2012
 
December 31,
2011
         
Debt to capital
 
53.1%
 
55.0%
Effect of excluding the securitization bonds
 
(1.4)%
 
(1.5)%
Debt to capital, excluding securitization bonds (1)
 
51.7%
 
53.5%
Effect of subtracting cash
 
(0.6)%
 
(0.3)%
Net debt to net capital, excluding securitization bonds (1)
 
51.1%
 
53.2%

(1)
Calculation excludes the securitization bonds, which are non-recourse to Entergy Arkansas.

Net debt consists of debt less cash and cash equivalents.  Debt consists of notes payable and long-term debt, including the currently maturing portion.  Capital consists of debt, preferred stock without sinking fund, and shareholders’ equity.  Net capital consists of capital less cash and cash equivalents.  Entergy Arkansas uses the net debt to net capital ratio and the ratios excluding securitization bonds in analyzing its financial condition and believes they provide useful information to its investors and creditors in evaluating Entergy Arkansas’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 Arkansas’s uses and sources of capital.  Entergy Arkansas is developing its capital investment plan for 2013 through 2015 and currently anticipates making $1.4 billion in capital investments during that period, including approximately $758 million for maintenance of existing assets.  The remaining $593 million is associated with specific investments such as environmental compliance spending, transmission upgrades and system improvements, and other investments.  Following are additional updates to the information provided in the Form 10-K.
 
 
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Entergy Arkansas, Inc. and Subsidiaries
Management's Financial Discussion and Analysis



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

September 30,
2012
 
December 31,
2011
 
September 30,
2011
 
December 31,
2010
(In Thousands)
             
$7,487
 
$17,362
 
($32,102)
 
$41,463

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

Entergy Arkansas has credit facilities in the amount of $20 million and $150 million scheduled to expire in April 2013 and March 2017, respectively.  No borrowings were outstanding under the credit facilities as of September 30, 2012.  See Note 4 to the financial statements herein for additional discussion of the credit facilities.

Hot Spring Energy Facility Purchase Agreement

See the Form 10-K for a discussion of Entergy Arkansas’s agreement to acquire the Hot Spring Energy Facility.  In July 2011, Entergy Arkansas filed its application with the APSC requesting approval of the acquisition and full cost recovery.  In July 2012 the APSC approved the acquisition and cost recovery through a capacity acquisition rider and set the level of return on equity at the level established in Entergy Arkansas’s June 2009 base rate proceeding.  The parties have satisfied their obligations under the Hart-Scott-Rodino Act.  The U.S. Department of Justice (DOJ) review of the transaction is ongoing.  Closing has been delayed while the DOJ continues its review.  Entergy Arkansas does not know when the DOJ will conclude its review or the extent to which its review of the transaction will be affected by the ongoing civil investigation of competitive issues concerning the Utility operating companies that is discussed in the Form 10-K.

State and Local Rate Regulation

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – State and Local Rate Regulation" in the Form 10-K for a discussion of state and local rate regulation.  See Note 2 to the financial statements herein for an update regarding the System Agreement proceedings and Entergy Arkansas’s production cost allocation rider.

Federal Regulation

See “Entergy’s Proposal to Join the MISO RTO” in the “Rate, Cost-recovery, and Other Regulation – Federal Regulation” section of Entergy Corporation and Subsidiaries Management’s Financial Discussion and Analysis for updates to the Federal Regulation discussion in the Form 10-K.

Nuclear Matters

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Nuclear Matters" in the Form 10-K for a discussion of nuclear matters.

Environmental Risks

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Environmental Risks" in the Form 10-K for a discussion of 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 Entergy Arkansas’s accounting for nuclear decommissioning costs, unbilled revenue, and qualified pension and other postretirement benefits.

 
 
 
 
CONSOLIDATED INCOME STATEMENTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
   
(In Thousands)
 
                         
OPERATING REVENUES
                       
Electric
  $ 656,201     $ 658,356     $ 1,633,401     $ 1,618,687  
                                 
OPERATING EXPENSES
                               
Operation and Maintenance:
                               
   Fuel, fuel-related expenses, and
                               
     gas purchased for resale
    116,026       100,381       362,954       269,494  
   Purchased power
    145,305       164,901       318,474       373,244  
   Nuclear refueling outage expenses
    11,891       11,172       35,441       31,391  
   Other operation and maintenance
    140,730       129,300       406,561       373,530  
Decommissioning
    10,198       9,588       30,128       28,327  
Taxes other than income taxes
    26,676       24,989       69,073       63,520  
Depreciation and amortization
    55,092       54,483       165,697       163,993  
Other regulatory credits - net
    (2,553 )     (1,280 )     (35,478 )     (9,611 )
TOTAL
    503,365       493,534       1,352,850       1,293,888  
                                 
OPERATING INCOME
    152,836       164,822       280,551       324,799  
                                 
OTHER INCOME
                               
Allowance for equity funds used during construction
    2,258       2,033       6,491       4,913  
Interest and investment income
    3,861       3,938       11,233       13,099  
Miscellaneous - net
    (496 )     (1,213 )     (3,139 )     (3,102 )
TOTAL
    5,623       4,758       14,585       14,910  
                                 
INTEREST EXPENSE
                               
Interest expense
    20,532       20,726       61,707       62,749  
Allowance for borrowed funds used during construction
    (648 )     (818 )     (1,724 )     (1,919 )
TOTAL
    19,884       19,908       59,983       60,830  
                                 
INCOME BEFORE INCOME TAXES
    138,575       149,672       235,153       278,879  
                                 
Income taxes
    56,024       68,727       92,973       122,028  
                                 
NET INCOME
    82,551       80,945       142,180       156,851  
                                 
Preferred dividend requirements
    1,718       1,718       5,155       5,155  
                                 
EARNINGS APPLICABLE TO
                               
COMMON STOCK
  $ 80,833     $ 79,227     $ 137,025     $ 151,696  
                                 
See Notes to Financial Statements.
                               
 

 

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
OPERATING ACTIVITIES
           
Net income
  $ 142,180     $ 156,851  
Adjustments to reconcile net income to net cash flow provided by operating activities:
         
  Depreciation, amortization, and decommissioning, including nuclear fuel amortization
    266,755       255,051  
  Deferred income taxes, investment tax credits, and non-current taxes accrued
    97,641       (17,536 )
  Changes in assets and liabilities:
               
    Receivables
    (86,046 )     (69,699 )
    Fuel inventory
    3,130       (8,904 )
    Accounts payable
    (144,562 )     134,019  
    Taxes accrued and prepaid taxes
    (9,302 )     126,029  
    Interest accrued
    (11,061 )     (5,716 )
    Deferred fuel costs
    88,097       8,112  
    Other working capital accounts
    32,465       (129,416 )
    Provisions for estimated losses
    171       (2,491 )
    Other regulatory assets
    51,089       23,478  
    Pension and other postretirement liabilities
    (40,976 )     (110,423 )
    Other assets and liabilities
    (51,661 )     (24,593 )
Net cash flow provided by operating activities
    337,920       334,762  
                 
INVESTING ACTIVITIES
               
Construction expenditures
    (273,010 )     (271,443 )
Allowance for equity funds used during construction
    9,002       6,451  
Nuclear fuel purchases
    (134,928 )     (127,978 )
Proceeds from sale of nuclear fuel
    76,042       -  
Proceeds from nuclear decommissioning trust fund sales
    103,394       82,655  
Investment in nuclear decommissioning trust funds
    (110,520 )     (95,723 )
Change in money pool receivable - net
    9,875       41,463  
Investment in affiliates
    -       10,994  
Remittances to transition charge account
    (11,987 )     (11,866 )
Payments from transition charge account
    7,476       6,336  
Net cash flow used in investing activities
    (324,656 )     (359,111 )
                 
FINANCING ACTIVITIES
               
Proceeds from the issuance of long-term debt
    -       54,804  
Retirement of long-term debt
    (5,990 )     (39,145 )
Changes in short-term borrowings - net
    18,776       (4,477 )
Changes in money pool payable - net
    -       32,102  
Dividends paid:
               
  Common stock
    -       (117,100 )
  Preferred stock
    (5,155 )     (5,155 )
Other
    (872 )     -  
Net cash flow provided by (used in) financing activities
    6,759       (78,971 )
                 
Net increase (decrease) in cash and cash equivalents
    20,023       (103,320 )
                 
Cash and cash equivalents at beginning of period
    22,599       106,102  
                 
Cash and cash equivalents at end of period
  $ 42,622     $ 2,782  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid (received) during the period for:
               
  Interest - net of amount capitalized
  $ 68,990     $ 64,670  
  Income taxes
  $ (6,897 )   $ -  
                 
See Notes to Financial Statements.
               


 

 
CONSOLIDATED BALANCE SHEETS
 
ASSETS
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT ASSETS
           
Cash and cash equivalents:
           
  Cash
  $ 6,423     $ 4,712  
  Temporary cash investments
    36,199       17,887  
    Total cash and cash equivalents
    42,622       22,599  
Securitization recovery trust account
    8,401       3,890  
Accounts receivable:
               
  Customer
    150,964       90,940  
  Allowance for doubtful accounts
    (26,948 )     (26,155 )
  Associated companies
    64,013       58,030  
  Other
    66,002       66,838  
  Accrued unbilled revenues
    82,508       70,715  
    Total accounts receivable
    336,539       260,368  
Deferred fuel costs
    92,763       209,776  
Fuel inventory - at average cost
    45,759       48,889  
Materials and supplies - at average cost
    146,037       143,343  
Deferred nuclear refueling outage costs
    43,348       49,047  
System agreement cost equalization
    17,689       36,800  
Prepayments and other
    12,180       8,562  
TOTAL
    745,338       783,274  
                 
OTHER PROPERTY AND INVESTMENTS
               
Decommissioning trust funds
    599,857       541,657  
Non-utility property - at cost (less accumulated depreciation)
    1,672       1,677  
Other
    3,182       3,182  
TOTAL
    604,711       546,516  
                 
UTILITY PLANT
               
Electric
    8,260,030       8,079,732  
Property under capital lease
    1,175       1,234  
Construction work in progress
    172,918       120,211  
Nuclear fuel
    272,041       272,593  
TOTAL UTILITY PLANT
    8,706,164       8,473,770  
Less - accumulated depreciation and amortization
    3,964,741       3,833,596  
UTILITY PLANT - NET
    4,741,423       4,640,174  
                 
DEFERRED DEBITS AND OTHER ASSETS
               
Regulatory assets:
               
  Deferred fuel costs
    28,916       -  
  Regulatory asset for income taxes - net
    77,768       87,357  
Other regulatory assets (includes securitization property of
         
$95,755 as of September 30, 2012 and $105,762 as of
         
       December 31, 2011)
    1,085,411       1,126,911  
Other
    27,082       27,980  
TOTAL
    1,219,177       1,242,248  
                 
TOTAL ASSETS
  $ 7,310,649     $ 7,212,212  
                 
See Notes to Financial Statements.
               

 
 
 
ENTERGY ARKANSAS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
LIABILITIES AND EQUITY
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT LIABILITIES
           
Currently maturing long-term debt
  $ 330,000     $ -  
Short-term borrowings
    52,690       33,914  
Accounts payable:
               
  Associated companies
    61,481       228,163  
  Other
    158,494       138,054  
Customer deposits
    85,336       81,074  
Taxes accrued
    26,979       36,281  
Accumulated deferred income taxes
    40,571       124,267  
Interest accrued
    18,820       29,881  
Other
    32,984       23,305  
TOTAL
    807,355       694,939  
                 
NON-CURRENT LIABILITIES
               
Accumulated deferred income taxes and taxes accrued
    1,886,459       1,708,760  
Accumulated deferred investment tax credits
    41,445       42,939  
Other regulatory liabilities
    152,954       133,960  
Decommissioning
    670,356       640,228  
Accumulated provisions
    5,811       5,640  
Pension and other postretirement liabilities
    498,066       539,016  
Long-term debt (includes securitization bonds of $107,783 as of
         
    September 30, 2012 and $113,761 as of December 31, 2011)
    1,540,076       1,875,921  
Other
    10,628       10,335  
TOTAL
    4,805,795       4,956,799  
                 
Commitments and Contingencies
               
                 
Preferred stock without sinking fund
    116,350       116,350  
                 
COMMON EQUITY
               
Common stock, $0.01 par value, authorized 325,000,000
         
shares; issued and outstanding 46,980,196 shares in 2012
         
  and 2011
    470       470  
Paid-in capital
    588,444       588,444  
Retained earnings
    992,235       855,210  
TOTAL
    1,581,149       1,444,124  
                 
TOTAL LIABILITIES AND EQUITY
  $ 7,310,649     $ 7,212,212  
                 
See Notes to Financial Statements.
               


 

 
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON EQUITY
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited) (In Thousands)
 
                         
   
Common Equity
             
   
Common Stock
   
Paid-in Capital
   
Retained Earnings
   
Total
 
Balance at December 31, 2010
  $ 470     $ 588,444     $ 814,992     $ 1,403,906  
                                 
Net income
    -       -       156,851       156,851  
Common stock dividends
    -       -       (117,100 )     (117,100 )
Preferred stock dividends
    -       -       (5,155 )     (5,155 )
                                 
Balance at September 30, 2011
  $ 470     $ 588,444     $ 849,588     $ 1,438,502  
                                 
                                 
Balance at December 31, 2011
  $ 470     $ 588,444     $ 855,210     $ 1,444,124  
                                 
Net income
    -       -       142,180       142,180  
Preferred stock dividends
    -       -       (5,155 )     (5,155 )
                                 
Balance at September 30, 2012
  $ 470     $ 588,444     $ 992,235     $ 1,581,149  
                                 
See Notes to Financial Statements.
                         
                                 


 

 
SELECTED OPERATING RESULTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
                         
   
Three Months Ended
   
Increase/
       
Description
 
2012
   
2011
   
(Decrease)
 
%
 
   
(Dollars In Millions)
       
Electric Operating Revenues:
                   
  Residential
  $ 276     $ 280     $ (4 )     (1 )
  Commercial
    148       146       2       1  
  Industrial
    137       134       3       2  
  Governmental
    4       6       (2 )     (33 )
    Total retail
    565       566       (1 )     -  
  Sales for resale:
                               
     Associated companies
    71       75       (4 )     (5 )
     Non-associated companies
    19       22       (3 )     (14 )
  Other
    1       (5 )     6       120  
    Total
  $ 656     $ 658     $ (2 )     -  
                                 
Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    2,646       2,769       (123 )     (4 )
  Commercial
    1,859       1,905       (46 )     (2 )
  Industrial
    1,967       2,003       (36 )     (2 )
  Governmental
    72       81       (9 )     (11 )
    Total retail
    6,544       6,758       (214 )     (3 )
  Sales for resale:
                               
     Associated companies
    1,581       1,937       (356 )     (18 )
     Non-associated companies
    292       267       25       9  
    Total
    8,417       8,962       (545 )     (6 )
                                 
                                 
   
Nine Months Ended
   
Increase/
         
Description
    2012       2011    
(Decrease)
 
%
 
   
(Dollars In Millions)
         
Electric Operating Revenues:
                         
  Residential
  $ 613     $ 612     $ 1       -  
  Commercial
    364       345       19       6  
  Industrial
    335       318       17       5  
  Governmental
    15       15       -       -  
    Total retail
    1,327       1,290       37       3  
  Sales for resale:
                               
     Associated companies
    221       212       9       4  
     Non-associated companies
    28       69       (41 )     (59 )
  Other
    57       48       9       19  
    Total
  $ 1,633     $ 1,619     $ 14       1  
                                 
Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    6,270       6,674       (404 )     (6 )
  Commercial
    4,682       4,690       (8 )     -  
  Industrial
    5,248       5,320       (72 )     (1 )
  Governmental
    198       210       (12 )     (6 )
    Total retail
    16,398       16,894       (496 )     (3 )
  Sales for resale:
                               
     Associated companies
    5,450       5,318       132       2  
     Non-associated companies
    800       892       (92 )     (10 )
    Total
    22,648       23,104       (456 )     (2 )
                                 

 
 


ENTERGY GULF STATES LOUISIANA, L.L.C.

MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS


Plan to Spin Off the Utility’s Transmission Business

See the “Plan to Spin Off the Utility’s Transmission Business” section of Entergy Corporation and Subsidiaries Management’s Financial Discussion and Analysis in the Form 10-K and herein for a discussion of Entergy’s plan to spin off its transmission business and merge it with a newly formed subsidiary of ITC Holdings Corp., including the planned retirement of debt and preferred securities.

Hurricane Isaac

In August 2012, Hurricane Isaac caused extensive damage to Entergy Gulf States Louisiana’s service area.  The storm resulted in widespread power outages, significant damage primarily to distribution infrastructure, and the loss of sales during the power outages.  Total restoration costs for the repair and/or replacement of Entergy Gulf States Louisiana’s electric facilities damaged by Hurricane Isaac are currently estimated to be in the range of $70 million to $90 million.  Entergy Gulf States Louisiana is considering all reasonable avenues to recover storm-related costs from Hurricane Isaac, including, but not limited to, accessing funded storm reserves; securitization or other alternative financing; and traditional retail recovery on an interim and permanent basis.  Storm cost recovery or financing may be subject to review by applicable regulatory authorities.

Entergy Gulf States Louisiana has recorded accounts payable for the estimated costs incurred that were necessary to return customers to service.  Entergy Gulf States Louisiana recorded corresponding regulatory assets of approximately $19 million and construction work in progress of approximately $55 million.  Entergy Gulf States Louisiana recorded the regulatory assets in accordance with its accounting policies and based on the historic treatment of such costs in its service area because management believes that recovery through some form of regulatory mechanism is probable.  Because Entergy Gulf States Louisiana has not gone through the regulatory process regarding these storm costs, however, there is an element of risk, and Entergy Gulf States Louisiana is unable to predict with certainty the degree of success it may have in its recovery initiatives, the amount of restoration costs that it may ultimately recover, or the timing of such recovery.

Results of Operations

Net Income

Third Quarter 2012 Compared to Third Quarter 2011

Net income decreased $3 million primarily due to lower net revenue, partially offset by higher other income and a lower effective income tax rate.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net income decreased $21.2 million primarily due to lower net revenue and higher other operation and maintenance expenses. These items were partially offset by the $19.8 million income tax benefit resulting from an IRS settlement in June 2012 related to the uncertain tax position regarding the Hurricane Katrina and Hurricane Rita Louisiana Act 55 financing, which also resulted in a $27.7 million ($17 million net-of-tax) regulatory charge that reduced net revenue because the benefit will be shared with customers. See Note 10 to the financial statements for additional discussion of the tax settlement and benefit sharing.


 
96

Entergy Gulf States Louisiana, L.L.C.
Management's Financial Discussion and Analysis



Net Revenue

Third Quarter 2012 Compared to Third Quarter 2011

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges (credits).  Following is an analysis of the change in net revenue comparing the third quarter 2012 to the third quarter 2011.

   
Amount
   
(In Millions)
     
2011 net revenue
 
$253.8 
Net wholesale revenue
 
(5.7)
Retail electric price
 
(4.6)
Asset retirement obligation
 
(3.6)
Volume/weather
 
(2.0)
Other
 
1.4 
2012 net revenue
 
$239.3 

The net wholesale revenue variance is primarily due to lower price.

The retail electric price variance is primarily due to increased affiliate purchased power capacity costs recovered through base rates set in the annual formula rate plan mechanism. Entergy Gulf States Louisiana’s formula rate plan is discussed in Note 2 to the financial statements herein and in the Form 10-K.

The asset retirement obligation variance is primarily due to higher regulatory charges resulting from an increase in decommissioning trust earnings as a result of realized gains on investments. There is no effect on net income as these earnings are reflected in other income.

The volume/weather variance is primarily due to the effect of milder weather, as compared to the prior period, on residential and commercial sales and the effects of the power outages caused by Hurricane Isaac.

Gross operating revenues and fuel and purchased power expenses

Gross operating revenues decreased primarily due to a decrease of $71 million in fuel cost recovery revenues primarily due to lower fuel rates, a decrease of $46.8 million in rider revenues primarily due to higher System Agreement credits in 2012, and a decrease of $37.3 million in gross wholesale revenues due to a decrease in sales to affiliated customers. Entergy Gulf States Louisiana’s fuel and purchased power recovery mechanism is discussed in Note 2 to the financial statements in the Form 10-K.

Fuel and purchased power expenses decreased primarily due to:

·  
a decrease in the average market price of purchased power and decreased demand; and
·  
a decrease in deferred fuel expense due to the timing of receipt of System Agreement payments and credits to customers and lower fuel cost recovery revenues in 2012.


 
97

Entergy Gulf States Louisiana, L.L.C.
Management's Financial Discussion and Analysis



Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges (credits).  Following is an analysis of the change in net revenue comparing the nine months ended September 30, 2012 to the nine months ended September 30, 2011.

   
Amount
   
(In Millions)
     
2011 net revenue
 
$718.6 
Louisiana Act 55 financing tax settlement sharing
 
(27.2)
Volume/weather
 
(13.0)
Retail electric price
 
(10.8)
Net wholesale revenue
 
(10.2)
Other
 
(3.7)
2012 net revenue
 
$653.7 

The Louisiana Act 55 financing tax settlement sharing variance results from a regulatory charge because the benefit of the settlement with the IRS related to the uncertain tax position regarding the Hurricane Katrina and Hurricane Rita Louisiana Act 55 financing will be shared with customers.  See Note 10 to the financial statements for additional discussion of the settlement and benefit sharing.

The volume/weather variance is primarily due to the effect of milder weather, as compared to the prior period, on residential and commercial sales and the effects of the power outages caused by Hurricane Isaac.

The retail electric price variance is primarily due to increased affiliate purchased power capacity costs recovered through base rates set in the annual formula rate plan mechanism. Entergy Gulf States Louisiana’s formula rate plan is discussed in Note 2 to the financial statements herein and in the Form 10-K.

The net wholesale revenue variance is primarily due to lower price.

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

Gross operating revenues decreased primarily due to a decrease of $158.6 million in fuel cost recovery revenues primarily due to lower fuel rates, a decrease of $118.7 million in gross wholesale revenues due to a decrease in sales to affiliated customers, and a decrease of $63.7 million in rider revenues primarily due to higher System Agreement credits in 2012. Entergy Gulf States Louisiana’s fuel and purchased power recovery mechanism is discussed in Note 2 to the financial statements in the Form 10-K.

Fuel and purchased power expenses decreased primarily due to:

·  
a decrease in the average market prices of purchased power and natural gas; and
·  
a decrease in deferred fuel expense due to the timing of receipt of System Agreement payments and credits to customers and lower fuel cost recovery revenues in 2012.

Other regulatory charges increased primarily due to a settlement with the IRS related to the uncertain tax position regarding the Hurricane Katrina and Hurricane Rita Louisiana Act 55 financing because the settlement will be shared with customers.  See Note 10 to the financial statements for additional discussion of the settlement and benefit sharing.


 
98

Entergy Gulf States Louisiana, L.L.C.
Management's Financial Discussion and Analysis



Other Income Statement Variances

Third Quarter 2012 Compared to Third Quarter 2011

Other income increased primarily due to higher earnings in 2012 on decommissioning trust fund investments.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Other operation and maintenance expenses increased primarily due to:

·  
an increase of $7.7 million in compensation and benefits costs primarily due to decreasing discount rates and changes in certain actuarial assumptions resulting from a recent experience study.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for further discussion of benefits costs;
·  
an increase of $5.1 million in nuclear generation expenses primarily due to higher labor costs, including higher contract labor;
·  
an increase of $4.6 million in fossil-fueled generation expenses resulting primarily from increased plant outages and an increased scope of work as compared to the prior year; and
·  
$3.4 million of costs incurred in 2012 related to the planned spin-off and merger of the transmission business.

The increase was partially offset by the deferral, as approved by the LPSC and the FERC, of costs related to the transition and implementation of joining the MISO RTO, which reduced expenses by $4.2 million.

Income Taxes

The effective income tax rate was 36.8% for the third quarter 2012 and 24.2% for the nine months ended September 30, 2012.  The difference in the effective income tax rate for the third quarter 2012 versus the federal statutory rate of 35% is due to state income taxes and the provision for uncertain tax positions, partially offset by book and tax differences related to the non-taxable income distributions earned on preferred membership interests. The difference in the effective income tax rate for the nine months ended September 30, 2012 versus the federal statutory rate of 35% is due to book and tax differences related to the non-taxable income distributions earned on preferred membership interests and the reversal of the provision for uncertain tax positions related to an IRS settlement on how to treat the Louisiana Act 55 financing of the Hurricane Katrina and Hurricane Rita storm costs, partially offset by state income taxes.

The effective income tax rate was 41.2% for the third quarter 2011 and 38% for the nine months ended September 30, 2011.  The differences in the effective income tax rates for the third quarter 2011 and for the nine months ended September 30, 2011 versus the federal statutory rate of 35% were due to state income taxes, certain book and tax differences related to utility plant items, and the provision for uncertain tax positions, partially offset by book and tax differences related to the non-taxable income distributions earned on preferred membership interests.

Correction of Regulatory Asset for Income Taxes

See Note 2 to the financial statements herein for a discussion of the financial statement effects of a correction to Entergy Gulf States Louisiana’s regulatory asset for income taxes.


 
99

Entergy Gulf States Louisiana, L.L.C.
Management's Financial Discussion and Analysis



Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2012 and 2011 were as follows:

   
2012
 
2011
   
(In Thousands)
         
Cash and cash equivalents at beginning of period
 
$24,845 
 
$155,173 
         
Cash flow provided by (used in):
       
 
Operating activities
 
391,711 
 
314,457 
 
Investing activities
 
(145,984)
 
(179,431)
 
Financing activities
 
(94,008)
 
(264,335)
Net increase (decrease) in cash and cash equivalents
 
151,719 
 
(129,309)
         
Cash and cash equivalents at end of period
 
$176,564 
 
$25,864 

Operating Activities

Net cash flow provided by operating activities increased $77.3 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to:

·  
an increase in the recovery of fuel and purchased power costs due to System Agreement bandwidth remedy payments of $75 million received in January 2012 as a result of receipts required to implement the FERC’s remedy in an October 2011 order for the period June – December 2005.  See Note 2 to the financial statements herein and in the Form 10-K for a discussion of the System Agreement proceedings; and
·  
a decrease of $9.1 million in pension contributions.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for a discussion of qualified pension and other postretirement benefits.

Investing Activities

Net cash flow used in investing activities decreased $33.4 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to:

·  
fluctuations in nuclear fuel activity because of variations from year to year in the timing and pricing of fuel reload requirements in the Utility business, material and services deliveries, and the timing of cash payments during the nuclear fuel cycle;
·  
$51 million in proceeds from the sale of a portion of Entergy Gulf States Louisiana’s investment in Entergy Holdings Company’s Class A preferred membership interests to a third party in 2012; and
·  
a decrease in nuclear construction expenditures as a result of the River Bend refueling outage in 2011. River Bend had a refueling outage in 2011 and did not have one in 2012.

The decrease was partially offset by:

·  
money pool activity;
·  
higher distribution construction expenses due to Hurricane Isaac and increased reliability work performed in 2012; and
·  
an increase in fossil-fueled generation construction expenses due to an increased scope of work in 2012.


 
100

Entergy Gulf States Louisiana, L.L.C.
Management's Financial Discussion and Analysis



Increases in Entergy Gulf States Louisiana’s receivable from the money pool are a use of cash flow, and Entergy Gulf States Louisiana’s receivable from the money pool increased by $8.6 million for the nine months ended September 30, 2012 compared to decreasing by $49.7 million for the nine months ended September 30, 2011.  The money pool is an inter-company borrowing arrangement designed to reduce the Utility operating companies’ need for external short-term borrowings.

Financing Activities

Net cash flow used in financing activities decreased $170.3 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to a decrease of $214.6 million in common equity distributions and the issuance of $75 million 3.25% Series Q notes by the nuclear fuel company variable interest entity in July 2012, partially offset by:

·  
the repayment, at maturity, of $60 million 5.41% Series O notes by the nuclear fuel company variable interest entity in July 2012;
·  
the redemption of $10.84 million of 5.8% Series pollution control revenue bonds in April 2012; and
·  
payments of $29.4 million on credit borrowings for the nine months ended September 30, 2012 compared to an increase of $18.5 million in credit borrowings for the nine months ended September 30, 2011 against the nuclear fuel company variable interest entity credit facility.

Capital Structure

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

   
September 30,
2012
 
December 31,
2011
         
Debt to capital
 
51.9% 
 
53.6% 
Effect of subtracting cash
 
(3.1)%
 
(0.4)%
Net debt to net capital
 
48.8% 
 
53.2% 

Net debt consists of debt less cash and cash equivalents.  Debt consists of notes payable and long-term debt, including the currently maturing portion.  Capital consists of debt and member’s equity.  Net capital consists of capital less cash and cash equivalents.  Entergy Gulf States 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 Gulf States 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 Gulf States Louisiana’s uses and sources of capital.  Entergy Gulf States Louisiana is developing its capital investment plan for 2013 through 2015 and currently anticipates making $679 million in capital investments during that period, including approximately $432 million for maintenance of existing assets.  The remaining $247 million is associated with specific investments such as environmental compliance spending, transmission upgrades and system improvements, and other investments.  Following are additional updates to the information provided in the Form 10-K.


 
101

Entergy Gulf States Louisiana, L.L.C.
Management's Financial Discussion and Analysis


Entergy Gulf States Louisiana’s receivables from the money pool were as follows:

September 30,
2012
 
December 31,
2011
 
September 30,
2011
 
December 31,
2010
(In Thousands)
             
$32,161
 
$23,596
 
$13,280
 
$63,003

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

Entergy Gulf States Louisiana has a credit facility in the amount of $150 million scheduled to expire in March 2017.  No borrowings were outstanding under the facility as of September 30, 2012.  See Note 4 to the financial statements herein for additional discussion of the credit facility.

In April 2012, Entergy Gulf States Louisiana redeemed, prior to maturity, its $10.84 million 5.8% Series pollution control revenue bonds due April 2016.

In July 2012 the Entergy Gulf States Louisiana nuclear fuel company variable interest entity issued $75 million 3.25% Series Q notes due July 2017.  Entergy Gulf States Louisiana used the proceeds to pay, at maturity, its $60 million 5.41% Series O notes due July 2012 and to repay borrowings of $3.5 million under its $85 million nuclear fuel company variable interest entity credit facility.

In the first quarter 2012, Entergy Gulf States Louisiana sold to a third party for $51 million a portion of its investment in Entergy Holdings Company’s Class A preferred membership interests.

New Nuclear Development

Entergy Gulf States Louisiana and Entergy Louisiana are developing a project option for new nuclear generation at River Bend.  In March 2010, Entergy Gulf States Louisiana and Entergy Louisiana filed with the LPSC seeking approval to continue the limited development activities necessary to preserve an option to construct a new unit at River Bend.  The testimony and legal briefs of the LPSC staff generally support the request of Entergy Gulf States Louisiana and Entergy Louisiana, although other parties filed briefs, without supporting testimony, in opposition to the request.  At an evidentiary hearing in October 2011, Entergy Gulf States Louisiana, Entergy Louisiana, and the LPSC staff presented testimony in support of certification of activities to preserve an option for a new nuclear plant at River Bend.  The ALJ recommended, however, that the LPSC decline the request of Entergy Gulf States Louisiana and Entergy Louisiana on the basis that the LPSC’s rule on new nuclear development does not apply to activities to preserve an option to develop and on the further grounds that the companies improperly engaged in advanced preparation activities prior to certification.  There has been no suggestion that the planning activities or costs incurred were imprudent.  At its June 28, 2012 meeting the LPSC voted to uphold the ALJ’s decision and directed that Entergy Gulf States Louisiana and Entergy Louisiana be permitted to seek recovery of these costs in the rate case filings that are anticipated in January 2013, fully reserving the LPSC’s right to determine the recoverability of such costs in rates.  On September 10, 2012, Entergy Gulf States Louisiana and Entergy Louisiana filed a petition for appeal and judicial review of the LPSC’s order with the Louisiana Nineteenth Judicial District Court.  A schedule for the appeal has not been established.


 
 
102

Entergy Gulf States Louisiana, L.L.C.
Management's Financial Discussion and Analysis


Ninemile Point Unit 6 Self-Build Project

See the Form 10-K for a discussion of Entergy Louisiana’s Ninemile Point Unit 6 self-build project.  The Ninemile 6 capacity and energy is proposed to be allocated 55% to Entergy Louisiana, 25% to Entergy Gulf States Louisiana, and 20% to Entergy New Orleans.  In June 2011, Entergy Louisiana filed with the LPSC an application seeking certification that the public necessity and convenience would be served by Entergy Louisiana’s construction of the facility.  Entergy Gulf States Louisiana joined in the application, seeking certification of its purchase under a life-of-unit power purchase agreement of its allocated share of the capacity and energy generated by Ninemile 6.  In February 2012 the City Council passed a resolution authorizing Entergy New Orleans to purchase 20% of the Ninemile 6 energy and capacity.  In March 2012 the LPSC unanimously voted to grant the certifications requested by Entergy Louisiana and Entergy Gulf States Louisiana, and Entergy Louisiana has given the contractor a full notice to proceed with the construction.  Under the terms approved by the LPSC, costs may be recovered through Entergy Louisiana’s and Entergy Gulf States Louisiana’s formula rate plans, if one is in effect when the project is placed in service; alternatively, Entergy Louisiana and Entergy Gulf States Louisiana must file rate cases approximately 12 months prior to the expected in-service date.

State and Local Rate Regulation and Fuel-Cost Recovery

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – State and Local Rate Regulation and Fuel-Cost Recovery" in the Form 10-K for a discussion of state and local rate regulation and fuel-cost recovery.  Following is an update to that discussion.

In May 2012, Entergy Gulf States Louisiana made its formula rate plan filing with the LPSC for the 2011 test year.  The filing reflected an 11.94% earned return on common equity, which is above the earnings bandwidth and would indicate a $6.5 million cost of service rate change was necessary under the formula rate plan.  The filing also reflected a $22.9 million rate decrease for incremental capacity costs.  Subsequently, in August 2012, Entergy Gulf States Louisiana submitted a revised filing that reflects an earned return on common equity of 11.86% indicating a $5.7 million cost of service rate decrease is necessary under the formula rate plan.  The revised filing also indicates that a reduction of $20.3 million should be reflected in the incremental capacity rider.  The rate reductions were implemented, subject to refund, effective for bills rendered the first billing cycle of September 2012.  The filing remains subject to LPSC review.  The September 2012 rate change reduced Entergy Gulf States Louisiana’s revenues by approximately $2.2 million for the third quarter 2012.

In January 2012, Entergy Gulf States Louisiana filed with the LPSC its gas rate stabilization plan for the test year ended September 30, 2011.  The filing showed an earned return on common equity of 10.48%, which is within the earnings bandwidth of 10.5%, plus or minus fifty basis points.  In April 2012, the LPSC Staff filed its findings, suggesting adjustments that produced an 11.54% earned return on common equity for the test year and a $0.1 million rate reduction.  Entergy Gulf States Louisiana accepted the LPSC Staff’s recommendations, and the rate reduction was effective with the first billing cycle of May 2012. Related to the annual gas rate stabilization plan proceedings, the LPSC directed its staff to initiate an evaluation of the 10.5% allowed return on common equity for the Entergy Gulf States Louisiana gas rate stabilization plan.  The LPSC directed that its staff should provide an analysis of the current return on equity and justification for any proposed changes to the return on equity.  In August 2012 the LPSC staff filed direct testimony recommending a midpoint return on equity of 9.3%.  Entergy Gulf States Louisiana filed responsive testimony recommending that the 10.5% return on equity remain unchanged.  The hearing in this proceeding is currently scheduled for November 8-9, 2012.

Industrial and Commercial Customers

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Industrial and Commercial Customers" in the Form 10-K for a discussion of industrial and commercial customers.

 
 
103

Entergy Gulf States Louisiana, L.L.C.
Management's Financial Discussion and Analysis

Federal Regulation

See “Entergy’s Proposal to Join the MISO RTO” in the “Rate, Cost-recovery, and Other Regulation – Federal Regulation” section of Entergy Corporation and Subsidiaries Management’s Financial Discussion and Analysis for updates to the Federal Regulation discussion in the Form 10-K.

Nuclear Matters

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Nuclear Matters" in the Form 10-K for a discussion of nuclear matters.

Environmental Risks

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Environmental Risks" in the Form 10-K for a discussion of 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 Entergy Gulf States Louisiana’s accounting for nuclear decommissioning costs, unbilled revenue, impairment of long-lived assets and trust fund investments, and qualified pension and other postretirement benefits.

 

 
INCOME STATEMENTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
   
(In Thousands)
 
                         
OPERATING REVENUES
                       
Electric
  $ 425,999     $ 587,275     $ 1,201,178     $ 1,565,964  
Natural gas
    8,452       9,673       34,251       49,444  
TOTAL
    434,451       596,948       1,235,429       1,615,408  
                                 
OPERATING EXPENSES
                               
Operation and Maintenance:
                               
   Fuel, fuel-related expenses, and
                               
     gas purchased for resale
    34,821       135,034       131,248       291,592  
   Purchased power
    156,398       224,452       417,909       622,949  
   Nuclear refueling outage expenses
    4,415       4,454       13,147       13,796  
   Other operation and maintenance
    89,446       89,081       267,505       255,566  
Decommissioning
    3,783       3,572       11,187       10,565  
Taxes other than income taxes
    19,141       20,668       55,728       58,246  
Depreciation and amortization
    36,958       35,784       109,345       107,183  
Other regulatory charges (credits) - net
    3,928       (16,373 )     32,536       (17,695 )
TOTAL
    348,890       496,672       1,038,605       1,342,202  
                                 
OPERATING INCOME
    85,561       100,276       196,824       273,206  
                                 
OTHER INCOME
                               
Allowance for equity funds used during construction
    1,760       2,273       6,512       6,176  
Interest and investment income
    13,442       10,269       33,350       30,100  
Miscellaneous - net
    (1,615 )     (2,643 )     (6,727 )     (6,515 )
TOTAL
    13,587       9,899       33,135       29,761  
                                 
INTEREST EXPENSE
                               
Interest expense
    20,406       20,731       62,297       63,311  
Allowance for borrowed funds used during construction
    (652 )     (931 )     (2,516 )     (2,624 )
TOTAL
    19,754       19,800       59,781       60,687  
                                 
INCOME BEFORE INCOME TAXES
    79,394       90,375       170,178       242,280  
                                 
Income taxes
    29,184       37,205       41,220       92,083  
                                 
NET INCOME
    50,210       53,170       128,958       150,197  
                                 
Preferred distribution requirements and other
    206       206       619       619  
                                 
                                 
EARNINGS APPLICABLE TO COMMON EQUITY
  $ 50,004     $ 52,964     $ 128,339     $ 149,578  
                                 
See Notes to Financial Statements.
                               
                                 



 
STATEMENTS OF COMPREHENSIVE INCOME
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
 
 
Three Months Ended
   
Nine Months Ended
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
   
(In Thousands)
 
                         
Net Income
  $ 50,210     $ 53,170     $ 128,958     $ 150,197  
Other comprehensive income
                               
   Pension and other postretirement liabilities
                               
     (net of tax expense of $703, $507, $8,247, and $1,522)
    862       486       12,397       1,715  
         Other comprehensive income
    862       486       12,397       1,715  
Comprehensive Income
  $ 51,072     $ 53,656     $ 141,355     $ 151,912  
                                 
                                 
See Notes to Financial Statements.
                               
                                 
                                 
                                 



 
STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
OPERATING ACTIVITIES
           
Net income
  $ 128,958     $ 150,197  
Adjustments to reconcile net income to net cash flow provided by operating activities:
         
  Depreciation, amortization, and decommissioning, including nuclear fuel amortization
    158,577       154,739  
  Deferred income taxes, investment tax credits, and non-current taxes accrued
    51,415       (24,492 )
  Changes in working capital:
               
    Receivables
    63,699       (153,380 )
    Fuel inventory
    (7,747 )     9,427  
    Accounts payable
    42,149       (64,105 )
    Prepaid taxes and taxes accrued
    67,987       148,158  
    Interest accrued
    5,696       5,877  
    Deferred fuel costs
    (91,354 )     (1,596 )
    Other working capital accounts
    (11,434 )     75,582  
  Changes in provisions for estimated losses
    (3,100 )     1,670  
  Changes in other regulatory assets
    (5,648 )     21,858  
  Changes in pension and other postretirement liabilities
    (3,459 )     (16,605 )
  Other
    (4,028 )     7,127  
Net cash flow provided by operating activities
    391,711       314,457  
                 
INVESTING ACTIVITIES
               
Construction expenditures
    (198,785 )     (156,944 )
Allowance for equity funds used during construction
    6,512       6,176  
Nuclear fuel purchases
    (41,592 )     (73,853 )
Proceeds from the sale of nuclear fuel
    56,579       9,647  
Proceeds from nuclear decommissioning trust fund sales
    96,653       56,543  
Investment in nuclear decommissioning trust funds
    (111,084 )     (70,623 )
Change in money pool receivable - net
    (8,565 )     49,723  
Proceeds from the sale of investment
    51,000       -  
Receipts from storm reserve escrow account
    3,364       -  
Other
    (66 )     (100 )
Net cash flow used in investing activities
    (145,984 )     (179,431 )
                 
FINANCING ACTIVITIES
               
Proceeds from the issuance of long-term debt
    74,251       -  
Retirement of long-term debt
    (70,840 )     -  
Changes in credit borrowings - net
    (29,400 )     18,500  
Dividends/distributions paid:
               
  Common equity
    (67,400 )     (281,950 )
  Preferred membership interests
    (619 )     (619 )
Other
    -       (266 )
Net cash flow used in financing activities
    (94,008 )     (264,335 )
                 
Net increase (decrease) in cash and cash equivalents
    151,719       (129,309 )
                 
Cash and cash equivalents at beginning of period
    24,845       155,173  
                 
Cash and cash equivalents at end of period
  $ 176,564     $ 25,864  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid/(received) during the period for:
               
  Interest - net of amount capitalized
  $ 54,291     $ 55,073  
  Income taxes
  $ -     $ (7 )
                 
See Notes to Financial Statements.
               
                 

 

 
BALANCE SHEETS
 
ASSETS
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT ASSETS
           
Cash and cash equivalents:
           
  Cash
  $ 20,295     $ 217  
  Temporary cash investments
    156,269       24,628  
        Total cash and cash equivalents
    176,564       24,845  
Accounts receivable:
               
  Customer
    64,723       61,648  
  Allowance for doubtful accounts
    (749 )     (843 )
  Associated companies
    110,558       171,431  
  Other
    18,710       22,082  
  Accrued unbilled revenues
    57,097       51,155  
    Total accounts receivable
    250,339       305,473  
Fuel inventory - at average cost
    30,996       23,249  
Materials and supplies - at average cost
    120,566       114,075  
Deferred nuclear refueling outage costs
    8,474       21,066  
Gas hedge contracts
    2,971       -  
Prepayments and other
    9,053       5,180  
TOTAL
    598,963       493,888  
                 
OTHER PROPERTY AND INVESTMENTS
               
Investment in affiliate preferred membership interests
    289,664       339,664  
Decommissioning trust funds
    474,976       420,917  
Non-utility property - at cost (less accumulated depreciation)
    164,898       164,712  
Storm reserve escrow account
    86,951       90,249  
Other
    13,310       12,701  
TOTAL
    1,029,799       1,028,243  
                 
UTILITY PLANT
               
Electric
    7,206,302       7,068,657  
Natural gas
    133,893       129,950  
Construction work in progress
    172,141       122,051  
Nuclear fuel
    151,729       206,031  
TOTAL UTILITY PLANT
    7,664,065       7,526,689  
Less - accumulated depreciation and amortization
    3,983,405       3,906,353  
UTILITY PLANT - NET
    3,680,660       3,620,336  
                 
DEFERRED DEBITS AND OTHER ASSETS
               
Regulatory assets:
               
  Regulatory asset for income taxes - net
    172,995       173,724  
  Other regulatory assets
    340,275       333,898  
  Deferred fuel costs
    100,124       100,124  
Other
    15,768       13,506  
TOTAL
    629,162       621,252  
                 
TOTAL ASSETS
  $ 5,938,584     $ 5,763,719  
                 
See Notes to Financial Statements.
               


 

ENTERGY GULF STATES LOUISIANA, L.L.C.
 
BALANCE SHEETS
 
LIABILITIES AND EQUITY
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT LIABILITIES
           
Currently maturing long-term debt
  $ 75,000     $ 60,000  
Accounts payable:
               
  Associated companies
    87,451       73,305  
  Other
    154,731       101,009  
Customer deposits
    48,146       49,734  
Taxes accrued
    175,354       107,367  
Accumulated deferred income taxes
    20,634       5,107  
Interest accrued
    31,780       26,084  
Deferred fuel costs
    5,824       97,178  
Pension and other postretirement liabilities
    8,295       7,911  
Gas hedge contracts
    -       8,572  
Other
    14,763       15,294  
TOTAL
    621,978       551,561  
                 
NON-CURRENT LIABILITIES
               
Accumulated deferred income taxes and taxes accrued
    1,371,292       1,368,563  
Accumulated deferred investment tax credits
    79,114       81,520  
Other regulatory liabilities
    117,007       75,721  
Decommissioning and asset retirement cost liabilities
    375,452       359,792  
Accumulated provisions
    96,351       99,033  
Pension and other postretirement liabilities
    328,829       332,672  
Long-term debt
    1,442,369       1,482,430  
Long-term payables - associated companies
    29,912       31,254  
Other
    68,282       47,397  
TOTAL
    3,908,608       3,878,382  
                 
Commitments and Contingencies
               
                 
EQUITY
               
Preferred membership interests without sinking fund
    10,000       10,000  
Member's equity
    1,455,211       1,393,386  
Accumulated other comprehensive loss
    (57,213 )     (69,610 )
TOTAL
    1,407,998       1,333,776  
                 
TOTAL LIABILITIES AND EQUITY
  $ 5,938,584     $ 5,763,719  
                 
See Notes to Financial Statements.
               


 

 
STATEMENTS OF CHANGES IN EQUITY
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited) (In Thousands)
 
                         
         
Common Equity
       
   
Preferred Membership Interests
   
Member's Equity
   
Accumulated Other Comprehensive Income (Loss)
   
Total
 
Balance at December 31, 2010
  $ 10,000     $ 1,494,593     $ (40,304 )   $ 1,464,289  
                                 
Net income
    -       150,197       -       150,197  
Other comprehensive income
    -       -       1,715       1,715  
Dividends/distributions declared on common equity
    -       (281,950 )     -       (281,950 )
Dividends/distributions declared on preferred membership interests
    -       (619 )     -       (619 )
Other
    -       (19 )     -       (19 )
                                 
Balance at September 30, 2011
  $ 10,000     $ 1,362,202     $ (38,589 )   $ 1,333,613  
                                 
                                 
Balance at December 31, 2011
  $ 10,000     $ 1,393,386     $ (69,610 )   $ 1,333,776  
                                 
Net income
    -       128,958       -       128,958  
Member contribution
    -       1,000       -       1,000  
Other comprehensive income
    -       -       12,397       12,397  
Dividends/distributions declared on common equity
    -       (67,400 )     -       (67,400 )
Dividends/distributions declared on preferred membership interests
    -       (619 )     -       (619 )
Other
    -       (114 )     -       (114 )
                                 
Balance at September 30, 2012
  $ 10,000     $ 1,455,211     $ (57,213 )   $ 1,407,998  
                                 
See Notes to Financial Statements.
                               
                                 
                                 


 

 
SELECTED OPERATING RESULTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
                         
   
Three Months Ended
   
Increase/
       
Description
 
2012
   
2011
   
(Decrease)
   
%
 
   
(Dollars In Millions)
       
Electric Operating Revenues:
                       
  Residential
  $ 119     $ 166     $ (47 )     (28 )
  Commercial
    90       125       (35 )     (28 )
  Industrial
    89       136       (47 )     (35 )
  Governmental
    5       5       0       -  
    Total retail
    303       432       (129 )     (30 )
  Sales for resale:
                               
     Associated companies
    103       136       (33 )     (24 )
     Non-associated companies
    9       14       (5 )     (36 )
  Other
    11       5       6       120  
    Total
  $ 426     $ 587     $ (161 )     (27 )
                                 
Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    1,718       1,802       (84 )     (5 )
  Commercial
    1,500       1,516       (16 )     (1 )
  Industrial
    2,210       2,299       (89 )     (4 )
  Governmental
    61       61       0       -  
    Total retail
    5,489       5,678       (189 )     (3 )
  Sales for resale:
                               
     Associated companies
    2,295       2,462       (167 )     (7 )
     Non-associated companies
    229       243       (14 )     (6 )
    Total
    8,013       8,383       (370 )     (4 )
                                 
                                 
   
Nine Months Ended
   
Increase/
         
Description
    2012       2011    
(Decrease)
   
%
 
   
(Dollars In Millions)
         
Electric Operating Revenues:
                               
  Residential
  $ 295     $ 386     $ (91 )     (24 )
  Commercial
    258       325       (67 )     (21 )
  Industrial
    287       379       (92 )     (24 )
  Governmental
    14       16       (2 )     (13 )
    Total retail
    854       1,106       (252 )     (23 )
  Sales for resale:
                               
     Associated companies
    281       381       (100 )     (26 )
     Non-associated companies
    23       42       (19 )     (45 )
  Other
    43       37       6       16  
    Total
  $ 1,201     $ 1,566     $ (365 )     (23 )
                                 
Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    4,019       4,278       (259 )     (6 )
  Commercial
    4,003       4,004       (1 )     -  
  Industrial
    6,741       6,819       (78 )     (1 )
  Governmental
    174       168       6       4  
    Total retail
    14,937       15,269       (332 )     (2 )
  Sales for resale:
                               
     Associated companies
    5,858       6,598       (740 )     (11 )
     Non-associated companies
    673       753       (80 )     (11 )
    Total
    21,468       22,620       (1,152 )     (5 )
                                 
                                 
 
 


ENTERGY LOUISIANA, LLC AND SUBSIDIARIES

MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS


Plan to Spin Off the Utility’s Transmission Business

See the “Plan to Spin Off the Utility’s Transmission Business” section of Entergy Corporation and Subsidiaries Management’s Financial Discussion and Analysis in the Form 10-K and herein for a discussion of Entergy’s plan to spin off its transmission business and merge it with a newly formed subsidiary of ITC Holdings Corp., including the planned retirement of debt and preferred securities.

Hurricane Isaac

In August 2012, Hurricane Isaac caused extensive damage to Entergy Louisiana’s service area.  The storm resulted in widespread power outages, significant damage primarily to distribution infrastructure, and the loss of sales during the power outages.  Total restoration costs for the repair and/or replacement of Entergy Louisiana’s electric facilities damaged by Hurricane Isaac are currently estimated to be in the range of $240 million to $300 million.  Entergy Louisiana is considering all reasonable avenues to recover storm-related costs from Hurricane Isaac, including, but not limited to, accessing funded storm reserves; securitization or other alternative financing; and traditional retail recovery on an interim and permanent basis.  Storm cost recovery or financing may be subject to review by applicable regulatory authorities.

Entergy Louisiana has recorded accounts payable for the estimated costs incurred that were necessary to return customers to service.  Entergy Louisiana recorded corresponding regulatory assets of approximately $84 million and construction work in progress of approximately $161 million.  Entergy Louisiana recorded the regulatory assets in accordance with its accounting policies and based on the historic treatment of such costs in its service area because management believes that recovery through some form of regulatory mechanism is probable.  Because Entergy Louisiana has not gone through the regulatory process regarding these storm costs, however, there is an element of risk, and Entergy Louisiana is unable to predict with certainty the degree of success it may have in its recovery initiatives, the amount of restoration costs that it may ultimately recover, or the timing of such recovery.

Results of Operations

Net Income

Third Quarter 2012 Compared to Third Quarter 2011

Net income decreased $257.5 million primarily due to a prior year settlement with the IRS related to the mark-to-market income tax treatment of power purchase contracts, which resulted in a $422 million reduction in income tax expense in the third quarter 2011.  The net income effect was partially offset by a $199 million regulatory charge, which reduced net revenue in the third quarter 2011, because Entergy Louisiana is sharing the benefits with customers.  See Note 3 to the financial statements in the Form 10-K for additional discussion of the settlement and benefit sharing.


 
112

Entergy Louisiana, LLC and Subsidiaries
Management's Financial Discussion and Analysis



Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net income decreased $208.9 million primarily due to a prior year settlement with the IRS related to the mark-to-market income tax treatment of power purchase contracts, which resulted in a $422 million reduction in income tax expense in the third quarter 2011.  The net income effect was partially offset by a $199 million regulatory charge, which reduced net revenue in the nine months ended September 30, 2011, because Entergy Louisiana is sharing the benefit with customers.  See Note 3 to the financial statements in the Form 10-K for additional discussion of the settlement and benefit sharing.  Partially offsetting the decrease in net income was the IRS tax settlement, in June 2012, related to the uncertain tax position regarding the Hurricane Katrina and Hurricane Rita Louisiana Act 55 financing, which resulted in a $142.7 million income tax benefit, partially offset by a $137.1 million ($84.3 million net-of-tax) regulatory charge, which reduced net revenue in the nine months ended September 30, 2012, because Entergy Louisiana is sharing the benefit with customers.  See Note 10 to the financial statements herein for additional discussion of the settlement and benefit sharing.

Net Revenue

Third Quarter 2012 Compared to Third Quarter 2011

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges (credits).  Following is an analysis of the change in net revenue comparing the third quarter 2012 to the third quarter 2011.

   
Amount
   
(In Millions)
     
2011 net revenue
 
$130.3 
Mark-to-market tax settlement sharing
 
199.6 
Volume/weather
 
(16.7)
Other
 
(1.1)
2012 net revenue
 
$312.1 

The mark-to-market tax settlement sharing variance results from a regulatory charge recorded in the third quarter 2011 because Entergy Louisiana is sharing the benefits of a settlement with the IRS related to mark-to-market income tax treatment of power purchase contracts with customers.  See Note 3 to the financial statements in the Form 10-K for additional discussion of the settlement and benefit sharing.

The volume/weather variance is primarily due to the effect of milder weather as compared to the previous year on residential and commercial sales, the effects of the power outages caused by Hurricane Isaac, and decreased usage in the industrial sector as a result of decreased consumption by a large industrial customer in the chemical industry as a result of an unplanned outage.

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

Gross operating revenues decreased primarily due to a decrease of $158.7 million in fuel cost recovery revenues primarily due to lower fuel rates and the decrease related to volume/weather, as discussed above.  Entergy Louisiana’s fuel and purchased power recovery mechanism is discussed in Note 2 to the financial statements in the Form 10-K.

Fuel and purchased power expenses decreased primarily due to a decrease in the average market prices of natural gas and purchased power and decreased demand.

Other regulatory charges decreased primarily due to a regulatory charge recorded in the third quarter 2011 because Entergy Louisiana is sharing the benefits of a settlement with the IRS related to mark-to-market income tax treatment of power purchase contracts with customers.  See Note 3 to the financial statements in the Form 10-K for additional discussion of the settlement.
 
 
113

Entergy Louisiana, LLC and Subsidiaries
Management's Financial Discussion and Analysis



Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges.  Following is an analysis of the change in net revenue comparing the nine months ended September 30, 2012 to the nine months ended September 30, 2011.

   
Amount
   
(In Millions)
     
2011 net revenue
 
$650.1 
Mark-to-market tax settlement sharing
 
201.4 
Retail electric price
 
13.7 
Volume/weather
 
(25.5)
Louisiana Act 55 financing tax settlement sharing
 
(135.6)
Other
 
(1.6)
2012 net revenue
 
$702.5 

The mark-to-market tax settlement sharing variance results from a regulatory charge recorded in the third quarter 2011 because Entergy Louisiana is sharing the benefits of a settlement with the IRS related to mark-to-market income tax treatment of power purchase contracts with customers.  See Note 3 to the financial statements in the Form 10-K for additional discussion of the settlement and benefit sharing.

The retail electric price variance is primarily due to a special formula rate plan rate increase effective May 2011 in accordance with a previous LPSC order relating to the acquisition of Unit 2 of the Acadia Energy Center.  See Note 2 to the financial statements in the Form 10-K for a discussion of the formula rate plan increase.

The volume/weather variance is primarily due to the effect of milder weather as compared to the previous year on residential and commercial sales and the effects of the power outages caused by Hurricane Isaac, partially offset by increased usage in the industrial sector as a result of increased consumption by a large industrial customer in the chemical industry as a result of plant expansion.

The Louisiana Act 55 financing tax settlement sharing variance results from a regulatory charge recorded in the second quarter 2012 because Entergy Louisiana is sharing the benefits of the settlement with the IRS related to the uncertain tax position regarding the Hurricane Katrina and Hurricane Rita Louisiana Act 55 financing with customers.  See Note 10 to the financial statements for additional discussion of the settlement and benefit sharing.

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

Gross operating revenues decreased primarily due to:

·  
a decrease of $270.2 million in fuel cost recovery revenues primarily due to lower fuel rates.  Entergy Louisiana’s fuel and purchased power recovery mechanism is discussed in Note 2 to the financial statements in the Form 10-K;
·  
the decrease related to volume/weather, as discussed above; and
·  
a decrease of $15.9 million in gross wholesale revenues due to a decrease in sales to affiliated customers.

Fuel and purchased power expenses decreased primarily due to a decrease in the average market prices of natural gas and purchased power.


 
114

Entergy Louisiana, LLC and Subsidiaries
Management's Financial Discussion and Analysis



Other regulatory charges decreased primarily due to a regulatory charge recorded in the third quarter 2011 because Entergy Louisiana is sharing the benefits of a settlement with the IRS related to mark-to-market income tax treatment of power purchase contracts with customers, partially offset by a regulatory charge recorded in the second quarter 2012 because Entergy Louisiana is sharing the benefits of a settlement with the IRS related to the uncertain tax position regarding the Hurricane Katrina and Hurricane Rita Louisiana Act 55 financing with customers.  See Note 10 to the financial statements herein and Note 3 to the financial statements in the Form 10-K for additional discussion of the settlements.

Other Income Statement Variances

Third Quarter 2012 Compared to Third Quarter 2011

Interest expense increased primarily due to:

·  
cessation in 2011 of interest on transmission credits per a FERC order relating to an interconnection and operating agreement between a power producer and Entergy Louisiana;
·  
the issuance by Entergy Louisiana Investment Recovery Funding, L.L.C., a wholly owned subsidiary of Entergy Louisiana, of $207.2 million of senior secured investment recovery bonds with a coupon rate of 2.04% in September 2011;
·  
the issuance of $250 million of 1.875% Series first mortgage bonds in January 2012; and
·  
the issuance of $200 million of 5.25% Series first mortgage bonds in July 2012.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Other operation and maintenance expenses increased primarily due to:

·  
an increase of $8 million in compensation and benefits costs primarily due to decreasing discount rates and changes in certain actuarial assumptions resulting from a recent experience study.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for further discussion of benefits costs;
·  
an increase of $8.6 million in fossil-fueled generation expenses due to an overall higher scope of outages compared to prior year and the addition of Acadia Unit 2 in April 2011; and
·  
$4.8 million of costs incurred in 2012 related to the planned spin-off and merger of the transmission business.

The increase was partially offset by the deferral, as approved by the LPSC and the FERC, of costs related to the transition and implementation of joining the MISO RTO, which reduced expenses by $5.2 million.

Depreciation and amortization expenses increased primarily due to additions to plant in service, including the acquisition of the Acadia Unit 2 in 2011.

Interest expense increased primarily due to:

·  
cessation in 2011 of interest on transmission credits per a FERC order relating to an interconnection and operating agreement between a power producer and Entergy Louisiana;
·  
the issuance of $200 million of 4.8% Series first mortgage bonds in March 2011;
·  
the issuance by Entergy Louisiana Investment Recovery Funding, L.L.C., a wholly owned subsidiary of Entergy Louisiana, of $207.2 million of senior secured investment recovery bonds with a coupon rate of 2.04% in September 2011;
·  
the issuance of $250 million of 1.875% Series first mortgage bonds in January 2012; and
·  
the issuance of $200 million of 5.25% Series first mortgage bonds in July 2012.


 
115

Entergy Louisiana, LLC and Subsidiaries
Management's Financial Discussion and Analysis



Income Taxes

The effective income tax rate was 34.7% for the third quarter 2012 and (110.1%) for the nine months ended September 30, 2012.  The difference in the effective income tax rate for the third quarter 2012 versus the federal statutory rate of 35% is due to a change in the regulatory treatment of state income taxes included in formula rate plan filings, partially offset by book and tax differences related to the non-taxable income distributions earned on preferred membership interests.  The difference in the effective income tax rate for the nine months ended September 30, 2012 versus the federal statutory rate of 35% is due to the reversal of the provision for uncertain tax positions related to the IRS settlement on how to treat the Louisiana Act 55 financing of the Hurricane Katrina and Hurricane Rita storm costs, book and tax differences related to the non-taxable income distributions earned on preferred membership interests, and book and tax differences related to the allowance for equity funds used during construction, partially offset by a change to the regulatory treatment of state income taxes included in formula rate plan filings.

The effective income tax rate was 727.8% for the third quarter 2011 and (359.5%) for the nine months ended September 30, 2011.  The differences in the effective income tax rates for the third quarter 2011 and the nine months ended September 30, 2011 versus the federal statutory rate of 35% were primarily due to the third quarter 2011 reversal of the provision for uncertain tax positions resulting from a settlement with the IRS related to the mark-to-market income tax treatment of power purchase contracts.

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2012 and 2011 were as follows:

   
2012
 
2011
   
(In Thousands)
         
Cash and cash equivalents at beginning of period
 
$878 
 
$123,254 
         
Cash flow provided by (used in):
       
 
Operating activities
 
401,672 
 
248,173 
 
Investing activities
 
(519,816)
 
(699,523)
 
Financing activities
 
266,171 
 
381,593 
Net increase (decrease) in cash and cash equivalents
 
148,027 
 
(69,757)
         
Cash and cash equivalents at end of period
 
$148,905 
 
$53,497 

Operating Activities

Net cash flow provided by operating activities increased $153.5 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to the purchase in 2011 of $28.1 million of fuel oil from System Fuels because System Fuels will no longer procure fuel oil for the Utility companies, a decrease of $22.6 million in pension contributions, and the timing of collections of customer receivables, partially offset by an increase of $18.6 million in interest paid, as discussed above.  See “MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates” in the Form 10-K and Note 6 to the financial statements herein for a discussion of qualified pension and other postretirement benefits.


 
116

Entergy Louisiana, LLC and Subsidiaries
Management's Financial Discussion and Analysis



Investing Activities

Net cash flow used in investing activities decreased $179.7 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to:

·  
the purchase of the Acadia Unit 2 for approximately $300 million in April 2011;
·  
a decrease in nuclear fuel activity because of variations from year to year in the timing and pricing of fuel reload requirements in the Utility business, material and services deliveries, and the timing of cash payments during the nuclear fuel cycle;
·  
a decrease in transmission construction expenditures due to increased work performed in 2011; and
·  
receipts of $13.7 million in 2012 from the storm reserve escrow account.

The decrease was partially offset by the following:

·  
an increase in fossil construction expenditures due to spending on the Ninemile Unit 6 self-build project;
·  
an increase in nuclear construction expenditures due to the Waterford 3 steam generator replacement project in 2012.  The increase is partially offset by various nuclear projects in 2011; and
·  
money pool activity.

Increases in Entergy Louisiana’s receivable from the money pool are a use of cash flow, and Entergy Louisiana’s receivable from the money pool increased by $30.7 million for the nine months ended September 30, 2012 compared to decreasing by $22.8 million for the nine months ended September 30, 2011.  The money pool is an inter-company borrowing arrangement designed to reduce the Utility subsidiaries’ need for external short-term borrowings.

Financing Activities

Net cash flow provided by financing activities decreased $115.4 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to the following cash flow activity:

·  
money pool activity;
·  
the payment on credit borrowings of $50 million on Entergy Louisiana’s credit facility in 2012;
·  
a principal payment of $12.3 million in 2012 for the Senior Secured Investment Recovery bonds;
·  
the issuances of $250 million of 1.875% Series first mortgage bonds in January 2012 and $200 million of 5.25% Series first mortgage bonds in July 2012 compared to the issuance of $200 million of 4.8% Series first mortgage bonds in March 2011;
·  
the issuance by Entergy Louisiana Investment Recovery Funding, L.L.C., a wholly owned subsidiary of Entergy Louisiana, of $207.2 million of senior secured investment recovery bonds with a coupon rate of 2.04% in September 2011;
·  
an increase in borrowings of $12.1 million on the nuclear fuel company variable interest entity’s credit facility in 2012 compared to an increase in borrowings of $33.5 million on the nuclear fuel company variable interest entity’s credit facility in 2011;
·  
the issuance of the $25 million 3.25% Series G note by the nuclear fuel company variable interest entity in August 2012;
·  
the issuance of the $20 million 3.30% Series F note by the nuclear fuel company variable interest entity in March 2011;
·  
a principal payment of $25.3 million in 2012 for the Waterford 3 sale-leaseback obligation compared to a principal payment of $35.5 million in 2011; and
·  
a decrease of $30.6 million in common equity dividends in 2012.

Decreases in Entergy Louisiana’s payable to the money pool are a use of cash flow, and Entergy Louisiana’s payable to the money pool decreased by $118.4 million for the nine months ended September 30, 2012.

 
117

Entergy Louisiana, LLC and Subsidiaries
Management's Financial Discussion and Analysis



Capital Structure

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

   
September 30,
2012
 
December 31,
2011
         
Debt to capital
 
49.0%
 
47.2%
Effect of excluding securitization bonds
 
(1.9)%
 
(2.3)%
Debt to capital, excluding securitization bonds (1)
 
47.1%
 
44.9%
Effect of subtracting cash
 
(1.5)%
 
-%
Net debt to net capital, excluding securitization bonds (1)
 
45.6%
 
44.9%

(1)
Calculation excludes the securitization bonds, which are non-recourse to Entergy Louisiana.

Net debt consists of debt less cash and cash equivalents.  Debt consists of notes payable and long-term debt, including the currently maturing portion.  Capital consists of debt and member’s equity.  Net capital consists of capital less cash and cash equivalents.  Entergy Louisiana uses the net debt to net capital ratio and the ratios excluding securitization bonds in analyzing its financial condition and believes they provide 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 is developing its capital investment plan for 2013 through 2015 and currently anticipates making $1.5 billion in capital investments during that period, including approximately $647 million for maintenance of existing assets.  The remaining $867 million is associated with specific investments such as environmental compliance spending, transmission upgrades and system improvements, and other investments, such as the Ninemile Point Unit 6 self-build project and completion of the Waterford 3 steam generator replacement project.  Following are additional updates to the information provided in the Form 10-K.

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

September 30,
2012
 
December 31,
2011
 
September 30,
2011
 
December 31,
2010
(In Thousands)
             
$30,710
 
($118,415)
 
$27,107
 
$49,887

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

Entergy Louisiana has a credit facility in the amount of $200 million scheduled to expire in March 2017.  No borrowings were outstanding under the facility as of September 30, 2012.  See Note 4 to the financial statements herein for additional discussion of the credit facility.

In January 2012, Entergy Louisiana issued $250 million of 1.875% Series first mortgage bonds due December 2014.  Entergy Louisiana used a portion of the proceeds to repay short-term borrowings under the Entergy System money pool.

In July 2012, Entergy Louisiana issued $200 million of 5.25% Series first mortgage bonds due July 2052.  Entergy Louisiana used the proceeds for general corporate purposes.


 
118

Entergy Louisiana, LLC and Subsidiaries
Management's Financial Discussion and Analysis



In August 2012 the Entergy Louisiana nuclear fuel company variable interest entity issued $25 million of 3.25% Series G notes due July 2017.  The Entergy Louisiana nuclear fuel company variable interest entity used the proceeds to purchase additional nuclear fuel.

Waterford 3 Steam Generator Replacement Project

See the Form 10-K for a discussion of Entergy Louisiana’s plan to replace the Waterford 3 steam generators, along with the reactor vessel closure head and control element drive mechanisms.  Entergy Louisiana’s Fall 2012 refueling outage began in October 2012, which will include the steam generator, reactor vessel head, and control element drive mechanisms replacement project.

New Nuclear Development

See the Form 10-K for a discussion of the project option being developed by Entergy Gulf States Louisiana and Entergy Louisiana for new nuclear generation at River Bend.  In March 2010, Entergy Gulf States Louisiana and Entergy Louisiana filed with the LPSC seeking approval to continue the limited development activities necessary to preserve an option to construct a new unit at River Bend.  The testimony and legal briefs of the LPSC staff generally support the request of Entergy Gulf States Louisiana and Entergy Louisiana, although other parties filed briefs, without supporting testimony, in opposition to the request.  At an evidentiary hearing in October 2011, Entergy Gulf States Louisiana, Entergy Louisiana, and the LPSC staff presented testimony in support of certification of activities to preserve an option for a new nuclear plant at River Bend.  The ALJ recommended, however, that the LPSC decline the request of Entergy Gulf States Louisiana and Entergy Louisiana on the basis that the LPSC’s rule on new nuclear development does not apply to activities to preserve an option to develop and on the further grounds that the companies improperly engaged in advanced preparation activities prior to certification.  There has been no suggestion that the planning activities or costs incurred were imprudent.  At its June 28, 2012 meeting the LPSC voted to uphold the ALJ’s decision and directed that Entergy Gulf States Louisiana and Entergy Louisiana be permitted to seek recovery of these costs in the rate case filings that are anticipated in January 2013, fully reserving the LPSC’s right to determine the recoverability of such costs in rates. On September 10, 2012, Entergy Gulf States Louisiana and Entergy Louisiana filed a petition for appeal and judicial review of the LPSC’s order with the Louisiana Nineteenth Judicial District Court.  A schedule for the appeal has not been established.

Entergy Louisiana’s Ninemile Point Unit 6 Self-Build Project

See the Form 10-K for a discussion of Entergy Louisiana’s Ninemile Point Unit 6 self-build project.  The Ninemile 6 capacity and energy is proposed to be allocated 55% to Entergy Louisiana, 25% to Entergy Gulf States Louisiana, and 20% to Entergy New Orleans.  In June 2011, Entergy Louisiana filed with the LPSC an application seeking certification that the public necessity and convenience would be served by Entergy Louisiana’s construction of the facility.  Entergy Gulf States Louisiana joined in the application, seeking certification of its purchase under a life-of-unit power purchase agreement of its allocated share of the capacity and energy generated by Ninemile 6. In February 2012 the City Council passed a resolution authorizing Entergy New Orleans to purchase 20% of the Ninemile 6 energy and capacity.  In March 2012 the LPSC unanimously voted to grant the certifications requested by Entergy Louisiana and Entergy Gulf States Louisiana, and Entergy Louisiana has given the contractor a full notice to proceed with the construction. Under the terms approved by the LPSC, costs may be recovered through Entergy Louisiana’s formula rate plan, if one is in effect when the project is placed in service; alternatively, Entergy Louisiana must file a rate case approximately 12 months prior to the expected in-service date.


 
119

Entergy Louisiana, LLC and Subsidiaries
Management's Financial Discussion and Analysis



State and Local Rate Regulation

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – State and Local Rate Regulation" in the Form 10-K for a discussion of state and local rate regulation.  Following is an update to that discussion.

In May 2012, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2011 test year.  The filing reflected a 9.63% earned return on common equity, which is within the earnings bandwidth and results in no cost of service rate change under the formula rate plan.  The filing also reflected an $18.1 million rate increase for incremental capacity costs.  Subsequently, in June 2012, Entergy Louisiana supplemented the filing to estimate at $101 million the first-year revenue requirement associated with the Waterford 3 replacement steam generator project when it is placed into service.  In August 2012, Entergy Louisiana submitted a revised filing that reflects an earned return on common equity of 10.38%, which is still within the earnings bandwidth, resulting in no cost of service rate change.  The revised filing also indicates that an increase of $15.9 million should be reflected in the incremental capacity rider.  The rate change was implemented, subject to refund, effective for bills rendered the first billing cycle of September 2012.  The filing remains subject to LPSC review.  The September 2012 rate change contributed approximately $1.3 million to Entergy Louisiana’s revenues in the third quarter 2012.

Federal Regulation

See “Entergy’s Proposal to Join the MISO RTO” in the “Rate, Cost-recovery, and Other Regulation – Federal Regulation” section of Entergy Corporation and Subsidiaries Management’s Financial Discussion and Analysis for updates to the Federal Regulation discussion in the Form 10-K.

Nuclear Matters

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Nuclear Matters" in the Form 10-K for a discussion of nuclear matters.

Environmental Risks

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Environmental Risks" in the Form 10-K for a discussion of 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 Entergy Louisiana’s accounting for nuclear decommissioning costs, unbilled revenue, and qualified pension and other postretirement benefits.  Following is an update to that discussion.

Nuclear Decommissioning Costs

In the second quarter 2012, Entergy Louisiana recorded a revision to its estimated decommissioning cost liability for Waterford 3 as a result of a revised decommissioning cost study.  The revised estimate resulted in a $48.9 million increase in its decommissioning cost liability, along with a corresponding increase in the related asset retirement obligation asset that will be depreciated over the remaining life of the unit.



 
CONSOLIDATED INCOME STATEMENTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
   
(In Thousands)
 
                         
OPERATING REVENUES
                       
Electric
  $ 614,044     $ 786,814     $ 1,658,189     $ 1,954,095  
                                 
OPERATING EXPENSES
                               
Operation and Maintenance:
                               
   Fuel, fuel-related expenses, and
                               
     gas purchased for resale
    134,108       221,832       320,991       450,589  
   Purchased power
    168,817       239,484       505,935       670,408  
   Nuclear refueling outage expenses
    6,103       6,861       18,573       21,042  
   Other operation and maintenance
    106,523       107,740       334,559       320,544  
Decommissioning
    5,169       6,219       18,172       18,328  
Taxes other than income taxes
    17,913       18,232       52,122       53,316  
Depreciation and amortization
    54,642       52,991       162,474       154,414  
Other regulatory charges (credits) - net
    (956 )     195,161       128,749       182,951  
TOTAL
    492,319       848,520       1,541,575       1,871,592  
                                 
OPERATING INCOME (LOSS)
    121,725       (61,706 )     116,614       82,503  
                                 
OTHER INCOME
                               
Allowance for equity funds used during construction
    9,981       8,278       27,032       23,929  
Interest and investment income
    21,566       21,975       63,178       66,101  
Miscellaneous - net
    519       (1,353 )     (1,680 )     (2,007 )
TOTAL
    32,066       28,900       88,530       88,023  
                                 
INTEREST EXPENSE
                               
Interest expense
    35,731       25,363       101,434       84,698  
Allowance for borrowed funds used during construction
    (4,776 )     (4,373 )     (12,530 )     (12,776 )
TOTAL
    30,955       20,990       88,904       71,922  
                                 
INCOME (LOSS) BEFORE INCOME TAXES
    122,836       (53,796 )     116,240       98,604  
                                 
Income taxes (benefit)
    42,628       (391,518 )     (127,977 )     (354,521 )
                                 
NET INCOME
    80,208       337,722       244,217       453,125  
                                 
Preferred dividend requirements and other
    1,738       1,738       5,213       5,213  
                                 
EARNINGS APPLICABLE TO
                               
COMMON EQUITY
  $ 78,470     $ 335,984     $ 239,004     $ 447,912  
                                 
See Notes to Financial Statements.
                               



 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
 
 
Three Months Ended
   
Nine Months Ended
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
   
(In Thousands)
 
                         
Net Income
  $ 80,208     $ 337,722     $ 244,217     $ 453,125  
Other comprehensive income
                               
   Pension and other postretirement liabilities
                               
     (net of tax expense of $493, $366, $1,480, and $1,097)
    630       366       1,890       1,467  
         Other comprehensive income
    630       366       1,890       1,467  
Comprehensive Income
  $ 80,838     $ 338,088     $ 246,107     $ 454,592  
                                 
                                 
See Notes to Financial Statements.
                               



 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
OPERATING ACTIVITIES
           
Net income
  $ 244,217     $ 453,125  
Adjustments to reconcile net income to net cash flow provided by operating activities:
         
  Depreciation, amortization, and decommissioning, including nuclear fuel amortization
    299,745       212,963  
  Deferred income taxes, investment tax credits, and non-current taxes accrued
    (94,765 )     (273,339 )
  Changes in working capital:
               
    Receivables
    (37,610 )     (110,234 )
    Fuel inventory
    (3 )     (25,623 )
    Accounts payable
    65,772       (72 )
    Prepaid taxes and taxes accrued
    6,383       17,526  
    Interest accrued
    (1,557 )     1,342  
    Deferred fuel costs
    (30,132 )     (41,969 )
    Other working capital accounts
    (29,490 )     (13,528 )
Changes in provisions for estimated losses
    (17,392 )     (7,802 )
Changes in other regulatory assets
    (42,781 )     84,811  
Changes in other regulatory liabilities
    139,624       193,034  
Changes in pension and other postretirement liabilities
    (17,361 )     (42,095 )
Other
    (82,978 )     (199,966 )
Net cash flow provided by operating activities
    401,672       248,173  
                 
INVESTING ACTIVITIES
               
Construction expenditures
    (429,820 )     (314,799 )
Allowance for equity funds used during construction
    27,032       23,929  
Nuclear fuel purchases
    (134,413 )     (135,404 )
Proceeds from the sale of nuclear fuel
    48,990       11,570  
Payment for purchase of plant
    -       (299,589 )
Receipts from storm reserve escrow account
    13,669       -  
Remittances to transition charge account
    (22,113 )     -  
Payments from transition charge account
    15,472       -  
Proceeds from nuclear decommissioning trust fund sales
    19,833       11,491  
Investment in nuclear decommissioning trust funds
    (28,422 )     (19,279 )
Changes in money pool receivable - net
    (30,710 )     22,780  
Other
    666       (222 )
Net cash flow used in investing activities
    (519,816 )     (699,523 )
                 
FINANCING ACTIVITIES
               
Proceeds from the issuance of long-term debt
    465,997       420,076  
Retirement of long-term debt
    (37,649 )     (35,547 )
Changes in short-term borrowings - net
    (37,949 )     33,477  
Change in money pool payable - net
    (118,415 )     -  
Distributions paid:
               
  Common equity
    (600 )     (31,200 )
  Preferred membership interests
    (5,213 )     (5,213 )
Net cash flow provided by financing activities
    266,171       381,593  
                 
Net increase (decrease) in cash and cash equivalents
    148,027       (69,757 )
                 
Cash and cash equivalents at beginning of period
    878       123,254  
                 
Cash and cash equivalents at end of period
  $ 148,905     $ 53,497  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid (received) during the period for:
               
  Interest - net of amount capitalized
  $ 98,979     $ 80,354  
  Income taxes
  $ (3,601 )   $ (77 )
                 
                 
See Notes to Financial Statements.
               



 
CONSOLIDATED BALANCE SHEETS
 
ASSETS
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT ASSETS
           
Cash and cash equivalents:
           
  Cash
  $ 435     $ 878  
  Temporary cash investments
    148,470       -  
    Total cash and cash equivalents
    148,905       878  
Securitization recovery trust account
    11,840       5,200  
Accounts receivable:
               
  Customer
    140,270       102,379  
  Allowance for doubtful accounts
    (1,184 )     (1,147 )
  Associated companies
    82,752       60,661  
  Other
    7,663       10,945  
  Accrued unbilled revenues
    90,087       78,430  
    Total accounts receivable
    319,588       251,268  
Fuel inventory
    23,922       23,919  
Materials and supplies - at average cost
    150,411       140,561  
Deferred nuclear refueling outage costs
    10,504       24,197  
Prepayments and other
    18,083       13,171  
TOTAL
    683,253       459,194  
                 
OTHER PROPERTY AND INVESTMENTS
               
Investment in affiliate preferred membership interests
    807,423       807,424  
Decommissioning trust funds
    285,500       253,968  
Storm reserve escrow account
    186,914       201,249  
Non-utility property - at cost (less accumulated depreciation)
    624       760  
TOTAL
    1,280,461       1,263,401  
                 
UTILITY PLANT
               
Electric
    8,045,081       7,859,136  
Property under capital lease
    278,421       274,334  
Construction work in progress
    954,983       559,437  
Nuclear fuel
    182,115       165,380  
TOTAL UTILITY PLANT
    9,460,600       8,858,287  
Less - accumulated depreciation and amortization
    3,717,442       3,606,706  
UTILITY PLANT - NET
    5,743,158       5,251,581  
                 
DEFERRED DEBITS AND OTHER ASSETS
               
Regulatory assets:
               
  Regulatory asset for income taxes - net
    184,770       175,952  
  Other regulatory assets (includes securitization property of
               
  $178,664 as of September 30, 2012 and
               
  $198,445 as of December 31, 2011)
    848,435       814,472  
  Deferred fuel costs
    67,998       67,998  
Other
    42,252       31,269  
TOTAL
    1,143,455       1,089,691  
                 
TOTAL ASSETS
  $ 8,850,327     $ 8,063,867  
                 
See Notes to Financial Statements.
               

 

ENTERGY LOUISIANA, LLC AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
LIABILITIES AND EQUITY
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT LIABILITIES
           
Currently maturing long-term debt
  $ 14,236     $ 75,309  
Short-term borrowings
    56,444       44,392  
Accounts payable:
               
  Associated companies
    82,472       218,001  
  Other
    371,996       130,295  
Customer deposits
    87,943       86,099  
Accumulated deferred income taxes
    13,879       4,690  
Taxes accrued
    37,721       31,338  
Interest accrued
    34,978       36,535  
Deferred fuel costs
    36,403       66,535  
Pension and other postretirement liabilities
    9,348       9,161  
System agreement cost equalization
    17,689       36,800  
Gas hedge contracts
    -       12,397  
Other
    20,521       19,278  
TOTAL
    783,630       770,830  
                 
NON-CURRENT LIABILITIES
               
Accumulated deferred income taxes and taxes accrued
    1,011,483       1,098,690  
Accumulated deferred investment tax credits
    70,964       73,283  
Other regulatory liabilities
    435,166       295,542  
Decommissioning
    412,887       345,834  
Accumulated provisions
    195,668       213,060  
Pension and other postretirement liabilities
    442,137       459,685  
Long-term debt (includes securitization bonds of
               
  $194,797 as of September 30, 2012 and
               
  $207,123 as of December 31, 2011)
    2,625,478       2,177,003  
Other
    67,691       65,011  
TOTAL
    5,261,474       4,728,108  
                 
Commitments and Contingencies
               
                 
EQUITY
               
Preferred membership interests without sinking fund
    100,000       100,000  
Member's equity
    2,742,840       2,504,436  
Accumulated other comprehensive loss
    (37,617 )     (39,507 )
TOTAL
    2,805,223       2,564,929  
                 
TOTAL LIABILITIES AND EQUITY
  $ 8,850,327     $ 8,063,867  
                 
See Notes to Financial Statements.
               


 

 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited) (In Thousands)
 
                         
         
Common Equity
       
   
Preferred Membership Interests
   
Member's Equity
   
Accumulated Other Comprehensive Income (Loss)
   
Total
 
Balance at December 31, 2010
  $ 100,000     $ 2,061,833     $ (24,962 )   $ 2,136,871  
                                 
Net income
    -       453,125       -       453,125  
Additional non-cash contribution resulting from tax settlement
    -       333,830       -       333,830  
Other comprehensive income
    -       -       1,467       1,467  
Dividends/distributions declared on common equity
    -       (31,200 )     -       (31,200 )
Dividends/distributions declared on preferred membership interests
    -       (5,213 )     -       (5,213 )
                                 
Balance at September 30, 2011
  $ 100,000     $ 2,812,375     $ (23,495 )   $ 2,888,880  
                                 
Balance at December 31, 2011
  $ 100,000     $ 2,504,436     $ (39,507 )   $ 2,564,929  
                                 
Net income
    -       244,217       -       244,217  
Other comprehensive income
    -       -       1,890       1,890  
Dividends/distributions declared on common equity
    -       (600 )     -       (600 )
Dividends/distributions declared on preferred membership interests
    -       (5,213 )     -       (5,213 )
                                 
Balance at September 30, 2012
  $ 100,000     $ 2,742,840     $ (37,617 )   $ 2,805,223  
                                 
See Notes to Financial Statements.
                               
                                 
                                 


 

 
SELECTED OPERATING RESULTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
                         
   
Three Months Ended
   
Increase/
       
Description
 
2012
   
2011
   
(Decrease)
 
%
 
   
(Dollars In Millions)
       
Electric Operating Revenues:
                   
  Residential
  $ 227     $ 296     $ (69 )     (23 )
  Commercial
    136       169       (33 )     (20 )
  Industrial
    180       256       (76 )     (30 )
  Governmental
    11       12       (1 )     (8 )
    Total retail
    554       733       (179 )     (24 )
  Sales for resale:
                               
     Associated companies
    46       40       6       15  
     Non-associated companies
    1       1       -       -  
  Other
    13       13       -       -  
    Total
  $ 614     $ 787     $ (173 )     (22 )
                                 
Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    2,866       3,089       (223 )     (7 )
  Commercial
    1,786       1,833       (47 )     (3 )
  Industrial
    4,157       4,305       (148 )     (3 )
  Governmental
    125       124       1       1  
    Total retail
    8,934       9,351       (417 )     (4 )
  Sales for resale:
                               
     Associated companies
    682       669       13       2  
     Non-associated companies
    21       35       (14 )     (40 )
    Total
    9,637       10,055       (418 )     (4 )
                                 
                                 
   
Nine Months Ended
   
Increase/
         
Description
    2012       2011    
(Decrease)
 
%
 
   
(Dollars In Millions)
         
Electric Operating Revenues:
                         
  Residential
  $ 541     $ 667     $ (126 )     (19 )
  Commercial
    368       422       (54 )     (13 )
  Industrial
    554       649       (95 )     (15 )
  Governmental
    29       32       (3 )     (9 )
    Total retail
    1,492       1,770       (278 )     (16 )
  Sales for resale:
                               
     Associated companies
    99       109       (10 )     (9 )
     Non-associated companies
    1       6       (5 )     (83 )
  Other
    66       69       (3 )     (4 )
    Total
  $ 1,658     $ 1,954     $ (296 )     (15 )
                                 
Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    6,844       7,441       (597 )     (8 )
  Commercial
    4,675       4,729       (54 )     (1 )
  Industrial
    12,448       11,720       728       6  
  Governmental
    362       358       4       1  
    Total retail
    24,329       24,248       81       -  
  Sales for resale:
                               
     Associated companies
    1,749       1,772       (23 )     (1 )
     Non-associated companies
    39       118       (79 )     (67 )
    Total
    26,117       26,138       (21 )     -  
                                 

 
 
 

ENTERGY MISSISSIPPI, INC.

MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS


Plan to Spin Off the Utility’s Transmission Business

See the “Plan to Spin Off the Utility’s Transmission Business” section of Entergy Corporation and Subsidiaries Management’s Financial Discussion and Analysis in the Form 10-K and herein for a discussion of Entergy’s plan to spin off its transmission business and merge it with a newly formed subsidiary of ITC Holdings Corp., including the planned retirement of debt and preferred securities.

Hurricane Isaac

In August 2012, Hurricane Isaac caused extensive damage to Entergy Mississippi’s service area.  The storm resulted in widespread power outages, significant damage primarily to distribution infrastructure, and the loss of sales during the power outages.  Total restoration costs for the repair and/or replacement of Entergy Mississippi’s electric facilities damaged by Hurricane Isaac are currently estimated to be in the range of $30 million to $40 million.  Entergy Mississippi is considering all reasonable avenues to recover storm-related costs from Hurricane Isaac, including, but not limited to, traditional retail recovery on an interim and permanent basis.

Entergy Mississippi has recorded accounts payable for the estimated costs incurred that were necessary to return customers to service.  Entergy Mississippi recorded corresponding regulatory assets of approximately $10 million and construction work in progress of approximately $20 million.  Entergy Mississippi recorded the regulatory assets in accordance with its accounting policies and based on the historic treatment of such costs in its service area because management believes that recovery through some form of regulatory mechanism is probable.  Because Entergy Mississippi has not gone through the regulatory process regarding these storm costs, however, there is an element of risk, and Entergy Mississippi is unable to predict with certainty the degree of success it may have in its recovery initiatives, the amount of restoration costs that it may ultimately recover, or the timing of such recovery.

Results of Operations

Net Income

Third Quarter 2012 Compared to Third Quarter 2011

Net income decreased $6.1 million primarily due to higher other operation and maintenance expenses, higher interest expense, higher taxes other than income taxes, and lower other income, partially offset by higher net revenue.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net income decreased $22.6 million primarily due to higher other operation and maintenance expenses, higher interest expense, higher taxes other than income taxes, lower other income, and a higher effective income tax rate, partially offset by higher net revenue.


 
128

Entergy Mississippi, Inc.
Management’s Financial Discussion and Analysis


Net Revenue

Third Quarter 2012 Compared to Third Quarter 2011

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges.  Following is an analysis of the change in net revenue comparing the third quarter 2012 to the third quarter 2011.

   
Amount
   
(In Millions)
     
2011 net revenue
 
$155.9 
Retail electric price
 
12.1 
Other
 
(0.1)
2012 net revenue
 
$167.9 

The retail electric price variance is primarily due to an increase in the storm cost recovery rider, as approved by the MPSC for a five-month period effective August 2012.  The recovery of storm costs is offset in other operation and maintenance expenses.

Gross operating revenues and fuel expenses

Gross operating revenues decreased primarily due to:

·  
a decrease of $40.3 million in fuel cost recovery revenues primarily attributable to lower fuel rates.  Entergy Mississippi’s fuel recovery mechanism is discussed in Note 2 to the financial statements in the Form 10-K; and
·  
a decrease of $24.3 million in gross wholesale revenues due to a decrease in sales to affiliated customers.

The decrease was partially offset by an increase of $10 million in storm cost recovery rider revenue, as discussed above, and an increase of $4.3 million in power management rider revenue.  See Note 2 to the financial statements in the Form 10-K for additional discussion of the power management rider.

Fuel expenses decreased primarily due to a decrease in the average market price of natural gas and a decrease in deferred fuel expense due to lower fuel revenues, as discussed above.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges (credits).  Following is an analysis of the change in net revenue comparing the nine months ended September 30, 2012 to the nine months ended September 30, 2011.

   
Amount
   
(In Millions)
     
2011 net revenue
 
$427.5 
Retail electric price
 
10.2 
Reserve equalization
 
(3.4)
Volume/weather
 
(3.6)
Other
 
1.7 
2012 net revenue
 
$432.4 

 
129

Entergy Mississippi, Inc.
Management’s Financial Discussion and Analysis



The retail electric price variance is primarily due to an increase in the storm cost recovery rider, as approved by the MPSC for a five-month period effective August 2012.  The recovery of storm costs is offset in other operation and maintenance expenses.

The reserve equalization variance is primarily due to decreased reserve equalization revenue as a result of changes in the Entergy System generation mix compared to the same period in 2011.

The volume/weather variance is primarily due to a decrease of 326 GWh, or 3%, in billed electricity usage, including the effect of milder weather, compared to last year, on residential sales.

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

Gross operating revenues decreased primarily due to:

·  
a decrease of $56.9 million in fuel cost recovery revenues primarily attributable to lower fuel rates.  Entergy Mississippi’s fuel recovery mechanism is discussed in Note 2 to the financial statements in the Form 10-K;
·  
a decrease of $44.3 million in gross wholesale revenues due to a decrease in sales to affiliated customers; and
·  
a decrease of $9.4 million in power management rider revenue. See Note 2 to the financial statements in the Form 10-K for additional discussion of the power management rider.

The decrease was partially offset by an increase of $9.9 million in storm cost recovery rider revenue, as discussed above.

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

Other regulatory charges decreased primarily due to decreased recovery of costs associated with the power management recovery rider.  There is no material effect on net income because the power management recovery rider is an exact recovery rider and any differences in revenues and expenses are deferred for future recovery.

Other Income Statement Variances

Third Quarter 2012 Compared to Third Quarter 2011

Other operation and maintenance expenses increased primarily due to an increase of $10 million resulting from a temporary increase in the storm damage reserve authorized by the MPSC effective August 2012 and $2.2 million of costs incurred in 2012 related to the planned spin-off and merger of the transmission business.

Taxes other than income taxes increased primarily due to an increase in ad valorem taxes due to a higher 2012 assessment as compared to 2011.

Other income decreased primarily due to a decrease in the allowance for equity funds used during construction due to less construction work in progress in 2012.

Interest expense increased primarily due to a revision in 2011 caused by FERC’s acceptance of a change in the treatment of funds received from independent power producers for transmission interconnection projects.


 
130

Entergy Mississippi, Inc.
Management’s Financial Discussion and Analysis


Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Other operation and maintenance expenses increased primarily due to:

·  
an increase of $9.9 million resulting from a temporary increase in the storm damage reserve authorized by the MPSC effective August 2012;
·  
$5.4 million of costs incurred in 2012 related to the planned spin-off and merger of the transmission business; and
·  
an increase of $3.9 million in compensation and benefits costs resulting from decreasing discount rates and changes in certain actuarial assumptions resulting from a recent experience study.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for further discussion of benefits costs.

The increase was partially offset by a decrease of $2.8 million in fossil-fueled generation expenses due to a greater scope of work and additional outage costs in 2011.

Taxes other than income taxes increased primarily due to an increase in ad valorem taxes due to a higher 2012 assessment as compared to 2011.

Other income decreased primarily due to a decrease in the allowance for equity funds used during construction due to less construction work in progress in 2012.

Interest expense increased primarily due to a revision in 2011 caused by FERC’s acceptance of a change in the treatment of funds received from independent power producers for transmission interconnection projects.

Income Taxes

The effective income tax rate was 40.6% for the third quarter 2012 and 41.8% for the nine months ended September 30, 2012.  The differences in the effective income tax rates for the third quarter 2012 and the nine months ended September 30, 2012 versus the federal statutory rate of 35% are primarily due to state income taxes.

The effective income tax rate was 37.6% for the third quarter 2011 and 36.6% for the nine months ended September 30, 2011.  The difference in the effective income tax rate for the third quarter 2011 versus the federal statutory rate of 35% was primarily due to state income taxes.  The difference in the effective income tax rate for the nine months ended September 30, 2011 versus the federal statutory rate of 35% was due to state income taxes and certain book and tax differences related to utility plant items, partially offset by book and tax differences related to the allowance for equity funds used during construction.

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2012 and 2011 were as follows:

   
2012
 
2011
   
(In Thousands)
         
Cash and cash equivalents at beginning of period
 
$16 
 
$1,216 
         
Cash flow provided by (used in):
       
 
Operating activities
 
156,020 
 
43,148 
 
Investing activities
 
(124,165)
 
(109,146)
 
Financing activities
 
(4,214)
 
65,761 
Net increase (decrease) in cash and cash equivalents
 
27,461 
 
(237)
         
Cash and cash equivalents at end of period
 
$27,657 
 
$979 
 
 
131

Entergy Mississippi, Inc.
Management’s Financial Discussion and Analysis


Operating Activities

Cash flow provided by operating activities increased $112.9 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to:

·  
the purchase in 2011 of $42.6 million of fuel oil from System Fuels because System Fuels will no longer procure fuel oil for the Utility companies;
·  
an increase in the recovery of fuel costs due to System Agreement bandwidth remedy payments of $33 million received in January 2012 to implement the FERC’s remedy in an October 2011 order for the period June-December 2005.  See Note 2 to the financial statements in the Form 10-K for a discussion of the System Agreement proceedings; and
·  
a decrease of $15.5 million in pension contributions.  See “MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates in the Form 10-K and Note 6 to the financial statements herein for a discussion of qualified pension and other postretirement benefits.

Investing Activities

Cash flow used in investing activities increased $15 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to the repayment by System Fuels of Entergy Mississippi’s $5.5 million investment in System Fuels in 2011 and money pool activity.

Increases in Entergy Mississippi’s receivable from the money pool are a use of cash flow, and Entergy Mississippi’s receivable from the money pool increased $5.5 million for the nine months ended September 30, 2012.  The money pool is an inter-company borrowing arrangement designed to reduce the Utility subsidiaries’ need for external short-term borrowings.

Financing Activities

Entergy Mississippi’s financing activities used $4.2 million of cash for the nine months ended September 30, 2012 compared to providing $65.8 million of cash for the nine months ended September 30, 2011 primarily due to the issuances of $150 million of 6.0% Series first mortgage bonds in April 2011 and $125 million of 3.25% Series first mortgage bonds in May 2011, substantially offset by the redemptions of $80 million of 4.65% Series first mortgage bonds and $100 million of 5.92% Series first mortgage bonds in May 2011 and money pool activity.

Decreases in Entergy Mississippi’s payable to the money pool are a use of cash flow, and Entergy Mississippi’s payable to the money pool decreased by $2 million for the nine months ended September 30, 2012 compared to decreasing by $17.6 million for the nine months ended September 30, 2011.

Capital Structure

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

   
September 30,
2012
 
December 31,
2011
         
Debt to capital
 
49.8%
 
51.2%
Effect of subtracting cash
 
(0.7)%
 
-%
Net debt to net capital
 
49.1%
 
51.2%

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, preferred stock without sinking fund, and common 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.
 
 
132

Entergy Mississippi, Inc.
Management’s Financial Discussion and Analysis


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.  Entergy Mississippi is developing its capital investment plan for 2013 through 2015 and currently anticipates making $564 million in capital investments during that period, including approximately $385 million for maintenance of existing assets.  The remaining $179 million is associated with specific investments such as environmental compliance spending, transmission upgrades and system improvements, and other investments.  Following are additional updates to the information provided in the Form 10-K.

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

September 30,
2012
 
December 31,
2011
 
September 30,
2011
 
December 31,
2010
(In Thousands)
             
$5,497
 
($1,999)
 
($15,617)
 
($33,255)

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

In May 2012, Entergy Mississippi renewed its three separate credit facilities through May 2013 in the aggregate amount of $70 million.  No borrowings were outstanding under the credit facilities as of September 30, 2012.  See Note 4 to the financial statements herein for additional discussion of the credit facilities.

Hinds Energy Facility Purchase Agreement

See the Form 10-K for a discussion of Entergy Mississippi’s agreement to acquire the Hinds Energy Facility.  In July 2011, Entergy Mississippi filed with the MPSC requesting approval of the acquisition and full cost recovery.  In February 2012 the MPSC granted a certificate of public convenience and necessity and approved the estimated acquisition cost.  In April 2012, facilities studies were issued indicating that long-term transmission service is available for the Hinds facility provided that supplemental transmission upgrades estimated at approximately $580,000 are made and assuming that various projects already included in the transmission construction plan are completed.  Entergy Mississippi and the Mississippi Public Utilities Staff filed a joint stipulation in the retail cost recovery proceeding that provides that the non-fuel ownership costs of the Hinds facility should be recovered through the power management rider, and the MPSC adopted the stipulation on August 7, 2012.  The parties have satisfied their obligations under the Hart-Scott-Rodino Act.  The U.S. Department of Justice (DOJ) review of the transaction is ongoing.  Closing has been delayed while the DOJ continues its review.  Entergy Mississippi does not know when the DOJ will conclude its review or the extent to which its review of the transaction will be affected by the ongoing civil investigation of competitive issues concerning the Utility operating companies that is discussed in the Form 10-K.

State and Local Rate Regulation

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - State and Local Rate Regulation" in the Form 10-K for a discussion of the formula rate plan and fuel and purchased power cost recovery. Following are updates to that discussion.

In two orders issued in July 2012 the MPSC temporarily increased Entergy Mississippi’s storm damage reserve monthly accrual from $.75 million to $2.0 million for bills rendered during the billing months of August 2012 through December 2012, and approved recovery of $14.9 million in prudently incurred storm costs to be amortized over five months, beginning with August 2012 bills.
 
In March 2012, Entergy Mississippi submitted its formula rate plan filing for the 2011 test year.  The filing shows an earned return on common equity of 10.92% for the test year, which is within the earnings bandwidth and results in no change in rates.  The filing is currently subject to MPSC review.
 
 
133

Entergy Mississippi, Inc.
Management’s Financial Discussion and Analysis



In August 2012, the MPSC opened inquiries to review whether the current formulaic methodology used to calculate the return on common equity in both Entergy Mississippi’s formula rate plan and Mississippi Power Company’s annual formulary rate filing are still appropriate or can be improved to better serve the public interest. The intent of this inquiry and review is for informational purposes only; the evaluation of any recommendations for changes to the existing methodology would take place in a general rate case or in the existing formula rate plan docket. A report by the Mississippi Public Utilities Staff and consultants retained to conduct the study is expected by the end of 2012.  Entergy Mississippi will have an opportunity to respond to the report.

Federal Regulation

See “Entergy’s Proposal to Join the MISO RTO” in the “Rate, Cost-recovery, and Other Regulation – Federal Regulation” section of Entergy Corporation and Subsidiaries Management’s Financial Discussion and Analysis for updates to the Federal Regulation discussion in the Form 10-K.

Critical Accounting Estimates

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

 

 
INCOME STATEMENTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
   
(In Thousands)
 
                         
OPERATING REVENUES
                       
Electric
  $ 321,771     $ 365,569     $ 860,735     $ 956,746  
                                 
OPERATING EXPENSES
                               
Operation and Maintenance:
                               
   Fuel, fuel-related expenses, and
                               
     gas purchased for resale
    57,230       111,804       204,703       243,674  
   Purchased power
    93,817       95,319       232,140       270,823  
   Other operation and maintenance
    64,446       53,231       173,043       156,577  
Taxes other than income taxes
    19,742       18,279       56,980       52,841  
Depreciation and amortization
    24,377       23,476       72,451       69,630  
Other regulatory charges (credits) - net
    2,828       2,525       (8,476 )     14,700  
TOTAL
    262,440       304,634       730,841       808,245  
                                 
OPERATING INCOME
    59,331       60,935       129,894       148,501  
                                 
OTHER INCOME
                               
Allowance for equity funds used during construction
    760       1,927       2,950       6,246  
Interest and investment income
    19       120       43       187  
Miscellaneous - net
    (806 )     (742 )     (2,916 )     (2,579 )
TOTAL
    (27 )     1,305       77       3,854  
                                 
INTEREST EXPENSE
                               
Interest expense
    14,113       10,155       42,761       38,604  
Allowance for borrowed funds used during construction
    (405 )     (1,072 )     (1,568 )     (3,474 )
TOTAL
    13,708       9,083       41,193       35,130  
                                 
INCOME BEFORE INCOME TAXES
    45,596       53,157       88,778       117,225  
                                 
Income taxes
    18,516       19,988       37,102       42,913  
                                 
NET INCOME
    27,080       33,169       51,676       74,312  
                                 
Preferred dividend requirements and other
    707       707       2,121       2,121  
                                 
EARNINGS APPLICABLE TO
                               
COMMON STOCK
  $ 26,373     $ 32,462     $ 49,555     $ 72,191  
                                 
See Notes to Financial Statements.
                               
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Page left blank intentionally)


 

 
STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
OPERATING ACTIVITIES
           
Net income
  $ 51,676     $ 74,312  
Adjustments to reconcile net income to net cash flow provided by operating activities:
 
  Depreciation and amortization
    72,451       69,630  
  Deferred income taxes, investment tax credits, and non-current taxes accrued
    39,703       34,947  
  Changes in assets and liabilities:
               
    Receivables
    23,552       (19,554 )
    Fuel inventory
    (3,377 )     (43,219 )
    Accounts payable
    12,637       (2,248 )
    Taxes accrued
    (15,150 )     (1,665 )
    Interest accrued
    (3,683 )     774  
    Deferred fuel costs
    (12,249 )     (30,750 )
    Other working capital accounts
    (10,977 )     4,518  
    Provisions for estimated losses
    (2,496 )     (693 )
    Other regulatory assets
    10,526       (2,311 )
    Pension and other postretirement liabilities
    (10,438 )     (26,110 )
    Other assets and liabilities
    3,845       (14,483 )
Net cash flow provided by operating activities
    156,020       43,148  
                 
INVESTING ACTIVITIES
               
Construction expenditures
    (121,634 )     (121,813 )
Allowance for equity funds used during construction
    2,950       6,246  
Proceeds from sale of assets
    -       868  
Investments in affiliates
    -       5,527  
Change in money pool receivable - net
    (5,497 )     -  
Other
    16       26  
Net cash flow used in investing activities
    (124,165 )     (109,146 )
                 
FINANCING ACTIVITIES
               
Proceeds from the issuance of long-term debt
    -       268,820  
Retirement of long-term debt
    -       (180,000 )
Change in money pool payable - net
    (1,999 )     (17,638 )
Dividends paid:
               
  Common stock
    -       (3,300 )
  Preferred stock
    (2,121 )     (2,121 )
Other
    (94 )     -  
Net cash flow provided by (used in) financing activities
    (4,214 )     65,761  
                 
Net increase (decrease) in cash and cash equivalents
    27,641       (237 )
                 
Cash and cash equivalents at beginning of period
    16       1,216  
                 
Cash and cash equivalents at end of period
  $ 27,657     $ 979  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
         
Cash paid during the period for:
               
  Interest - net of amount capitalized
  $ 44,481     $ 35,861  
  Income taxes
  $ 2,118     $ -  
                 
See Notes to Financial Statements.
               


 

 
BALANCE SHEETS
 
ASSETS
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT ASSETS
           
Cash and cash equivalents:
           
  Cash
  $ 1,072     $ 7  
  Temporary cash investments
    26,585       9  
    Total cash and cash equivalents
    27,657       16  
Accounts receivable:
               
  Customer
    73,933       51,026  
  Allowance for doubtful accounts
    (1,112 )     (756 )
  Associated companies
    12,844       51,329  
  Other
    9,252       13,924  
  Accrued unbilled revenues
    40,919       38,368  
    Total accounts receivable
    135,836       153,891  
Accumulated deferred income taxes
    8,850       11,694  
Fuel inventory - at average cost
    45,876       42,499  
Materials and supplies - at average cost
    37,919       35,716  
Prepayments and other
    8,136       4,666  
TOTAL
    264,274       248,482  
                 
OTHER PROPERTY AND INVESTMENTS
               
Non-utility property - at cost (less accumulated depreciation)
    4,705       4,725  
Storm reserve escrow account
    31,828       31,844  
TOTAL
    36,533       36,569  
                 
UTILITY PLANT
               
Electric
    3,413,589       3,274,031  
Property under capital lease
    8,777       10,721  
Construction work in progress
    78,328       105,083  
TOTAL UTILITY PLANT
    3,500,694       3,389,835  
Less - accumulated depreciation and amortization
    1,265,248       1,210,092  
UTILITY PLANT - NET
    2,235,446       2,179,743  
                 
DEFERRED DEBITS AND OTHER ASSETS
               
Regulatory assets:
               
  Regulatory asset for income taxes - net
    63,833       65,196  
  Other regulatory assets
    384,224       393,387  
Other
    19,149       20,017  
TOTAL
    467,206       478,600  
                 
TOTAL ASSETS
  $ 3,003,459     $ 2,943,394  
                 
See Notes to Financial Statements.
               


 

ENTERGY MISSISSIPPI, INC.
 
BALANCE SHEETS
 
LIABILITIES AND EQUITY
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
 
 
CURRENT LIABILITIES
           
Currently maturing long-term debt
  $ 100,000     $ -  
Accounts payable:
               
  Associated companies
    49,365       46,311  
  Other
    59,749       41,489  
Customer deposits
    70,805       68,610  
Taxes accrued
    30,386       45,536  
Interest accrued
    17,867       21,550  
Deferred fuel costs
    3,592       15,841  
Other
    10,149       17,474  
TOTAL
    341,913       256,811  
                 
NON-CURRENT LIABILITIES
               
Accumulated deferred income taxes and taxes accrued
    709,322       672,129  
Accumulated deferred investment tax credits
    6,961       6,372  
Obligations under capital lease
    6,038       8,112  
Other regulatory liabilities
    2,260       -  
Asset retirement cost liabilities
    5,952       5,697  
Accumulated provisions
    35,793       38,289  
Pension and other postretirement liabilities
    133,606       144,088  
Long-term debt
    820,484       920,439  
Other
    5,488       5,370  
TOTAL
    1,725,904       1,800,496  
                 
Commitments and Contingencies
               
                 
Preferred stock without sinking fund
    50,381       50,381  
                 
COMMON EQUITY
               
Common stock, no par value, authorized 12,000,000
               
 shares; issued and outstanding 8,666,357 shares in 2012 and 2011
    199,326       199,326  
Capital stock expense and other
    (690 )     (690 )
Retained earnings
    686,625       637,070  
TOTAL
    885,261       835,706  
                 
TOTAL LIABILITIES AND EQUITY
  $ 3,003,459     $ 2,943,394  
                 
See Notes to Financial Statements.
               


 

 
STATEMENTS OF CHANGES IN COMMON EQUITY
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited) (In Thousands)
 
                         
   
Common Equity
       
   
Common Stock
   
Capital Stock Expense and Other
   
Retained Earnings
   
Total
 
Balance at December 31, 2010
  $ 199,326     $ (690 )   $ 534,469     $ 733,105  
                                 
Net income
    -       -       74,312       74,312  
Common stock dividends
    -       -       (3,300 )     (3,300 )
Preferred stock dividends
    -       -       (2,121 )     (2,121 )
                                 
Balance at September 30, 2011
  $ 199,326     $ (690 )   $ 603,360     $ 801,996  
                                 
                                 
Balance at December 31, 2011
  $ 199,326     $ (690 )   $ 637,070     $ 835,706  
                                 
Net income
    -       -       51,676       51,676  
Preferred stock dividends
    -       -       (2,121 )     (2,121 )
                                 
Balance at September 30, 2012
  $ 199,326     $ (690 )   $ 686,625     $ 885,261  
                                 
See Notes to Financial Statements.
                               
                                 


 

 
SELECTED OPERATING RESULTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
                         
   
Three Months Ended
   
Increase/
       
Description
 
2012
   
2011
   
(Decrease)
   
%
 
   
(Dollars In Millions)
       
Electric Operating Revenues:
                       
  Residential
  $ 144     $ 159     $ (15 )     (9 )
  Commercial
    108       117       (9 )     (8 )
  Industrial
    36       37       (1 )     (3 )
  Governmental
    10       10       -       -  
    Total retail
    298       323       (25 )     (8 )
  Sales for resale:
                               
     Associated companies
    5       28       (23 )     (82 )
     Non-associated companies
    7       9       (2 )     (22 )
  Other
    12       5       7       140  
    Total
  $ 322     $ 365     $ (43 )     (12 )
                                 
Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    1,917       2,020       (103 )     (5 )
  Commercial
    1,468       1,522       (54 )     (4 )
  Industrial
    651       641       10       2  
  Governmental
    117       120       (3 )     (3 )
    Total retail
    4,153       4,303       (150 )     (3 )
  Sales for resale:
                               
     Associated companies
    54       111       (57 )     (51 )
     Non-associated companies
    109       122       (13 )     (11 )
    Total
    4,316       4,536       (220 )     (5 )
                                 
                                 
   
Nine Months Ended
   
Increase/
         
Description
    2012       2011    
(Decrease)
   
%
 
   
(Dollars In Millions)
         
Electric Operating Revenues:
                               
  Residential
  $ 355     $ 394     $ (39 )     (10 )
  Commercial
    292       311       (19 )     (6 )
  Industrial
    107       111       (4 )     (4 )
  Governmental
    28       28       -       -  
    Total retail
    782       844       (62 )     (7 )
  Sales for resale:
                               
     Associated companies
    15       56       (41 )     (73 )
     Non-associated companies
    18       22       (4 )     (18 )
  Other
    46       35       11       31  
    Total
  $ 861     $ 957     $ (96 )     (10 )
                                 
Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    4,387       4,715       (328 )     (7 )
  Commercial
    3,785       3,834       (49 )     (1 )
  Industrial
    1,801       1,745       56       3  
  Governmental
    311       316       (5 )     (2 )
    Total retail
    10,284       10,610       (326 )     (3 )
  Sales for resale:
                               
     Associated companies
    153       316       (163 )     (52 )
     Non-associated companies
    201       274       (73 )     (27 )
    Total
    10,638       11,200       (562 )     (5 )
                                 
 
 
 


ENTERGY NEW ORLEANS, INC.

MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS

Plan to Spin Off the Utility’s Transmission Business

See the “Plan to Spin Off the Utility’s Transmission Business” section of Entergy Corporation and Subsidiaries Management’s Financial Discussion and Analysis in the Form 10-K and herein for a discussion of Entergy’s plan to spin off its transmission business and merge it with a newly formed subsidiary of ITC Holdings Corp., including the planned retirement of debt and preferred securities.

Hurricane Isaac

In August 2012, Hurricane Isaac caused extensive damage to Entergy New Orleans’s service area.  The storm resulted in widespread power outages, significant damage primarily to distribution infrastructure, and the loss of sales during the power outages.  Total restoration costs for the repair and/or replacement of Entergy New Orleans’s electric facilities damaged by Hurricane Isaac are currently estimated to be in the range of $50 million to $60 million.  Entergy New Orleans is considering all reasonable avenues to recover storm-related costs from Hurricane Isaac, including, but not limited to, accessing funded storm reserves; securitization or other alternative financing; and traditional retail recovery on an interim and permanent basis.  Storm cost recovery or financing may be subject to review by applicable regulatory authorities.

Entergy New Orleans has recorded accounts payable for the estimated costs incurred that were necessary to return customers to service.  Entergy New Orleans recorded corresponding regulatory assets of approximately $19 million and construction work in progress of approximately $30 million.  Entergy New Orleans recorded the regulatory assets in accordance with its accounting policies and based on the historic treatment of such costs in its service area because management believes that recovery through some form of regulatory mechanism is probable. Because Entergy New Orleans has not gone through the regulatory process regarding these storm costs, however, there is an element of risk, and Entergy New Orleans is unable to predict with certainty the degree of success it may have in its recovery initiatives, the amount of restoration costs that it may ultimately recover, or the timing of such recovery.

Results of Operations

Net Income

Third Quarter 2012 Compared to Third Quarter 2011

Net income decreased $8.4 million primarily due to higher other operation and maintenance expenses and lower net revenue, partially offset by a lower effective income tax rate.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net income decreased $18.3 million primarily due to higher other operation and maintenance expenses and lower net revenue, partially offset by a lower effective income tax rate.

 
142

Entergy New Orleans, Inc.
Management’s Financial Discussion and Analysis


Net Revenue

Third Quarter 2012 Compared to Third Quarter 2011

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges.  Following is an analysis of the changes in net revenue comparing the third quarter 2012 to the third quarter 2011.

   
Amount
   
(In Millions)
     
2011 net revenue
 
$71.5 
Retail electric price
 
(2.5)
Volume/weather
 
(2.0)
Other
 
2.4 
2012 net revenue
 
$69.4 

The retail electric price variance is primarily due to a formula rate plan decrease effective October 2011.  See Note 2 to the financial statements in the Form 10-K for a discussion of the formula rate plan filing.

The volume/weather variance is primarily due to the effect of milder weather, as compared to the prior period, on residential and commercial sales and the effects of the power outages caused by Hurricane Isaac.
 
Gross operating revenues and fuel expenses

Gross operating revenues decreased primarily due to a decrease of $17.5 million in gross wholesale revenue due to decreased sales to affiliate customers and a decrease of $1.7 million in gross gas revenues primarily due to lower fuel cost recovery revenues as a result of lower fuel rates.  Entergy New Orleans’s fuel and purchased power recovery mechanism is discussed in Note 2 to the financial statements in the Form 10-K.

Fuel expenses decreased primarily due to a decrease in the average market price of natural gas.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges.  Following is an analysis of the changes in net revenue comparing the nine months ended September 30, 2012 to the nine months ended September 30, 2011.

   
Amount
   
(In Millions)
     
2011 net revenue
 
$199.2 
Retail electric price
 
(6.2)
Volume/weather
 
(5.8)
Net gas revenue
 
(1.7)
Other
 
0.4 
2012 net revenue
 
$185.9 

The retail electric price variance is primarily due to a formula rate plan decrease effective October 2011.  See Note 2 to the financial statements in the Form 10-K for a discussion of the formula rate plan filing.


 
143

Entergy New Orleans, Inc.
Management’s Financial Discussion and Analysis

The volume/weather variance is primarily due to the effect of milder weather, as compared to the prior period, on residential and commercial sales and the effects of the power outages caused by Hurricane Isaac.

The net gas revenue variance is primarily due to the effect of milder weather, primarily in the residential sector, as compared to last year.

Gross operating revenues and fuel expenses

Gross operating revenues decreased primarily due to:

·  
a decrease of $45.5 million in gross wholesale revenue primarily due to decreased sales to affiliate customers;
·  
a decrease of $17.8 million in gross gas revenues primarily due to lower fuel cost recovery revenues as a result of lower fuel rates and the effect of milder weather.  Entergy New Orleans’s fuel and purchased power recovery mechanism is discussed in Note 2 to the financial statements in the Form 10-K; and
·  
less favorable volume/weather, as discussed above.

Fuel expenses decreased primarily due to a decrease in demand for gas-fired generation and a decrease in the average market price of natural gas.

Other Income Statement Variances

Third Quarter 2012 Compared to Third Quarter 2011

Other operation and maintenance expenses increased primarily due to the deferral in 2011 of $13.4 million of 2010 Michoud plant maintenance costs pursuant to the settlement of Entergy New Orleans’s 2010 test year formula rate plan filing approved by the City Council in September 2011.  See Note 2 to the financial statements in the Form 10-K for more discussion of the 2010 test year formula rate plan filing and settlement.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Other operation and maintenance expenses increased primarily due to:

·  
the deferral in 2011 of $13.4 million of 2010 Michoud plant maintenance costs pursuant to the settlement of Entergy New Orleans’s 2010 test year formula rate plan filing approved by the City Council in September 2011.  See Note 2 to the financial statements in the Form 10-K for more discussion of the 2010 test year formula rate plan filing and settlement; and
·  
an increase of $6.1 million in fossil-fueled generation expenses due to higher plant outage costs in 2012 due to a greater scope of work at the Michoud plant.

Income Taxes

The effective income tax rate was 36.9% for the third quarter 2012 and 26.1% for the nine months ended September 30, 2012.  The difference in the effective income tax rate for the third quarter 2012 versus the federal statutory rate of 35% is due to state income taxes and certain book and tax differences related to utility plant items, partially offset by flow-through tax accounting.  The difference in the effective income tax rate for the nine months ended September 30, 2012 versus the federal statutory rate of 35% is due to the provision for uncertain tax positions and flow-through tax accounting, offset by certain book and tax differences related to utility plant items and state income taxes.

The effective income tax rate was 43.9% for the third quarter 2011 and 40.6% for the nine months ended September 30, 2011.  The differences in the effective income tax rates for the third quarter 2011 and the nine months ended September 30, 2011 versus the federal statutory rate of 35% were due to the provision for uncertain tax positions, state income taxes, and certain book and tax differences related to utility plant items, partially offset by flow-through tax accounting.
 
 
144

Entergy New Orleans, Inc.
Management’s Financial Discussion and Analysis

 
Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2012 and 2011 were as follows:

   
2012
 
2011
   
(In Thousands)
         
Cash and cash equivalents at beginning of period
 
$9,834 
 
$54,986 
         
Cash flow provided by (used in):
       
 
Operating activities
 
23,160 
 
60,952 
 
Investing activities
 
(44,538)
 
(43,019)
 
Financing activities
 
12,716 
 
(29,554)
Net decrease in cash and cash equivalents
 
(8,662)
 
(11,621)
         
Cash and cash equivalents at end of period
 
$1,172 
 
$43,365 

Operating Activities

Net cash flow provided by operating activities decreased $37.8 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to decreased net income and the timing of collections of customer receivables, partially offset by a decrease of $4.5 million in pension contributions.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for a discussion of qualified pension and other postretirement benefits.

Investing Activities

Net cash flow used in investing activities increased $1.5 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to:

·  
higher distribution construction expenditures due to Hurricane Isaac;
·  
higher transmission construction expenditures due to increased work performed in 2012;
·  
the repayment by System Fuels of Entergy New Orleans’s $3.3 million investment in System Fuels in 2011; and
·  
an increase of  $2.0 million in payments to the storm reserve escrow account in 2012 compared to 2011.

The increase was offset by money pool activity and decreased spending on the gas system rebuild project.

Decreases in Entergy New Orleans’s receivable from the money pool are a source of cash flow, and Entergy New Orleans’s receivable from the money pool decreased $9.1 million for the nine months ended September 30, 2012 compared to increasing $0.3 million for the nine months ended September 30, 2011.  The money pool is an inter-company borrowing arrangement designed to reduce the Utility subsidiaries’ need for external short-term borrowings.

Financing Activities

Entergy New Orleans’s financing activities provided $12.7 million of cash for the nine months ended September 30, 2012 compared to using $29.6 million of cash for the nine months ended September 30, 2011 primarily due to a decrease of $26.1 million in common stock dividends paid and money pool activity.

 
 
145

Entergy New Orleans, Inc.
Management’s Financial Discussion and Analysis

Increases in Entergy New Orleans’s payable to the money pool are a source of cash flow, and Entergy New Orleans’s payable to the money pool increased by $15.7 million for the nine months ended September 30, 2012.

Capital Structure

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

   
September 30,
 2012
 
December 31,
2011
         
Debt to capital
 
43.5%
 
45.3%
Effect of subtracting cash
 
(0.2)%
 
(1.5)%
Net debt to net capital
 
43.3%
 
43.8%

Net debt consists of debt less cash and cash equivalents.  Debt consists of notes payable and long-term debt, including the currently maturing portion.  Capital consists of debt, preferred stock without sinking fund, and shareholders’ equity.  Net capital consists of capital less cash and cash equivalents.  Entergy New Orleans uses the net debt to net capital ratio in analyzing its financial condition and believes it provides useful information to its investors and creditors in evaluating Entergy New Orleans’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 New Orleans’s uses and sources of capital.  Entergy New Orleans is developing its capital investment plan for 2013 through 2015 and currently anticipates making $272 million in capital investments during that period, including approximately $143 million for maintenance of existing assets.  The remaining $129 million is associated with specific investments such as environmental compliance spending, transmission upgrades and system improvements, and other investments.  Following are additional updates to the information provided in the Form 10-K.

Entergy New Orleans’s receivables from or (payables to) the money pool were as follows:

September 30,
2012
 
December 31,
2011
 
September 30,
2011
 
December 31,
2010
(In Thousands)
             
($15,719)
 
$9,074
 
$22,110
 
$21,820

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

Entergy Louisiana’s Ninemile Point Unit 6 Self-Build Project

See the Form 10-K for a discussion of Entergy Louisiana’s Ninemile Point Unit 6 self-build project.  The Ninemile 6 capacity and energy is proposed to be allocated 55% to Entergy Louisiana, 25% to Entergy Gulf States Louisiana, and 20% to Entergy New Orleans.  In June 2011, Entergy Louisiana filed with the LPSC an application seeking certification that the public necessity and convenience would be served by Entergy Louisiana’s construction of the facility.  Entergy Gulf States Louisiana joined in the application, seeking certification of its purchase under a life-of-unit power purchase agreement of its allocated share of the capacity and energy generated by Ninemile 6.  In February 2012 the City Council passed a resolution authorizing Entergy New Orleans to purchase 20% of the Ninemile 6 energy and capacity.  In March 2012 the LPSC unanimously voted to grant the certifications requested by Entergy Louisiana and Entergy Gulf States Louisiana, and Entergy Louisiana has given the contractor a full notice to proceed with the construction.


 
146

Entergy New Orleans, Inc.
Management’s Financial Discussion and Analysis

State and Local Rate Regulation

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Rate, Cost-recovery, and Other Regulation - State and Local Rate Regulation and Fuel-Cost Recovery" in the Form 10-K for a discussion of state and local rate regulation.  Following is an update to the Form 10-K.

In May 2012, Entergy New Orleans filed its electric and gas formula rate plan evaluation reports for the 2011 test year.  Subsequent adjustments agreed upon with the City Council Advisors indicate a $4.9 million electric base revenue increase and a $0.05 million gas base revenue increase as necessary under the formula rate plan.  As part of the original filing, Entergy New Orleans is also requesting to increase annual funding for its storm reserve by approximately $5.7 million for the next five years.  On September 26, 2012, Entergy New Orleans made a filing with the City Council that implemented the $4.9 million electric formula rate plan rate increase and the $0.05 million gas formula rate plan rate increase.  The new rates were effective with the first billing cycle in October 2012.  In October 2012 the City Council approved a procedural schedule to resolve disputed items that includes a hearing in April 2013.  The rates implemented in October 2012 are subject to retroactive adjustments depending on the outcome of the proceeding.  The City Council has not yet acted on Entergy New Orleans’s request for an increase in storm reserve funding.

Federal Regulation

See “Entergy’s Proposal to Join the MISO RTO” in the “Rate, Cost-recovery, and Other Regulation – Federal Regulation” section of Entergy Corporation and Subsidiaries Management’s Financial Discussion and Analysis for updates to the Federal Regulation discussion in the Form 10-K.

Environmental Risks

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Environmental Risks" in the Form 10-K for a discussion of 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 Entergy New Orleans’s accounting for unbilled revenue and qualified pension and other postretirement benefits.



 
INCOME STATEMENTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
   
(In Thousands)
 
                         
OPERATING REVENUES
                       
Electric
  $ 146,459     $ 165,266     $ 360,772     $ 413,777  
Natural gas
    15,106       16,766       59,193       77,009  
TOTAL
    161,565       182,032       419,965       490,786  
                                 
OPERATING EXPENSES
                               
Operation and Maintenance:
                               
   Fuel, fuel-related expenses, and
                               
     gas purchased for resale
    29,298       53,013       68,585       133,698  
   Purchased power
    62,410       57,052       164,042       156,433  
   Other operation and maintenance
    28,671       14,850       92,475       70,888  
Taxes other than income taxes
    11,941       11,564       33,110       32,716  
Depreciation and amortization
    9,178       8,473       27,446       26,371  
Other regulatory charges - net
    502       477       1,483       1,434  
TOTAL
    142,000       145,429       387,141       421,540  
                                 
OPERATING INCOME
    19,565       36,603       32,824       69,246  
                                 
OTHER INCOME
                               
Allowance for equity funds used during construction
    185       147       487       369  
Interest and investment income
    8       59       29       122  
Miscellaneous - net
    (385 )     (317 )     (1,147 )     (848 )
TOTAL
    (192 )     (111 )     (631 )     (357 )
                                 
INTEREST EXPENSE
                               
Interest expense
    2,738       2,768       8,366       8,321  
Allowance for borrowed funds used during construction
    (88 )     (67 )     (230 )     (167 )
TOTAL
    2,650       2,701       8,136       8,154  
                                 
INCOME BEFORE INCOME TAXES
    16,723       33,791       24,057       60,735  
                                 
Income taxes
    6,168       14,848       6,276       24,658  
                                 
NET INCOME
    10,555       18,943       17,781       36,077  
                                 
Preferred dividend requirements and other
    241       241       724       724  
                                 
EARNINGS APPLICABLE TO
                               
COMMON STOCK
  $ 10,314     $ 18,702     $ 17,057     $ 35,353  
                                 
See Notes to Financial Statements.
                               



 
STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
   
2012
   
2011
 
   
(In Thousands)
 
OPERATING ACTIVITIES
           
Net income
  $ 17,781     $ 36,077  
Adjustments to reconcile net income to net cash flow provided by operating activities:
         
  Depreciation and amortization
    27,446       26,371  
  Deferred income taxes, investment tax credits, and non-current taxes accrued
    12,269       (9,129 )
  Changes in assets and liabilities:
               
    Receivables
    (17,721 )     4,073  
    Fuel inventory
    1,977       (1,171 )
    Accounts payable
    11,175       (8,504 )
    Prepaid taxes and taxes accrued
    (10,826 )     28,076  
    Interest accrued
    (740 )     (773 )
    Deferred fuel costs
    (6,095 )     (769 )
    Other working capital accounts
    (6,628 )     (1,489 )
    Provisions for estimated losses
    6,015       6,571  
    Other regulatory assets
    (10,748 )     (6,769 )
    Pension and other postretirement liabilities
    (6,597 )     (11,200 )
    Other assets and liabilities
    5,852       (412 )
Net cash flow provided by operating activities
    23,160       60,952  
                 
INVESTING ACTIVITIES
               
Construction expenditures
    (47,325 )     (41,607 )
Allowance for equity funds used during construction
    487       369  
Change in money pool receivable - net
    9,074       (290 )
Investment in affiliates
    -       3,256  
Payments to storm reserve escrow account
    (6,774 )     (4,747 )
Net cash flow used in investing activities
    (44,538 )     (43,019 )
                 
FINANCING ACTIVITIES
               
Change in money pool payable - net
    15,719       -  
Dividends paid:
               
  Common stock
    (1,700 )     (27,800 )
  Preferred stock
    (724 )     (724 )
Other
    (579 )     (1,030 )
Net cash flow provided by (used in) financing activities
    12,716       (29,554 )
                 
Net decrease in cash and cash equivalents
    (8,662 )     (11,621 )
                 
Cash and cash equivalents at beginning of period
    9,834       54,986  
                 
Cash and cash equivalents at end of period
  $ 1,172     $ 43,365  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
  Interest - net of amount capitalized
  $ 8,431     $ 8,343  
                 
See Notes to Financial Statements.
               

 
 
 
BALANCE SHEETS
 
ASSETS
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT ASSETS
           
Cash and cash equivalents
           
  Cash
  $ 1,171     $ 486  
  Temporary cash investments
    1       9,348  
        Total cash and cash equivalents
    1,172       9,834  
Accounts receivable:
               
  Customer
    46,283       29,038  
  Allowance for doubtful accounts
    (417 )     (465 )
  Associated companies
    4,332       12,167  
  Other
    1,299       2,603  
  Accrued unbilled revenues
    17,516       17,023  
    Total accounts receivable
    69,013       60,366  
Accumulated deferred income taxes
    4,862       6,419  
Fuel inventory - at average cost
    1,829       3,806  
Materials and supplies - at average cost
    10,750       9,392  
Prepaid taxes
    10,826       -  
Prepayments and other
    6,591       2,679  
TOTAL
    105,043       92,496  
                 
OTHER PROPERTY AND INVESTMENTS
               
Non-utility property at cost (less accumulated depreciation)
    1,016       1,016  
Storm reserve escrow account
    18,770       11,996  
TOTAL
    19,786       13,012  
                 
UTILITY PLANT
               
Electric
    832,998       812,329  
Natural gas
    216,906       213,160  
Construction work in progress
    36,590       13,610  
TOTAL UTILITY PLANT
    1,086,494       1,039,099  
Less - accumulated depreciation and amortization
    542,653       525,621  
UTILITY PLANT - NET
    543,841       513,478  
                 
DEFERRED DEBITS AND OTHER ASSETS
               
Regulatory assets:
               
  Deferred fuel costs
    4,080       4,080  
  Other regulatory assets
    189,564       178,815  
Other
    5,650       4,154  
TOTAL
    199,294       187,049  
                 
TOTAL ASSETS
  $ 867,964     $ 806,035  
                 
See Notes to Financial Statements.
               


 

ENTERGY NEW ORLEANS, INC.
 
BALANCE SHEETS
 
LIABILITIES AND EQUITY
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT LIABILITIES
           
Currently maturing long-term debt
  $ 70,000     $ -  
Accounts payable:
               
  Associated companies
    46,572       27,042  
  Other
    57,121       28,098  
Customer deposits
    21,988       21,878  
Interest accrued
    2,100       2,840  
Deferred fuel costs
    5,526       11,621  
Other
    2,729       4,197  
TOTAL CURRENT LIABILITIES
    206,036       95,676  
                 
NON-CURRENT LIABILITIES
               
Accumulated deferred income taxes and taxes accrued
    162,687       144,405  
Accumulated deferred investment tax credits
    1,360       1,539  
Regulatory liability for income taxes - net
    26,904       33,258  
Other regulatory liabilities
    10,211       5,726  
Asset retirement cost liabilities
    2,156       2,893  
Accumulated provisions
    21,858       15,843  
Pension and other postretirement liabilities
    67,420       74,017  
Long-term debt
    96,322       166,537  
Gas system rebuild insurance proceeds
    47,765       55,707  
Other
    8,943       9,489  
TOTAL NON-CURRENT LIABILITIES
    445,626       509,414  
                 
                 
Commitments and Contingencies
               
                 
Preferred stock without sinking fund
    19,780       19,780  
                 
COMMON EQUITY
               
Common stock, $4 par value, authorized 10,000,000
               
  shares; issued and outstanding 8,435,900 shares in 2012
               
  and 2011
    33,744       33,744  
Paid-in capital
    36,294       36,294  
Retained earnings
    126,484       111,127  
TOTAL
    196,522       181,165  
                 
TOTAL LIABILITIES AND EQUITY
  $ 867,964     $ 806,035  
                 
See Notes to Financial Statements.
               


 

 
STATEMENTS OF CHANGES IN COMMON EQUITY
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited) (In Thousands)
 
                         
   
Common Equity
       
   
Common Stock
   
Paid-in Capital
   
Retained Earnings
   
Total
 
Balance at December 31, 2010
  $ 33,744     $ 36,294     $ 118,116     $ 188,154  
                                 
Net income
    -       -       36,077       36,077  
Common stock dividends
    -       -       (27,800 )     (27,800 )
Preferred stock dividends
    -       -       (724 )     (724 )
                                 
Balance at September 30, 2011
  $ 33,744     $ 36,294     $ 125,669     $ 195,707  
                                 
                                 
Balance at December 31, 2011
  $ 33,744     $ 36,294     $ 111,127     $ 181,165  
                                 
Net income
    -       -       17,781       17,781  
Common stock dividends
    -       -       (1,700 )     (1,700 )
Preferred stock dividends
    -       -       (724 )     (724 )
                                 
Balance at September 30, 2012
  $ 33,744     $ 36,294     $ 126,484     $ 196,522  
                                 
See Notes to Financial Statements.
                               
                                 

 
 
 
 
SELECTED OPERATING RESULTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
                         
   
Three Months Ended
   
Increase/
       
Description
 
2012
   
2011
   
(Decrease)
 
%
 
   
(Dollars In Millions)
       
Electric Operating Revenues:
                       
  Residential
  $ 58     $ 61     $ (3 )     (5 )
  Commercial
    47       47       -       -  
  Industrial
    9       9       -       -  
  Governmental
    18       18       -       -  
    Total retail
    132       135       (3 )     (2 )
  Sales for resale:
                               
     Associated companies
    10       27       (17 )     (63 )
  Other
    4       3       1       33  
    Total
  $ 146     $ 165     $ (19 )     (12 )
                                 
Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    579       620       (41 )     (7 )
  Commercial
    553       561       (8 )     (1 )
  Industrial
    130       140       (10 )     (7 )
  Governmental
    219       223       (4 )     (2 )
    Total retail
    1,481       1,544       (63 )     (4 )
  Sales for resale:
                               
     Associated companies
    246       269       (23 )     (9 )
     Non-associated companies
    1       3       (2 )     (67 )
    Total
    1,728       1,816       (88 )     (5 )
                                 
                                 
   
Nine Months Ended
   
Increase/
         
Description
    2012       2011    
(Decrease)
 
%
 
   
(Dollars In Millions)
         
Electric Operating Revenues:
                               
  Residential
  $ 135     $ 143     $ (8 )     (6 )
  Commercial
    123       121       2       2  
  Industrial
    23       24       (1 )     (4 )
  Governmental
    47       47       -       -  
    Total retail
    328       335       (7 )     (2 )
  Sales for resale:
                               
     Associated companies
    21       66       (45 )     (68 )
  Other
    12       13       (1 )     (8 )
    Total
  $ 361     $ 414     $ (53 )     (13 )
                                 
Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    1,398       1,511       (113 )     (7 )
  Commercial
    1,507       1,480       27       2  
  Industrial
    365       381       (16 )     (4 )
  Governmental
    598       602       (4 )     (1 )
    Total retail
    3,868       3,974       (106 )     (3 )
  Sales for resale:
                               
     Associated companies
    436       867       (431 )     (50 )
     Non-associated companies
    4       14       (10 )     (71 )
    Total
    4,308       4,855       (547 )     (11 )
                                 
                                 

 


ENTERGY TEXAS, INC. AND SUBSIDIARIES

MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS


Plan to Spin Off the Utility’s Transmission Business

See the “Plan to Spin Off the Utility’s Transmission Business” section of Entergy Corporation and Subsidiaries Management’s Financial Discussion and Analysis in the Form 10-K and herein for a discussion of Entergy’s plan to spin off its transmission business and merge it with a newly formed subsidiary of ITC Holdings Corp., including the planned retirement of debt.

Results of Operations

Net Income

Third Quarter 2012 Compared to Third Quarter 2011

Net income decreased $21.6 million primarily due to lower net revenue, higher other operation and maintenance expenses, and lower other income.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net income decreased $42.5 million primarily due to lower net revenue, higher other operation and maintenance expenses, lower other income, and higher depreciation and amortization expenses.

Net Revenue

Third Quarter 2012 Compared to Third Quarter 2011

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges.  Following is an analysis of the change in net revenue comparing the third quarter 2012 to the third quarter 2011.

   
Amount
   
(In Millions)
     
2011 net revenue
 
$181.8 
Volume/weather
 
(8.7)
Fuel recovery
 
(7.0)
Purchased power capacity
 
(5.8)
Net wholesale revenue
 
(4.2)
Reserve equalization
 
7.6 
Other
 
(2.0)
2012 net revenue
 
$161.7 

The volume/weather variance is primarily due to a decrease of 255 GWh, or 5%, in billed electricity usage, including the effect of milder weather compared to last year on residential and commercial sales.


 
154

Entergy Texas, Inc. and Subsidiaries
Management’s Financial Discussion and Analysis

The fuel recovery variance is primarily the result of a $6 million adjustment to deferred fuel costs in accordance with a rate order from the PUCT issued in September 2012.  See Note 2 to the financial statements for further discussion of the PUCT rate order.

The purchased power capacity variance is primarily due to additional capacity purchases as well as price increases for ongoing purchased power capacity.

The net wholesale revenue variance is primarily due to a decrease in sales to municipal and co-op customers compared to the same period in 2011.

The reserve equalization variance is primarily due to increased reserve equalization revenue as a result of changes in the Entergy System generation mix compared to the same period in 2011.

Gross operating revenues and fuel and purchased power expenses

Gross operating revenues decreased primarily due to a decrease of $56.7 million in fuel cost recovery revenues primarily attributable to lower fuel rates and lower usage and less favorable volume/weather, as discussed above.  Entergy Texas’s fuel and purchased power recovery mechanism is discussed in Note 2 to the financial statements in the Form 10-K.

Fuel and purchased power expenses decreased primarily due to decreases in the average market prices of natural gas and purchased power, partially offset by an increase in the recovery from customers of deferred fuel costs and an adjustment to deferred fuel costs in accordance with a rate order from the PUCT issued in September 2012.  See Note 2 to the financial statements for further discussion of the PUCT rate order.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net revenue consists of operating revenues net of: 1) fuel, fuel-related expenses, and gas purchased for resale, 2) purchased power expenses, and 3) other regulatory charges.  Following is an analysis of the change in net revenue comparing the nine months ended September 30, 2012 to the nine months ended September 30, 2011.

   
Amount
   
(In Millions)
     
2011 net revenue
 
$451.1 
Purchased power capacity
 
(16.7)
Volume/weather
 
(19.9)
Fuel recovery
 
(6.1)
Reserve equalization
 
14.3 
Other
 
(1.1)
2012 net revenue
 
$421.6 

The purchased power capacity variance is primarily due to additional capacity purchases as well as price increases for ongoing purchased power capacity.

The volume/weather variance is primarily due to a decrease of 651 GWh, or 5%, in billed electricity usage, including the effect of milder weather compared to last year on residential and commercial sales and decreased usage in the industrial sector as a result of decreased consumption by a large industrial customer in the refining industry due to an unplanned outage.

The fuel recovery variance is primarily the result of a $6 million adjustment to deferred fuel costs in accordance with a rate order from the PUCT issued in September 2012.  See Note 2 to the financial statements for further discussion of the PUCT rate order.


 
155

Entergy Texas, Inc. and Subsidiaries
Management’s Financial Discussion and Analysis

The reserve equalization variance is primarily due to decreased reserve equalization expense as a result of changes in the Entergy System generation mix compared to the same period in 2011.

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

Gross operating revenues decreased primarily due to:

·  
a decrease of $133.2 million in fuel cost recovery revenues primarily attributable to lower fuel rates and lower usage, offset by lower interim fuel refunds in 2012 versus 2011.  Entergy Texas’s fuel and purchased power recovery mechanism is discussed in Note 2 to the financial statements in the Form 10-K.  The interim fuel refunds and the PUCT approvals are discussed in Note 2 to the financial statements herein and in the Form 10-K;
·  
a decrease of $33.8 million in gross wholesale revenues as a result of a decrease in sales volume to municipal and co-op customers and to affiliated customers; and
·  
less favorable volume/weather, as discussed above.

Fuel and purchased power expenses decreased primarily due to decreases in the average market prices of natural gas and purchased power, partially offset by an increase in deferred fuel expense due to an adjustment to deferred fuel costs in accordance with a rate order from the PUCT issued in September 2012 and as a result of lower interim fuel refunds in 2012 versus 2011, offset by lower fuel revenues, as discussed above.  See Note 2 to the financial statements for further discussion of the PUCT rate order.

Other regulatory charges increased primarily due to the distribution in the first quarter 2011 of $17.4 million to customers of the 2007 rough production cost equalization remedy receipts.  See Note 2 to the financial statements in the Form 10-K for further discussion of the rough production cost equalization proceedings.

Other Income Statement Variances

Third Quarter 2012 Compared to Third Quarter 2011

Other operation and maintenance expenses increased primarily due to the amortization of $4.3 million of Hurricane Rita storm costs in accordance with a rate order from the PUCT issued in September 2012 and $1.3 million of costs incurred in 2012 related to the planned spin-off and merger of the Utility’s transmission business.  See Note 2 to the financial statements for further discussion of the PUCT rate order.

Taxes other than income taxes decreased primarily due to a reduction in the provision recorded for sales and use taxes.

Depreciation and amortization expenses increased primarily due to additions to plant in service and an increase in depreciation rates as a result of the rate order approved by the PUCT in September 2012.  See Note 2 to the financial statements for further discussion of the rate order.

Other income decreased primarily due to the reversal of $6.7 million of disallowed carrying charges on Hurricane Rita storm restoration costs in accordance with a rate order from the PUCT issued in September 2012.  See Note 2 to the financial statements for further discussion of the PUCT rate order.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Other operation and maintenance expenses increased primarily due to:

·  
an increase of $7.5 million in fossil-fueled generation expenses due to a greater scope of work and an additional outage in 2012 compared to 2011;
·  
the amortization of $4.3 million of Hurricane Rita storm costs in accordance with a rate order from the PUCT issued in September 2012.  See Note 2 to the financial statements for further discussion of the PUCT rate order;

 
156

Entergy Texas, Inc. and Subsidiaries
Management’s Financial Discussion and Analysis


·  
an increase of $3.8 million in compensation and benefit costs primarily due to decreasing discount rates and changes in certain actuarial assumptions resulting from a recent experience study.   See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for further discussion of benefits costs;
·  
an increase of $3.9 million in transmission expenses primarily due to higher transmission equalization expenses in 2012; and
·  
$3.3 million of costs incurred in 2012 related to the planned spin-off and merger of the Utility’s transmission business.

The increase was partially offset by a decrease of $1.5 million in energy efficiency costs.  These costs are recovered through the energy efficiency rider and have no effect on net income.

Depreciation and amortization expenses increased primarily due to additions to plant in service and an increase in depreciation rates as a result of the rate order approved by the PUCT in September 2012.  See Note 2 to the financial statements for further discussion of the rate order.

Other income decreased primarily due to the reversal of $6.7 million of disallowed carrying charges on Hurricane Rita storm restoration costs in accordance with a rate order from the PUCT issued in September 2012.  See Note 2 to the financial statements for further discussion of the PUCT rate order.

Income Taxes

The effective income tax rate was 40.3% for the third quarter 2012 and 41.7% for the nine months ended September 30, 2012.  The differences in the effective income tax rates for the third quarter 2012 and for the nine months ended September 30, 2012 versus the federal statutory rate of 35% are due to certain book and tax differences related to utility plant items and state income taxes, partially offset by the amortization of investment tax credits and book and tax differences related to the allowance for equity funds used during construction.

The effective income tax rate was 36.6% for the third quarter 2011 and 37.3% for the nine months ended September 30, 2011.  The differences in the effective income tax rates for the third quarter 2011 and for the nine months ended September 30, 2011 versus the federal statutory rate of 35% were due to certain book and tax differences related to utility plant items and state income taxes, partially offset by the amortization of investment tax credits and book and tax differences related to the allowance for equity funds used during construction.

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2012 and 2011 were as follows:

   
2012
 
2011
   
(In Thousands)
         
Cash and cash equivalents at beginning of period
 
$65,289 
 
$35,342 
         
Cash flow provided by (used in):
       
 
Operating activities
 
171,985 
 
105,955 
 
Investing activities
 
(65,518)
 
(120,682)
 
Financing activities
 
(107,340)
 
20,631 
Net increase (decrease) in cash and cash equivalents
 
(873)
 
5,904 
         
Cash and cash equivalents at end of period
 
$64,416 
 
$41,246 


 
157

Entergy Texas, Inc. and Subsidiaries
Management’s Financial Discussion and Analysis


Operating Activities

Net cash flow provided by operating activities increased $66 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to:

·  
an increase in the recovery of fuel costs due to System Agreement bandwidth remedy payments of $43 million received in January 2012 as a result of receipts required to implement the FERC’s remedy in an October 2011 order for the period June-December 2005.  See Note 2 to the financial statements herein and in the Form 10-K for a discussion of the System Agreement proceedings;
·  
$67.2 million of fuel cost refunds for the nine months ended September 30, 2012 compared to $73.4 million of fuel cost refunds for the nine months ended September 30, 2011.  See Note 2 to the financial statements herein and in the Form 10-K for discussion of the fuel cost refunds; and
·  
a decrease of $5.9 million in pension contributions.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for a discussion of qualified pension and other postretirement benefits.

Investing Activities

Net cash flow used in investing activities decreased $55.2 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to money pool activity and a decrease in transmission construction expenditures due to reliability work performed in 2011, partially offset by higher fossil-fueled generation construction expenditures due to a greater scope of projects in 2012.

Decreases in Entergy Texas’s receivable from the money pool are a source of cash flow, and Entergy Texas’s receivable from the money pool decreased by $50.2 million for the nine months ended September 30, 2012 compared to increasing by $7.3 million for the nine months ended September 30, 2011.  The money pool is an inter-company borrowing arrangement designed to reduce Entergy’s subsidiaries’ need for external short-term borrowings.

Financing Activities

Entergy Texas’s financing activities used $107.3 million of cash for the nine months ended September 30, 2012 compared to providing $20.6 million for the nine months ended September 30, 2011 primarily due to the issuance of $75 million of 4.10% Series first mortgage bonds in September 2011 and an increase of $51.6 million in common stock dividends paid.

Capital Structure

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

   
September 30,
 2012
 
December 31,
2011
         
Debt to capital
 
64.9%
 
65.1%
Effect of excluding the securitization bonds
 
(13.6)%
 
(14.3)%
Debt to capital, excluding securitization bonds (1)
 
51.3%
 
50.8%
Effect of subtracting cash
 
(1.8)%
 
(1.9)%
Net debt to net capital, excluding securitization bonds (1)
 
49.5%
 
48.9%

(1)
Calculation excludes the securitization bonds, which are non-recourse to Entergy Texas.

Net debt consists of debt less cash and cash equivalents.  Debt consists of notes payable and long-term debt, including the currently maturing.  Capital consists of debt and shareholder’s equity.  Net capital consists of capital less cash and cash equivalents.  Entergy Texas uses the net debt to net capital ratio and the ratios excluding securitization bonds in analyzing its financial condition and believes they provide useful information to its investors and creditors in evaluating Entergy Texas’s financial condition.

 
158

Entergy Texas, Inc. and Subsidiaries
Management’s Financial Discussion and Analysis


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 Texas’s uses and sources of capital.  Entergy Texas is developing its capital investment plan for 2013 through 2015 and currently anticipates making $726 million in capital investments during that period, including approximately $394 million for maintenance of existing assets.  The remaining $332 million is associated with specific investments such as environmental compliance spending, plant upgrades, transmission upgrades and system improvements, and other investments.  Following are updates to the information provided in the Form 10-K.

Entergy Texas’s receivables from the money pool were as follows:

September 30,
2012
 
December 31,
2011
 
September 30,
2011
 
December 31,
2010
(In Thousands)
             
$12,981
 
$63,191
 
$20,942
 
$13,672

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

Entergy Texas has a credit facility in the amount of $150 million scheduled to expire in March 2017.  No borrowings were outstanding under the facility as of September 30, 2012.  See Note 4 to the financial statements herein for additional discussion of the credit facility.

State and Local Rate Regulation

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - State and Local Rate Regulation" in the Form 10-K for a discussion of state and local rate regulation.  Following are updates to the discussion in the Form 10-K.

See the Form 10-K for a discussion of the rate case that Entergy Texas filed in November 2011 requesting a $112 million base rate increase reflecting a 10.6% return on common equity based on an adjusted June 2011 test year. In April 2012 the PUCT Staff filed direct testimony recommending a base rate increase of $66 million and a 9.6% return on common equity.  The PUCT Staff, however, subsequently filed a statement of position in the proceeding indicating that it was still evaluating the position it would ultimately take in the case regarding Entergy Texas’s recovery of purchased power capacity costs and Entergy Texas’s proposal to defer its MISO transition expenses.  In April 2012, Entergy Texas filed rebuttal testimony indicating a revised request for a $105 million base rate increase.  A hearing was held in late-April through early-May 2012.

In September 2012 the PUCT issued an order approving a $28 million rate increase, effective July 2012.  The order includes a finding that “a return on common equity (ROE) of 9.80 percent will allow [Entergy Texas] a reasonable opportunity to earn a reasonable return on invested capital.”  The order also provides for increases in depreciation rates and the annual storm reserve accrual.  The order also reduced Entergy Texas’s proposed purchased power capacity costs, stating that they are not known and measureable; reduced Entergy Texas’s regulatory assets associated with Hurricane Rita; excluded from rate recovery capitalized financially-based incentive compensation; included $1.6 million of MISO transition expense in base rates, and reduced Entergy’s Texas’s fuel reconciliation recovery by $4.0 million because it disagreed with the line-loss factor used in the calculation.  After considering the progress of the proceeding in light of the PUCT order, Entergy Texas recorded in the third quarter 2012 an approximate $24 million charge to recognize that assets associated with Hurricane Rita, financially-based incentive compensation, and fuel recovery are no longer probable of recovery.  Entergy Texas continues to believe that it is entitled to recover these prudently incurred costs, however, and it filed a motion for rehearing regarding these and several other issues in the PUCT’s order on October 4, 2012.  Several other parties have also filed motions for rehearing of the PUCT’s order.  The PUCT subsequently denied rehearing of substantive issues.


 
159

Entergy Texas, Inc. and Subsidiaries
Management’s Financial Discussion and Analysis

In December 2011, Entergy Texas filed with the PUCT a request to refund approximately $43 million, including interest, of fuel cost recovery over-collections through October 2011.  Entergy Texas and the parties to the proceeding reached an agreement that Entergy Texas would refund $67 million, including interest and additional over-recoveries through December 2011, over a three-month period.  Entergy Texas and the parties requested that interim rates consistent with the settlement be approved effective with the March 2012 billing month, and the PUCT approved the application in March 2012.  Entergy Texas completed this refund to customers in May 2012.

In October 2012, Entergy Texas filed with the PUCT a request to refund approximately $78 million, including interest, of fuel cost recovery over-collections through September 2012.  Entergy Texas requested that the refund be implemented over a six-month period effective with the January 2013 billing month.

In July 2012, Entergy Texas filed with the PUCT an application to credit its customers approximately $37.5 million, including interest, resulting from the FERC’s October 2011 order in the System Agreement rough production cost equalization proceeding.  See the Form 10-K for a discussion of the FERC’s October 2011 order.  In September 2012 the parties submitted a stipulation resolving the proceeding.  The stipulation provides that Entergy Texas customers will be credited over a four-month period beginning October 2012.  The credits were initiated with the October 2012 billing month on an interim basis, and the PUCT subsequently approved the stipulation, also in October 2012.

Federal Regulation

See “Entergy’s Proposal to Join the MISO RTO” in the “Rate, Cost-recovery, and Other Regulation – Federal Regulation” section of Entergy Corporation and Subsidiaries Management’s Financial Discussion and Analysis for updates to the Federal Regulation discussion in the Form 10-K.

Environmental Risks

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS - Environmental Risks" in the Form 10-K for a discussion of 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 unbilled revenue and qualified pension and other postretirement benefits.

 

 
CONSOLIDATED INCOME STATEMENTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
   
(In Thousands)
 
                         
OPERATING REVENUES
                       
Electric
  $ 489,078     $ 556,955     $ 1,174,069     $ 1,350,262  
                                 
OPERATING EXPENSES
                               
Operation and Maintenance:
                               
   Fuel, fuel-related expenses, and
                               
     gas purchased for resale
    103,542       127,745       178,473       247,568  
   Purchased power
    200,483       222,283       523,208       613,794  
   Other operation and maintenance
    58,343       52,455       170,791       149,373  
Taxes other than income taxes
    19,031       22,680       50,640       52,567  
Depreciation and amortization
    23,043       19,823       64,887       59,059  
Other regulatory charges - net
    23,402       25,159       50,791       37,816  
TOTAL
    427,844       470,145       1,038,790       1,160,177  
                                 
OPERATING INCOME
    61,234       86,810       135,279       190,085  
                                 
OTHER INCOME
                               
Allowance for equity funds used during construction
    1,281       946       3,355       2,493  
Interest and investment income
    (5,566 )     1,374       (2,648 )     4,112  
Miscellaneous - net
    (1,520 )     (730 )     (3,164 )     (1,700 )
TOTAL
    (5,805 )     1,590       (2,457 )     4,905  
                                 
INTEREST EXPENSE
                               
Interest expense
    24,246       24,616       71,510       69,657  
Allowance for borrowed funds used during construction
    (1,033 )     (653 )     (2,417 )     (1,721 )
TOTAL
    23,213       23,963       69,093       67,936  
                                 
INCOME BEFORE INCOME TAXES
    32,216       64,437       63,729       127,054  
                                 
Income taxes
    12,982       23,562       26,547       47,356  
                                 
NET INCOME
  $ 19,234     $ 40,875     $ 37,182     $ 79,698  
                                 
See Notes to Financial Statements.
                               
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Page left blank intentionally)



 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
OPERATING ACTIVITIES
           
Net income
  $ 37,182     $ 79,698  
Adjustments to reconcile net income to net cash flow provided by operating activities:
         
  Depreciation and amortization
    64,887       59,059  
  Deferred income taxes, investment tax credits, and non-current taxes accrued
    28,140       51,650  
  Changes in assets and liabilities:
               
    Receivables
    (15,544 )     (123,024 )
    Fuel inventory
    (2,650 )     4,694  
    Accounts payable
    11,930       20,369  
    Taxes accrued
    (8,545 )     (2,408 )
    Interest accrued
    (9,032 )     (8,542 )
    Deferred fuel costs
    11,543       (51,985 )
    Other working capital accounts
    (10,244 )     51,410  
    Provisions for estimated losses
    3,172       (113 )
    Other regulatory assets
    72,559       55,428  
    Pension and other postretirement liabilities
    (11,158 )     (18,260 )
    Other assets and liabilities
    (255 )     (12,021 )
Net cash flow provided by operating activities
    171,985       105,955  
                 
INVESTING ACTIVITIES
               
Construction expenditures
    (128,199 )     (120,992 )
Allowance for equity funds used during construction
    3,355       2,493  
Change in money pool receivable - net
    50,210       (7,270 )
Remittances to transition charge account
    (65,325 )     (69,607 )
Payments from transition charge account
    74,441       74,694  
Net cash flow used in investing activities
    (65,518 )     (120,682 )
                 
FINANCING ACTIVITIES
               
Proceeds from the issuance of long-term debt
    -       74,264  
Retirement of long-term debt
    (49,192 )     (47,853 )
Dividends paid:
               
  Common stock
    (57,420 )     (5,780 )
Other
    (728 )     -  
Net cash flow provided by (used in) financing activities
    (107,340 )     20,631  
                 
Net increase (decrease) in cash and cash equivalents
    (873 )     5,904  
                 
Cash and cash equivalents at beginning of period
    65,289       35,342  
                 
Cash and cash equivalents at end of period
  $ 64,416     $ 41,246  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
  Interest - net of amount capitalized
  $ 77,264     $ 74,937  
  Income taxes
  $ 6,000     $ -  
                 
See Notes to Financial Statements.
               


 

 
CONSOLIDATED BALANCE SHEETS
 
ASSETS
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT ASSETS
           
Cash and cash equivalents:
           
  Cash
  $ 1,621     $ 150  
   Temporary cash investments
    62,795       65,139  
    Total cash and cash equivalents
    64,416       65,289  
Securitization recovery trust account
    32,099       41,215  
Accounts receivable:
               
  Customer
    83,954       68,290  
  Allowance for doubtful accounts
    (912 )     (1,461 )
  Associated companies
    74,811       129,561  
  Other
    12,730       9,573  
  Accrued unbilled revenues
    42,287       41,573  
    Total accounts receivable
    212,870       247,536  
Accumulated deferred income taxes
    56,530       88,436  
Fuel inventory - at average cost
    56,534       53,884  
Materials and supplies - at average cost
    30,983       29,810  
Prepayments and other
    19,948       15,203  
TOTAL
    473,380       541,373  
                 
OTHER PROPERTY AND INVESTMENTS
               
Investments in affiliates - at equity
    669       783  
Non-utility property - at cost (less accumulated depreciation)
    711       930  
Other
    18,587       17,969  
TOTAL
    19,967       19,682  
                 
UTILITY PLANT
               
Electric
    3,429,389       3,338,608  
Construction work in progress
    95,876       90,856  
TOTAL UTILITY PLANT
    3,525,265       3,429,464  
Less - accumulated depreciation and amortization
    1,323,423       1,289,166  
UTILITY PLANT - NET
    2,201,842       2,140,298  
                 
DEFERRED DEBITS AND OTHER ASSETS
               
Regulatory assets:
               
  Regulatory asset for income taxes - net
    128,118       129,924  
  Other regulatory assets (includes securitization property
       of $661,097 as of September 30, 2012 and
       $704,896 as of December 31, 2011)
    1,107,312       1,178,067  
Long-term receivables - associated companies
    29,912       31,254  
Other
    18,810       18,408  
TOTAL
    1,284,152       1,357,653  
                 
TOTAL ASSETS
  $ 3,979,341     $ 4,059,006  
                 
See Notes to Financial Statements.
               


 

ENTERGY TEXAS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
LIABILITIES AND EQUITY
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT LIABILITIES
           
Accounts payable:
           
  Associated companies
  $ 86,418     $ 60,583  
  Other
    54,408       69,160  
Customer deposits
    42,170       38,294  
Taxes accrued
    31,766       40,311  
Interest accrued
    24,063       33,095  
Deferred fuel costs
    76,207       64,664  
Pension and other postretirement liabilities
    1,010       1,029  
System agreement cost equalization
    37,405       43,290  
Other
    2,530       4,847  
TOTAL
    355,977       355,273  
                 
NON-CURRENT LIABILITIES
               
Accumulated deferred income taxes and taxes accrued
    932,592       934,990  
Accumulated deferred investment tax credits
    18,142       19,339  
Other regulatory liabilities
    7,455       11,710  
Asset retirement cost liabilities
    4,043       3,870  
Accumulated provisions
    8,196       5,024  
Pension and other postretirement liabilities
    126,596       137,735  
Long-term debt (includes securitization bonds of
       $700,501 as of September 30, 2012 and
       $749,673 as of December 31, 2011)
    1,628,270       1,677,127  
Other
    18,953       14,583  
TOTAL
    2,744,247       2,804,378  
                 
Commitments and Contingencies
               
                 
COMMON EQUITY
               
Common stock, no par value, authorized 200,000,000 shares;
               
  issued and outstanding 46,525,000 shares in 2012 and 2011
    49,452       49,452  
Paid-in capital
    481,994       481,994  
Retained earnings
    347,671       367,909  
TOTAL
    879,117       899,355  
                 
TOTAL LIABILITIES AND EQUITY
  $ 3,979,341     $ 4,059,006  
                 
See Notes to Financial Statements.
               


 

 
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON EQUITY
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited) (In Thousands)
 
                         
   
Common Equity
       
   
Common Stock
   
Paid-in Capital
   
Retained Earnings
   
Total
 
Balance at December 31, 2010
  $ 49,452     $ 481,994     $ 292,844     $ 824,290  
                                 
Net income
    -       -       79,698       79,698  
Common stock dividends
    -       -       (5,780 )     (5,780 )
                                 
Balance at September 30, 2011
  $ 49,452     $ 481,994     $ 366,762     $ 898,208  
                                 
                                 
Balance at December 31, 2011
  $ 49,452     $ 481,994     $ 367,909     $ 899,355  
                                 
Net income
    -       -       37,182       37,182  
Common stock dividends
    -       -       (57,420 )     (57,420 )
                                 
Balance at September 30, 2012
  $ 49,452     $ 481,994     $ 347,671     $ 879,117  
                                 
See Notes to Financial Statements.
                               
                                 
                                 


 

 
SELECTED OPERATING RESULTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
                         
   
Three Months Ended
   
Increase/
       
Description
 
2012
   
2011
   
(Decrease)
   
%
 
   
(Dollars In Millions)
       
Electric Operating Revenues:
                       
  Residential
  $ 192     $ 233     $ (41 )     (18 )
  Commercial
    98       114       (16 )     (14 )
  Industrial
    87       102       (15 )     (15 )
  Governmental
    6       7       (1 )     (14 )
    Total retail
    383       456       (73 )     (16 )
  Sales for resale:
                               
     Associated companies
    92       76       16       21  
     Non-associated companies
    8       23       (15 )     (65 )
  Other
    6       2       4       200  
    Total
  $ 489     $ 557     $ (68 )     (12 )
                                 
Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    1,879       2,076       (197 )     (9 )
  Commercial
    1,267       1,318       (51 )     (4 )
  Industrial
    1,634       1,635       (1 )     -  
  Governmental
    74       80       (6 )     (8 )
    Total retail
    4,854       5,109       (255 )     (5 )
  Sales for resale:
                               
     Associated companies
    1,982       1,238       744       60  
     Non-associated companies
    179       370       (191 )     (52 )
    Total
    7,015       6,717       298       4  
                                 
                                 
   
Nine Months Ended
   
Increase/
         
Description
    2012       2011    
(Decrease)
   
%
 
   
(Dollars In Millions)
         
Electric Operating Revenues:
                               
  Residential
  $ 425     $ 501     $ (76 )     (15 )
  Commercial
    248       276       (28 )     (10 )
  Industrial
    226       261       (35 )     (13 )
  Governmental
    17       18       (1 )     (6 )
    Total retail
    916       1,056       (140 )     (13 )
  Sales for resale:
                               
     Associated companies
    201       205       (4 )     (2 )
     Non-associated companies
    28       59       (31 )     (53 )
  Other
    29       30       (1 )     (3 )
    Total
  $ 1,174     $ 1,350     $ (176 )     (13 )
                                 
Billed Electric Energy
                               
 Sales (GWh):
                               
  Residential
    4,386       4,790       (404 )     (8 )
  Commercial
    3,342       3,392       (50 )     (1 )
  Industrial
    4,512       4,696       (184 )     (4 )
  Governmental
    209       222       (13 )     (6 )
    Total retail
    12,449       13,100       (651 )     (5 )
  Sales for resale:
                               
     Associated companies
    4,145       3,227       918       28  
     Non-associated companies
    683       971       (288 )     (30 )
    Total
    17,277       17,298       (21 )     -  
                                 
 
 


SYSTEM ENERGY RESOURCES, INC.

MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS


Results of Operations

System Energy’s principal asset consists of a 78.5% ownership interest and 11.5% 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.

Third Quarter 2012 Compared to Third Quarter 2011

Net income increased $16.4 million primarily due to increased operating income partially offset by lower other income.  Operating income was higher because of higher rate base compared to 2011.  Other income was lower due to AFUDC accrued on the Grand Gulf uprate project in 2011.  Grand Gulf’s spring 2012 refueling outage was completed in June 2012, and the majority of uprate-related capital improvements were completed during this outage.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net income increased $36.9 million primarily due to increased operating income, higher other income, and a lower effective income tax rate.  Operating income was higher because of higher rate base compared to 2011.  Other income was higher due to AFUDC accrued on the Grand Gulf uprate project.

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2012 and 2011 were as follows:

   
2012
 
2011
   
(In Thousands)
         
Cash and cash equivalents at beginning of period
 
$185,157
 
$263,772 
         
Cash flow provided by (used in):
       
 
Operating activities
 
217,040 
 
233,804 
 
Investing activities
 
(513,256)
 
(177,322)
 
Financing activities
 
131,297 
 
(142,564)
Net decrease in cash and cash equivalents
 
(164,919)
 
(86,082)
         
Cash and cash equivalents at end of period
 
$20,238 
 
$177,690 

Operating Activities

Net cash provided by operating activities decreased $16.8 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to an increase in nuclear refueling outage expenditures, partially offset by a decrease of $14.7 million in pension contributions.  See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Critical Accounting Estimates" in the Form 10-K and Note 6 to the financial statements herein for a discussion of qualified pension and other postretirement benefits.

 
168

System Energy Resources, Inc.
Management’s Financial Discussion and Analysis

Investing Activities

Net cash used in investing activities increased $335.9 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to:

·  
an increase in construction expenditures resulting from the uprate project at Grand Gulf;
·  
an increase of $114.9 million in nuclear fuel activity primarily due to the 2012 Grand Gulf refueling outage; and
·  
$72.2 million of bond proceeds deposited with a trustee in September 2012.  System Energy issued $250 million of 4.10% Series first mortgage bonds in September 2012 and used a portion of the proceeds to redeem, at maturity, its $70 million 6.2% Series first mortgage bonds due October 2012.  The funds were held by trustee until the redemption of the bonds on October 1, 2012.

The increase was partially offset by money pool activity.

Decreases in System Energy’s receivable from the money pool are a source of cash flow, and System Energy’s receivable from the money pool decreased $116.3 million for the nine months ended September 30, 2012 compared to decreasing by $24.4 million for the nine months ended September 30, 2011.  The money pool is an inter-company borrowing arrangement designed to reduce the Utility subsidiaries’ need for external short-term borrowings.

Financing Activities

System Energy’s financing activities provided $131.3 million of cash for the nine months ended September 30, 2012 compared to using $142.6 million of cash for the nine months ended September 30, 2011 primarily due to the following cash flow activity:

·  
the issuance of $250 million of 4.10% Series first mortgage bonds in September 2012;
·  
the issuance of $50 million of 4.02% Series H notes by the nuclear fuel company variable interest entity in February 2012;
·  
an increase in borrowings of $62.8 million on the nuclear fuel company variable interest entity’s credit facility in 2012 compared to the repayment on borrowings of $38.3 million on the nuclear fuel company variable interest entity’s credit facility in 2011;
·  
a decrease of $29.3 million in common equity dividends in 2012; and
·  
the redemption of $152.975 million of pollution control revenue bonds in 2012.

Capital Structure

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

   
September 30,
 2012
 
December 31,
2011
         
Debt to capital
 
49.8%
 
48.3%
Effect of subtracting cash
 
(0.6)%
 
(7.1)%
Net debt to net capital
 
49.2%
 
41.2%

Net debt consists of debt less cash and cash equivalents.  Debt consists of notes payable and long-term debt, including the currently maturing portion.  Capital consists of debt and 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.


 
169

System Energy Resources, Inc.
Management’s Financial Discussion and Analysis


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.  System Energy is developing its capital investment plan for 2013 through 2015 and currently anticipates making $91 million in capital investments during that period, including approximately $52 million for maintenance of existing assets.  The remaining $39 million is associated with specific investments, such as plant improvements.  Following are updates to the information provided in the Form 10-K.

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

September 30,
2012
 
December 31,
2011
 
September 30,
2011
 
December 31,
2010
(In Thousands)
             
$4,103
 
$120,424
 
$73,570
 
$97,948

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

In February 2012 the System Energy nuclear fuel company variable interest entity issued $50 million of 4.02% Series H notes due February 2017.  System Energy used the proceeds to purchase additional nuclear fuel.

In September 2012, System Energy issued $250 million of 4.10% Series first mortgage bonds due April 2023.  System Energy used a portion of the proceeds to pay, at maturity, its $70 million 6.2% Series first mortgage bonds due October 2012 and to pay, prior to maturity, its $102.975 million 5.9% Series pollution control revenue bonds due May 2022 and its $50 million 6.2% Series pollution control revenue bonds due February 2026.

Grand Gulf Uprate

As discussed in more detail in the Form 10-K, the estimated capital investments for 2012-2014 include System Energy’s approximately 178 MW uprate of the Grand Gulf nuclear plant.  Grand Gulf’s spring 2012 refueling outage was completed in June 2012, and the majority of uprate-related capital improvements were made during this outage.  Based upon the uprate-related work completed during the spring 2012 refueling outage, additional information from the project's engineering, procurement and construction contractor, the costs required to install instrumentation in the steam dryer in response to evolving guidance from the NRC staff, and delays in obtaining NRC approval, System Energy now estimates the total capital investment made in the course of the implementation of the Grand Gulf uprate project is approximately $874 million, including SMEPA’s share.  Construction work was completed in June 2012 and in July 2012 the NRC approved the license amendment, which allows the plant to operate at the uprated capacity level.

Nuclear Matters

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Nuclear Matters" in the Form 10-K for a discussion of nuclear matters.

Environmental Risks

See "MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS – Environmental Risks" in the Form 10-K for a discussion of environmental risks.

Critical Accounting Estimates

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


 
 
INCOME STATEMENTS
 
For the Three and Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
                         
   
Three Months Ended
   
Nine Months Ended
 
   
2012
   
2011
   
2012
   
2011
 
   
(In Thousands)
   
(In Thousands)
 
                         
OPERATING REVENUES
                       
Electric
  $ 188,680     $ 152,431     $ 428,413     $ 409,946  
                                 
OPERATING EXPENSES
                               
Operation and Maintenance:
                               
   Fuel, fuel-related expenses, and
                               
     gas purchased for resale
    25,538       19,698       38,976       58,873  
   Nuclear refueling outage expenses
    7,304       4,115       14,352       12,204  
   Other operation and maintenance
    38,029       36,493       105,754       100,336  
Decommissioning
    8,327       7,752       24,541       23,568  
Taxes other than income taxes
    5,230       5,312       16,262       16,525  
Depreciation and amortization
    47,991       42,362       102,989       96,608  
Other regulatory credits - net
    (2,673 )     (1,821 )     (7,096 )     (7,071 )
TOTAL
    129,746       113,911       295,778       301,043  
                                 
OPERATING INCOME
    58,934       38,520       132,635       108,903  
                                 
OTHER INCOME
                               
Allowance for equity funds used during construction
    2,171       5,912       24,158       15,433  
Interest and investment income
    2,506       3,054       8,108       8,103  
Miscellaneous - net
    (146 )     (253 )     (446 )     (502 )
TOTAL
    4,531       8,713       31,820       23,034  
                                 
INTEREST EXPENSE
                               
Interest expense
    12,631       14,548       34,076       33,673  
Allowance for borrowed funds used during construction
    (401 )     (1,800 )     (6,892 )     (4,716 )
TOTAL
    12,230       12,748       27,184       28,957  
                                 
INCOME BEFORE INCOME TAXES
    51,235       34,485       137,271       102,980  
                                 
Income taxes
    20,619       20,222       44,751       47,395  
                                 
NET INCOME
  $ 30,616     $ 14,263     $ 92,520     $ 55,585  
                                 
See Notes to Financial Statements.
                               


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Page left blank intentionally)



 
 
 
 
STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
OPERATING ACTIVITIES
           
Net income
  $ 92,520     $ 55,585  
Adjustments to reconcile net income to net cash flow provided by operating activities:
         
  Depreciation, amortization, and decommissioning, including nuclear fuel amortization
    157,070       162,492  
  Deferred income taxes, investment tax credits, and non-current taxes accrued
    106,167       (53,032 )
  Changes in assets and liabilities:
               
    Receivables
    (8,224 )     (2,916 )
    Accounts payable
    (9,070 )     1,449  
    Taxes accrued and prepaid taxes
    (63,879 )     94,285  
    Interest accrued
    (1,636 )     (35,671 )
    Other working capital accounts
    (30,126 )     6,928  
    Other regulatory assets
    (38,909 )     53,727  
    Pension and other postretirement liabilities
    (9,375 )     (23,598 )
    Other assets and liabilities
    22,502       (25,445 )
Net cash flow provided by operating activities
    217,040       233,804  
                 
INVESTING ACTIVITIES
               
Construction expenditures
    (415,013 )     (164,013 )
Allowance for equity funds used during construction
    24,158       15,433  
Nuclear fuel purchases
    (182,619 )     (41,717 )
Proceeds from the sale of nuclear fuel
    38,413       12,420  
Changes in other investments - net
    (72,170 )     -  
Proceeds from nuclear decommissioning trust fund sales
    315,006       166,890  
Investment in nuclear decommissioning trust funds
    (337,352 )     (190,713 )
Changes in money pool receivable - net
    116,321       24,378  
Net cash flow used in investing activities
    (513,256 )     (177,322 )
                 
FINANCING ACTIVITIES
               
Proceeds from the issuance of long-term debt
    297,908       -  
Retirement of long-term debt
    (192,867 )     (38,161 )
Changes in credit borrowings - net
    62,772       (38,264 )
Dividends paid:
               
  Common stock
    (32,750 )     (62,000 )
Other
    (3,766 )     (4,139 )
Net cash flow provided by (used in) financing activities
    131,297       (142,564 )
                 
Net decrease in cash and cash equivalents
    (164,919 )     (86,082 )
                 
Cash and cash equivalents at beginning of period
    185,157       263,772  
                 
Cash and cash equivalents at end of period
  $ 20,238     $ 177,690  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid (received) during the period for:
               
  Interest - net of amount capitalized
  $ 27,667     $ 28,409  
  Income taxes
  $ (3,873 )   $ -  
                 
See Notes to Financial Statements.
               



 
BALANCE SHEETS
 
ASSETS
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT ASSETS
           
Cash and cash equivalents:
           
  Cash
  $ 401     $ 30,961  
  Temporary cash investments
    19,837       154,196  
    Total cash and cash equivalents
    20,238       185,157  
Accounts receivable:
               
  Associated companies
    67,144       172,943  
  Other
    4,996       7,294  
    Total accounts receivable
    72,140       180,237  
Materials and supplies - at average cost
    80,983       86,333  
Deferred nuclear refueling outage costs
    41,544       9,479  
Funds held on deposit
    72,170       -  
Prepayments and other
    4,267       1,111  
TOTAL
    291,342       462,317  
                 
OTHER PROPERTY AND INVESTMENTS
               
Decommissioning trust funds
    484,188       423,409  
TOTAL
    484,188       423,409  
                 
UTILITY PLANT
               
Electric
    4,031,332       3,438,424  
Property under capital lease
    491,023       491,023  
Construction work in progress
    50,209       357,826  
Nuclear fuel
    271,496       157,967  
TOTAL UTILITY PLANT
    4,844,060       4,445,240  
Less - accumulated depreciation and amortization
    2,537,005       2,518,190  
UTILITY PLANT - NET
    2,307,055       1,927,050  
                 
DEFERRED DEBITS AND OTHER ASSETS
               
Regulatory assets:
               
  Regulatory asset for income taxes - net
    129,945       124,777  
  Other regulatory assets
    321,536       287,796  
Other
    17,445       20,016  
TOTAL
    468,926       432,589  
                 
TOTAL ASSETS
  $ 3,551,511     $ 3,245,365  
                 
See Notes to Financial Statements.
               



SYSTEM ENERGY RESOURCES, INC.
 
BALANCE SHEETS
 
LIABILITIES AND EQUITY
 
September 30, 2012 and December 31, 2011
 
(Unaudited)
 
             
   
2012
   
2011
 
   
(In Thousands)
 
             
CURRENT LIABILITIES
           
Currently maturing long-term debt
  $ 181,854     $ 110,163  
Short-term borrowings
    62,772       -  
Accounts payable:
               
  Associated companies
    5,153       8,032  
  Other
    46,459       63,331  
Taxes accrued
    28,576       92,455  
Accumulated deferred income taxes
    16,082       3,428  
Interest accrued
    16,140       17,776  
Other
    2,336       2,591  
TOTAL
    359,372       297,776  
                 
NON-CURRENT LIABILITIES
               
Accumulated deferred income taxes and taxes accrued
    762,227       652,418  
Accumulated deferred investment tax credits
    56,638       57,865  
Other regulatory liabilities
    240,767       214,745  
Decommissioning
    469,893       445,352  
Pension and other postretirement liabilities
    130,344       139,719  
Long-term debt
    671,917       636,885  
Other
    20       42  
TOTAL
    2,331,806       2,147,026  
                 
Commitments and Contingencies
               
                 
COMMON EQUITY
               
Common stock, no par value, authorized 1,000,000 shares;
         
  issued and outstanding 789,350 shares in 2012 and 2011
    789,350       789,350  
Retained earnings
    70,983       11,213  
TOTAL
    860,333       800,563  
                 
TOTAL LIABILITIES AND EQUITY
  $ 3,551,511     $ 3,245,365  
                 
See Notes to Financial Statements.
               



 
STATEMENTS OF CHANGES IN COMMON EQUITY
 
For the Nine Months Ended September 30, 2012 and 2011
 
(Unaudited) (In Thousands)
 
                   
   
Common Equity
       
   
Common Stock
   
Retained Earnings
   
Total
 
Balance at December 31, 2010
  $ 789,350     $ 23,016     $ 812,366  
                         
Net income
    -       55,585       55,585  
Common stock dividends
    -       (62,000 )     (62,000 )
                         
Balance at September 30, 2011
  $ 789,350     $ 16,601     $ 805,951  
                         
                         
Balance at December 31, 2011
  $ 789,350     $ 11,213     $ 800,563  
                         
Net income
    -       92,520       92,520  
Common stock dividends
    -       (32,750 )     (32,750 )
                         
Balance at September 30, 2012
  $ 789,350     $ 70,983     $ 860,333  
                         
See Notes to Financial Statements.
                       
 

 


ENTERGY CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

See "PART I, Item 1, Litigation" in the Form 10-K for a discussion of legal, administrative, and other regulatory proceedings affecting Entergy.  Following is an update to that discussion.  Also see "Item 5, Other Information, Environmental Regulation", below, for updates regarding environmental proceedings and regulation.

Texas Power Price Lawsuit

See the Form 10-K for a discussion of the lawsuit filed in August 2003 in the district court of Chambers County, Texas by Texas residents on behalf of a purported class of the Texas retail customers of Entergy Gulf States, Inc. who were billed and paid for electric power from January 1, 1994 to the present.  The case is pending in state district court, and in March 2012 the court found that the case met the requirements to be maintained as a class action under Texas law.  On April 30, 2012, the court entered an order certifying the class.  The defendants have appealed the order to the Texas Court of Appeals – First District.  The appeal is pending, and proceedings in district court are stayed until the appeal is resolved.

Item 1A.  Risk Factors

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

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

Issuer Purchases of Equity Securities (1)

 
 
 
 
Period
 
 
 
 
Total Number of
Shares Purchased
 
 
 
 
Average Price Paid
per Share
 
Total Number of
Shares Purchased
as Part of a
Publicly
Announced Plan
 
Maximum $
Amount
of Shares that May
Yet be Purchased
Under a Plan (2)
                 
7/01/2012-7/31/2012
 
-
 
$-
 
-
 
$350,052,918
8/01/2012-8/31/2012
 
-
 
$-
 
-
 
$350,052,918
9/01/2012-9/30/2012
 
-
 
$-
 
-
 
$350,052,918
Total
 
-
 
$-
 
-
   
 
 
(1)
In accordance with Entergy’s stock-based compensation plans, Entergy periodically grants stock options to key employees, which may be exercised to obtain shares of Entergy’s common stock.  According to the plans, these shares can be newly issued shares, treasury stock, or shares purchased on the open market.  Entergy’s management has been authorized by the Board to repurchase on the open market shares up to an amount sufficient to fund the exercise of grants under the plans.  See Note 12 to the financial statements in the Form 10-K for additional discussion of the stock-based compensation plans.  In addition to this authority, in October 2010 the Board granted authority for an additional $500 million share repurchase program.  The amount of share repurchases under these programs may vary as a result of material changes in business results or capital spending or new investment opportunities.  In addition, in the first quarter 2012, Entergy withheld 20,110 shares of its common stock at $70.62 per share to pay taxes due upon vesting of restricted stock granted as part of its long-term incentive program.
(2)
Maximum amount of shares that may yet be repurchased does not include an estimate of the amount of shares that may be purchased to fund the exercise of grants under the stock-based compensation plans.




Item 5.  Other Information

Regulation of the Nuclear Power Industry

Nuclear Waste Policy Act of 1982

Spent Nuclear Fuel

See the discussion in Part I, Item 1, in the Form 10-K for information regarding litigation against the U.S. Department of Energy.  Following are updates to that discussion.   In April 2012 the U.S. Court of Federal Claims issued a final judgment for approximately $10 million in the Grand Gulf case.  Entergy received payment of that amount from the U.S. Treasury in June 2012.  In April 2012, the same court also entered final judgment in the amount of approximately $4 million in the Pilgrim case.  On October 9, 2012 the DOE again appealed that decision to the U.S. Court of Appeals for the Federal Circuit (Federal Circuit).  In April 2012 the Federal Circuit issued a decision in the appeal in the Entergy Nuclear Indian Point 2 case. In that decision, the Federal Circuit reversed certain damages awarded to Entergy, but also reversed the trial court's denial of certain overhead costs. The revisions to the award reduced the net amount from approximately $106 million to approximately $103 million, and Entergy received payment of that amount from the U.S. Treasury in August 2012.  In June 2012 the Federal Circuit issued a decision in the appeal of the Vermont Yankee case.  In that decision, the Federal Circuit reversed certain damages awarded to Entergy, but again reversed the trial court’s denial of certain overhead costs.  The revisions to the award reduced the net amount from approximately $47 million to approximately $41 million.  In September 2012, Entergy Nuclear Palisades, LLC filed suit against the DOE for damages from the DOE's breach of the spent fuel disposal contract accruing at Palisades and Big Rock Point since the date of acquisition of those sites from Consumers Energy Company in 2007.  The timing of eventual receipt from the DOE of the Pilgrim and Vermont Yankee damage awards or any other damage awards discussed in the Form 10-K is uncertain.

Environmental Regulation

Following are updates to the Environmental Regulation section of Part I, Item 1 of the Form 10-K.

Clean Air Act and Subsequent Amendments

Interstate Air Transport

In March 2005, the EPA finalized the Clean Air Interstate Rule (CAIR), which was intended to reduce SO2 and NOx emissions from electric generation plants in order to improve air quality in twenty-nine eastern states.  The rule required a combination of investment of capital to install pollution control equipment and increased operating costs through the purchase of emission allowances.  Entergy began implementation in 2007, including installation of controls at several facilities and the development of an emission allowance procurement strategy.

Based on several court challenges, the CAIR was vacated and remanded to the EPA by the D.C. Circuit Court of Appeals in 2008.  The court allowed the CAIR to become effective in January 2009, while the EPA revised the rule.  On July 7, 2011, the EPA released its final Cross-State Air Pollution Rule (CSAPR, which previously was referred to as the Transport Rule).  The rule was directed at limiting the interstate transport of emissions of NOx and SO2 as precursors to ozone and fine particulate matter.  The final rule provided a significantly lower number of allowances to Entergy’s Utility states than did the draft rule.  Entergy’s capital investment and annual allowance purchase costs under the CSAPR would depend on the economic assessment of NOx and SO2 allowance markets, the cost of control technologies, generation unit utilization, and the availability and cost of purchased power.

Entergy filed a petition for review with the United States Court of Appeals for the D.C. Circuit and a petition with the EPA for reconsideration of the rule and stay of its effectiveness.  Several other parties filed similar petitions.  On December 30, 2011, the D.C. Circuit Court of Appeals stayed CSAPR and instructed the EPA to continue administering CAIR, pending further judicial review.  In August 2012, the D.C. Circuit issued a decision vacating CSAPR and leaving CAIR in place pending the promulgation of a lawful replacement for both rules.  In the interim, Entergy is complying with CAIR as it continues to be implemented.  The EPA has requested rehearing of the D.C. Circuit’s decision.
 


Regional Haze

In June 2005, the EPA issued final Best Available Retrofit Control Technology (BART) regulations that could potentially result in a requirement to install SO2 and NOx pollution control technology on certain of Entergy’s fossil-fueled generation units.  The rule leaves certain BART determinations to the states.  The Arkansas Department of Environmental Quality (ADEQ) prepared a State Implementation Plan (SIP) for Arkansas facilities to implement its obligations under the Clean Air Visibility Rule.  The ADEQ determined that Entergy Arkansas’s White Bluff power plant affects a Class I Area’s visibility and will be subject to the EPA’s presumptive BART limits, which likely would require the installation of scrubbers and low NOx burners.  Under then-current state regulations, the scrubbers would have had to be operational by October 2013.  Entergy Arkansas filed a petition in December 2009 with the Arkansas Pollution Control and Ecology Commission requesting a variance from this deadline because the EPA had expressed concerns about Arkansas’s Regional Haze SIP and questioned the appropriateness of issuing an air permit prior to that approval.  Entergy Arkansas’s petition requested that, consistent with federal law, the compliance deadline be changed to as expeditiously as practicable, but in no event later than five years after EPA approval of the Arkansas Regional Haze SIP.  The Arkansas Pollution Control and Ecology Commission approved the variance in March 2010.  In October 2011 the EPA released a proposed rule addressing the Arkansas Regional Haze SIP.  In the proposal the EPA disapproved a large portion of the Arkansas Regional Haze SIP, including the emission limits for NOx and SO2 at White Bluff.  The final rule was published, substantially unchanged, and became final on April 11, 2012.  The EPA did not issue a Federal Implementation Plan for regional haze requirements because Arkansas has indicated it wishes to correct and resubmit its SIP.  There will be a two-year timeframe in which the EPA must either approve a SIP issued by Arkansas or issue a Federal Implementation Plan.

New Source Performance Standards for Greenhouse Gas Emissions

The EPA announced a schedule for establishing new source performance standards (NSPS) for greenhouse gas (GHG) emissions from power plants and refineries.  Under the schedule, the EPA would have issued proposed regulations for power plants by July 26, 2011 and final regulations no later than May 26, 2012.  On April 13, 2012, EPA published the proposed NSPS for GHGs for new sources.  According to the EPA, the proposed rule applies directly only to new units and would limit CO2 emissions for any fossil-fired power plant greater than 25 MW to 1,000 pounds of CO2 per MWh of electricity produced.  Concerns have been expressed regarding the proposed rule’s potential applicability to existing facilities that undergo modification. The rule would not apply to certain units such as simple-cycle natural gas units and biomass units.  Entergy will continue to monitor the rulemaking process.

Clean Water Act

NPDES Permits and Section 401 Water Quality Certifications

Indian Point

As discussed in more detail in the Form 10-K, Entergy is involved in an administrative permitting process with the New York State Department of Environmental Conservation (NYSDEC) for renewal of the Indian Point 2 and Indian Point 3 discharge permits.  The NYSDEC has directed Entergy to develop detailed feasibility information regarding the construction and operation of cooling towers, and alternatives to closed cycle cooling, prior to the issuance of a new draft permit by the NYSDEC staff and commencement of the adjudicatory proceeding.    Entergy has proposed an alternative to the cooling towers, the use of cylindrical wedge wire screens, the construction costs of which are now expected to be approximately $250 million to $300 million to install.

In July 2012 the New York State Department of State adopted a significant coastal fisheries and habitat designation specifying the area of the Hudson River near Indian Point as significant habitat for certain species.  This designation becomes part of New York’s state coastal management program and, if approved by the federal government, would become part of New York’s management plan under the federal Coastal Zone Management Act.  In October 2012, Entergy filed a petition in Albany County Supreme Court challenging the procedure by which the designation was adopted and the factual premise for the designation.  Although the designation does not conclude that any specific activity impacts the designated habitat, if the designation is upheld, Indian Point may be required to meet a heightened habitat impairment test to avoid a state objection to coastal plan consistency determinations.
 


Pilgrim

In October 2012, EcoLaw, a coalition of several environmental groups, served Entergy Nuclear Generation Company (owner of Pilgrim) and Entergy Nuclear Operations, Inc. with a notice of intent to sue under the Clean Water Act for alleged violations at Pilgrim.  The notice of intent alleges 33,253 discharge permit violations since 1994 (which begins prior to Entergy’s ownership, Entergy purchased the plant in 1999) and seeks $25,000 for each alleged violation.  The Clean Water Act states that an alleged violator must be given 60 days’ notice prior to a citizen’s suit being filed.  Early review of the notice of intent indicates that many of the alleged violations were discharges in compliance with the current facility discharge permit and that the putative plaintiff alleges that the EPA permit involved was improperly issued or modified.  An additional notice of intent was served by EcoLaw to the same Entergy parties and the Massachusetts Department of Environmental Protection alleging violations of state water quality standards and requesting revocation of the state-issued Section 401 Water Quality Certification associated with the plant’s water discharge permit (state law requires a 21-day notice of intent).  Entergy continues to review the Notices of Intent and will respond accordingly.

316(b) Cooling Water Intake Structures

EPA finalized regulations in July 2004 governing the intake of water at large existing power plants employing cooling water intake structures.  The rule sought to reduce perceived impacts on aquatic resources by requiring covered facilities to implement technology or other measures to meet EPA-targeted reductions in water use and corresponding perceived aquatic impacts.  Entergy, other industry members and industry groups, environmental groups, and a coalition of northeastern and mid-Atlantic states challenged various aspects of the rule.  In January 2007, the U.S. Second Circuit Court of Appeals remanded the rule to the EPA for reconsideration.  The court instructed the EPA to reconsider several aspects of the rule that were beneficial to businesses affected by the rule after finding that these provisions of the rule were contrary to the language of the Clean Water Act or were not sufficiently explained in the rule.  In April 2008, the U.S. Supreme Court agreed to review the Second Circuit decision on the question of whether the EPA may take into consideration a cost-benefit analysis in developing these regulations, a consideration of potential benefit to businesses affected by the rule that the Second Circuit disallowed.  In March 2009, the Supreme Court ruled in favor of the petitioners that cost-benefit analysis may be taken into consideration.  The EPA reissued the proposed rule in April 2011, with finalization originally anticipated by July 27, 2012; however, the EPA extended the deadline to June 27, 2013.  Entergy filed comments with the EPA on the proposed rule.

Other Environmental Matters

Entergy Gulf States Louisiana and Entergy Texas

In 1994, Entergy Gulf States, Inc. initiated an environmental groundwater assessment associated with the submittal of a permit application for a construction project at the Louisiana Station Generating Plant (Louisiana Station).  In 1995, the ongoing assessment confirmed subsurface soil and groundwater impact to three primary areas on the plant site.  Subsequently, from 1997 to 1999 soil was removed under guidance and permission of the Louisiana Department of Environmental Quality (LDEQ).  In 2000, Entergy pursued the final regulatory required remediation of the site’s groundwater and submitted a long-term monitoring plan approved by LDEQ in 2002.  Implementation of the monitoring plan in 2002 identified the presence of hydrocarbon contributed by a third party.  Responsibility has been defined and a cost sharing has been implemented with a responsible third party identified in the previous characterization phase.  The final groundwater clean-up and monitoring phase at Louisiana Station is expected to continue for an undefined period of time until groundwater characterization and compliance monitoring meet LDEQ Risk Evaluation and Corrective Action Program groundwater standards for a consistent period of time.  Current annual environmental management cost is now under $50 thousand per year and includes partial reimbursement by the third party.



Entergy

In November 2010 a transformer at the Indian Point facility failed, resulting in a fire and the release of non-PCB oil to the ground surface.  The fire was extinguished by the facility’s fire deluge system along with the site’s fire brigade.  No injuries occurred due to the transformer failure or Entergy’s response.  Non-PCB oil and deluge water were released into the facility’s discharge canal and the environment surrounding the transformer and discharge canal, including the Hudson River, as a result of the failure, fire, and fire suppression.  As a result of this discharge of non-PCB oil, Entergy in March 2012 agreed to a settlement with the New York State Department of Environmental Conservation under which Entergy paid a civil penalty of $625,000, will pay another $600,000 to environmental benefit programs in the region, and a possible additional payment of $275,000 that is suspended contingent upon Entergy’s compliance with the other terms of the settlement.  Entergy also paid $67,000 in natural resource damages and oversight costs.


Correction of Regulatory Asset for Income Taxes

As discussed in more detail in Note 2 to the financial statements, in the first quarter 2012, Entergy Gulf States Louisiana determined that its regulatory asset for income taxes was overstated because of a difference between the regulatory treatment of the income taxes associated with certain items (primarily pension expense) and the financial accounting treatment of those taxes.  The effect was immaterial to the balance sheets, results of operations, and cash flows of Entergy Gulf States Louisiana for all prior reporting periods.  Correcting the cumulative effect of the error in the first quarter 2012 could have been material to the 2012 results of operations of Entergy Gulf States Louisiana and, therefore, Entergy Gulf States Louisiana is revising its prior period financial statements to correct the errors.  The effect of the corrections on the Entergy Gulf States Louisiana financial statements presented in the Form 10-K is shown in the tables below:

 
Years Ended December 31,
 
2011
 
2010
 
2009
 
As
previously
reported
 
 
As
corrected
 
As
previously
reported
 
 
As
corrected
 
As
previously
reported
 
 
As
corrected
 
(In Thousands)
                       
Income Statement
                     
Income taxes
$88,313 
 
$89,736 
 
$75,878 
 
$92,297 
 
$89,185 
 
$88,951 
Net income
$203,027 
 
$201,604 
 
$190,738 
 
$174,319 
 
$153,047 
 
$153,281 
Earnings applicable to
  common equity
 
$202,202 
 
 
$200,779 
 
 
$189,911 
 
 
$173,492 
 
 
$152,222 
 
 
$152,456 
                       
Statement of Cash Flows
                     
Net income
$203,027 
 
$201,604 
 
$190,738 
 
$174,319 
 
$153,047 
 
$153,281 
Deferred income taxes,
 investment tax credits,
 and non-current taxes
 accrued
 
 
 
($6,268)
 
 
 
 
($4,845)
 
 
 
 
$87,920 
 
 
 
 
$104,339 
 
 
 
 
$138,817 
 
 
 
 
$138,583 
Changes in other
  regulatory assets
 
($80,027)
 
 
($77,713)
 
 
$114,528 
 
 
$141,216 
 
 
($44,612)
 
 
($44,993)
Other operating
  activities
 
($35,248)
 
 
($37,562)
 
 
$30,717 
 
 
$4,029 
 
 
($86,474)
 
 
($86,093)
                       




 
December 31,
 
2011
 
2010
 
As
previously
reported
 
 
As
corrected
 
As
previously
reported
 
 
As
corrected
 
(In Thousands)
               
Balance Sheet
             
Regulatory asset for income taxes - net
$249,058 
 
$173,724 
 
$234,406 
 
$161,386 
Accumulated deferred income taxes -
  current
 
$5,427 
 
 
$5,107 
 
 
$1,749 
 
 
$1,255 
Accumulated deferred income taxes
  and taxes accrued
 
$1,397,230 
 
 
$1,368,563 
 
 
$1,405,374 
 
 
$1,377,772 
Member’s equity
$1,439,733 
 
$1,393,386 
 
$1,539,517 
 
$1,494,593 

 
Years Ended December 31, 2011, 2010, and 2009
 
Member’s Equity
 
Total Equity
 
As
previously
reported
 
 
As
corrected
 
As
previously
reported
 
 
As
corrected
 
(In Thousands)
               
Statement of Changes in Equity
     
Balance at December 31, 2008
$1,352,408 
 
$1,323,669 
 
$1,332,143 
 
$1,303,404 
2009 Net income
$153,047 
 
$153,281 
 
$153,047 
 
$153,281 
Balance at December 31, 2009
$1,473,930 
 
$1,445,425 
 
$1,441,759 
 
$1,413,254 
2010 Net income
$190,738 
 
$174,319 
 
$190,738 
 
$174,319 
Balance at December 31, 2010
$1,539,517 
 
$1,494,593 
 
$1,509,213 
 
$1,464,289 
2011 Net income
$203,027 
 
$201,604 
 
$203,027 
 
$201,604 
Balance at December 31, 2011
$1,439,733 
 
$1,393,386 
 
$1,380,123 
 
$1,333,776 

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

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

 
Ratios of Earnings to Fixed Charges
 
Twelve Months Ended
 
December 31,
 
September 30,
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
                       
Entergy Arkansas
3.19
 
2.33
 
2.39
 
3.91
 
4.31
 
3.87
Entergy Gulf States Louisiana
2.84
 
2.44
 
2.99
 
3.58
 
4.36
 
3.57
Entergy Louisiana
3.44
 
3.14
 
3.52
 
3.41
 
1.86
 
1.88
Entergy Mississippi
3.22
 
2.92
 
3.31
 
3.35
 
3.55
 
2.88
Entergy New Orleans
2.74
 
3.71
 
3.61
 
4.43
 
5.37
 
2.28
Entergy Texas
2.07
 
2.04
 
1.92
 
2.10
 
2.34
 
1.67
System Energy
3.95
 
3.29
 
3.73
 
3.64
 
3.85
 
4.53




 
Ratios of Earnings to Combined Fixed Charges
and Preferred Dividends/Distributions
 
Twelve Months Ended
 
December 31,
 
September 30,
 
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
 
                         
Entergy Arkansas
2.88
 
1.95
 
2.09
 
3.60
 
3.83
 
3.43
 
Entergy Gulf States Louisiana
2.73
 
2.42
 
2.95
 
3.54
 
4.30
 
3.51
 
Entergy Louisiana
3.08
 
2.87
 
3.27
 
3.19
 
1.70
 
1.74
 
Entergy Mississippi
2.97
 
2.67
 
3.06
 
3.16
 
3.27
 
2.67
 
Entergy New Orleans
2.54
 
3.45
 
3.33
 
4.08
 
4.74
 
2.01
 

The Registrant Subsidiaries accrue interest expense related to unrecognized tax benefits in income tax expense and do not include it in fixed charges.


Item 6.  Exhibits *

*
4(a) -
Twenty-fourth Supplemental Indenture, dated as of September 1, 2012, to System Energy Resources, Inc. Mortgage and Deed of Trust, dated as of June 15, 1977 (4.42 to Form 8-K dated September 25, 2012 in 1-09067).
     
 
10(a) -
Entergy Corporation Service Recognition Program for Non-Employee Outside Directors (As Amended and Restated effective June 1, 2012).
     
 
10(b) -
First Amendment to The Entergy Corporation Outside Director Stock Program Established under the 2011 Equity Ownership and Long Term Cash Incentive Plan of Entergy Corporation and Subsidiaries.
     
 
12(a) -
Entergy Arkansas’s Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Dividends, as defined.
     
 
12(b) -
Entergy Gulf States Louisiana’s Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Distributions, as defined.
     
 
12(c) -
Entergy Louisiana’s Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Distributions, as defined.
     
 
12(d) -
Entergy Mississippi’s Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Preferred Dividends, as defined.
     
 
12(e) -
Entergy New Orleans’s Computation of Ratios of Earnings to Fixed Charges and of Earnings to Combined Fixed Charges and Pre­ferred Dividends, as defined.
     
 
12(f) -
Entergy Texas’s Computation of Ratios of Earnings to Fixed Charges, as defined.
     
 
12(g) -
System Energy’s Computation of Ratios of Earnings to Fixed Charges, as defined.
     
 
31(a) -
Rule 13a-14(a)/15d-14(a) Certification for Entergy Corporation.
     
 
31(b) -
Rule 13a-14(a)/15d-14(a) Certification for Entergy Corporation.
     
 
31(c) -
Rule 13a-14(a)/15d-14(a) Certification for Entergy Arkansas.
     
 
 
 
31(d) -
Rule 13a-14(a)/15d-14(a) Certification for Entergy Arkansas.
     
 
31(e) -
Rule 13a-14(a)/15d-14(a) Certification for Entergy Gulf States Louisiana.
     
 
31(f) -
Rule 13a-14(a)/15d-14(a) Certification for Entergy Gulf States Louisiana.
 
 
31(g) -
Rule 13a-14(a)/15d-14(a) Certification for Entergy Louisiana.
     
 
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 Mississippi.
     
 
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 New Orleans.
     
 
31(l) -
Rule 13a-14(a)/15d-14(a) Certification for Entergy New Orleans.
     
 
31(m) -
Rule 13a-14(a)/15d-14(a) Certification for Entergy Texas.
     
 
31(n) -
Rule 13a-14(a)/15d-14(a) Certification for Entergy Texas.
     
 
31(o) -
Rule 13a-14(a)/15d-14(a) Certification for System Energy.
     
 
31(p) -
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 Louisiana.
     
 
32(f) -
Section 1350 Certification for Entergy Gulf States Louisiana.
     
 
32(g) -
Section 1350 Certification for Entergy Louisiana.
     
 
32(h) -
Section 1350 Certification for Entergy Louisiana.
     
 
32(i) -
Section 1350 Certification for Entergy Mississippi.
     
 
32(j) -
Section 1350 Certification for Entergy Mississippi.
     
 
32(k) -
Section 1350 Certification for Entergy New Orleans.
     
 
32(l) -
Section 1350 Certification for Entergy New Orleans.
     
 
32(m) -
Section 1350 Certification for Entergy Texas.
     
 
32(n) -
Section 1350 Certification for Entergy Texas.
     
 
32(o) -
Section 1350 Certification for System Energy.
     
 
32(p) -
Section 1350 Certification for System Energy.
     
 
 
 
101 INS -
XBRL Instance Document.
     
 
101 SCH -
XBRL Taxonomy Extension Schema Document.
     
 
101 PRE -
XBRL Taxonomy Presentation Linkbase Document.
     
 
101 LAB -
XBRL Taxonomy Label Linkbase Document.
 
 
101 CAL -
XBRL Taxonomy Calculation Linkbase Document.
     
 
101 DEF -
XBRL Definition Linkbase Document.
___________________________

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.

*
Incorporated herein by reference as indicated.


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 LOUISIANA, L.L.C.
ENTERGY LOUISIANA, LLC
ENTERGY MISSISSIPPI, INC.
ENTERGY NEW ORLEANS, INC.
ENTERGY TEXAS, INC.
SYSTEM ENERGY RESOURCES, INC.
 
 
/s/ Alyson M. Mount
Alyson M. Mount
Senior Vice President and Chief Accounting Officer
(For each Registrant and for each as
Principal Accounting Officer)


Date:           November 6, 2012

 
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