__________________________________________________________________________________________

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, 2008

 

OR

 

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

   
 

For the transition period from ____________ to ____________


Commission
File Number

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

 


Commission
File Number

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

1-11299

ENTERGY CORPORATION
(a Delaware corporation)
639 Loyola Avenue
New Orleans, 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

 

0-5807

ENTERGY NEW ORLEANS, INC.
(a Louisiana corporation)
1600 Perdido Street, Building 505
New Orleans, Louisiana 70112
Telephone (504) 670-3700
72-0273040

         
         

333-148557

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

 

000-53134

ENTERGY TEXAS, INC.
(a Texas corporation)
350 Pine Street
Beaumont, Texas 77701
Telephone (409) 838-6631
61-1435798

         
         

1-32718

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

 

1-9067

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 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, 2008

Entergy Corporation

($0.01 par value)

189,330,159

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 Entergy Annual Report on Form 10-K for the calendar year ended December 31, 2007, the Entergy Texas Form 10, and the Entergy and Entergy Texas Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008, 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, 2008

 

Page Number

   
Definitions

1

Entergy Corporation and Subsidiaries  
  Management's Financial Discussion and Analysis  
    Plan to Pursue Separation of Non-Utility Nuclear

3

    Hurricane Gustav and Hurricane Ike

6

    Results of Operations

7

    Liquidity and Capital Resources

14

    Significant Factors, Known Trends, and Uncertainties

21

    Critical Accounting Estimates

26

    New Accounting Pronouncements

26

  Consolidated Statements of Income

27

  Consolidated Statements of Cash Flows

28

  Consolidated Balance Sheets

30

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


32

  Selected Operating Results

34

Notes to Financial Statements

35

Part I. Item 4. Controls and Procedures

62

Entergy Arkansas, Inc.  
  Management's Financial Discussion and Analysis  
    Results of Operations

63

    Liquidity and Capital Resources

6 6

    Significant Factors, Known Trends, and Uncertainties

6 7

    Critical Accounting Estimates

70

    New Accounting Pronouncements

70

  Income Statements

71

  Statements of Cash Flows

73

  Balance Sheets

74

  Selected Operating Results

76

Entergy Gulf States Louisiana, L.L.C.  
  Management's Financial Discussion and Analysis  
    Jurisdictional Separation of Entergy Gulf States, Inc. into Entergy Gulf States
  Louisiana and Entergy Texas

77

    Hurricane Gustav and Hurricane Ike

77

    Results of Operations

78

    Liquidity and Capital Resources

82

    Significant Factors, Known Trends, and Uncertainties

86

    Critical Accounting Estimates

87

    New Accounting Pronouncements

87

  Income Statements

88

  Statements of Cash Flows

89

  Balance Sheets

90

  Statements of Members' Equity and Comprehensive Income

92

  Selected Operating Results

93

Entergy Louisiana, LLC  
  Management's Financial Discussion and Analysis  
    Hurricane Gustav and Hurricane Ike

94

    Results of Operations

94

    Liquidity and Capital Resources

98

    Significant Factors, Known Trends, and Uncertainties

102

    Critical Accounting Estimates

103

    New Accounting Pronouncements

103

     
 

ENTERGY CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2008

 
   

Page Number

     
  Income Statements

104

  Statements of Cash Flows

105

  Balance Sheets

106

  Statements of Members' Equity and Comprehensive Income

108

  Selected Operating Results

109

Entergy Mississippi, Inc.  
  Management's Financial Discussion and Analysis  
    Results of Operations

110

    Liquidity and Capital Resources

113

    Significant Factors, Known Trends, and Uncertainties

115

    Critical Accounting Estimates

116

    New Accounting Pronouncements

116

  Income Statements

117

  Statements of Cash Flows

119

  Balance Sheets

120

  Selected Operating Results

122

Entergy New Orleans, Inc.  
  Management's Financial Discussion and Analysis  
    Hurricane Katrina

123

    Hurricane Gustav

123

    Results of Operations

124

    Liquidity and Capital Resources

127

    Significant Factors, Known Trends, and Uncertainties

128

    Critical Accounting Estimates

129

    New Accounting Pronouncements

129

  Income Statements

130

  Statements of Cash Flows

131

  Balance Sheets

132

  Selected Operating Results

134

Entergy Texas, Inc.  
  Management's Financial Discussion and Analysis  
    Jurisdictional Separation of Entergy Gulf States, Inc. into Entergy Gulf States
  Louisiana and Entergy Texas

135

    Hurricane Ike

135

    Results of Operations

135

    Liquidity and Capital Resources

139

    Significant Factors, Known Trends, and Uncertainties

141

    Critical Accounting Estimates

142

    New Accounting Pronouncements

142

  Consolidated Income Statements

143

  Consolidated Statements of Cash Flows

145

  Consolidated Balance Sheets

146

  Consolidated Statements of Retained Earnings and Paid-in-Capital

148

  Selected Operating Results

149

System Energy Resources, Inc.  
  Management's Financial Discussion and Analysis  
    Results of Operations

150

    Liquidity and Capital Resources

150

    Significant Factors, Known Trends, and Uncertainties

151

    Critical Accounting Estimates

152

    New Accounting Pronouncements

152

     
     
 

ENTERGY CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2008

 
   

Page Number

     
  Income Statements

153

  Statements of Cash Flows

155

  Balance Sheets

156

Part II. Other Information  
  Item 1. Legal Proceedings

158

  Item 1A. Risk Factors

158

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

158

  Item 5. Other Information

159

  Item 6. Exhibits

165

Signature

167

     

 

FORWARD-LOOKING INFORMATION

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

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

  • resolution of pending and future rate cases and negotiations, including various performance-based rate discussions and implementation of Texas restructuring legislation, and other regulatory proceedings, including those related to Entergy's System Agreement, Entergy's utility supply plan, recovery of storm costs, and recovery of fuel and purchased power costs
  • changes in utility regulation, including the beginning or end of retail and wholesale competition, the ability to recover net utility assets and other potential stranded costs, the operations of the independent coordinator of transmission that includes Entergy's utility service territory, and the application of 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 in the Non-Utility Nuclear business
  • resolution of pending or future applications for license renewals or modifications of nuclear generating facilities
  • the performance of Entergy's generating plants, and particularly 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 unregulated generating facilities, the ability to hedge, sell power forward or otherwise reduce the market price risk associated with those facilities, including the Non-Utility Nuclear plants, and the prices and availability of fuel and power Entergy must purchase for its utility customers, and Entergy's ability to meet credit support requirements for fuel and power supply contracts
  • volatility and changes in markets for electricity, natural gas, uranium, and other energy-related commodities
  • changes in law resulting from federal energy legislation
  • changes in environmental, tax, and other laws, including requirements for reduced emissions of sulfur, nitrogen, carbon, mercury, and other substances
  • 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 (including most recently, Hurricane Gustav and Hurricane Ike) and recovery of costs associated with restoration, including accessing funded storm reserves, federal and local recovery mechanisms, securitization, and insurance.
  • Entergy's and its subsidiaries' ability to manage their 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 growth in Entergy's service territory
  • the effects of Entergy's strategies to reduce tax payments

FORWARD-LOOKING INFORMATION (Concluded)

  • changes in the financial markets, particularly those affecting the availability of capital and Entergy's ability to refinance existing debt, execute its share repurchase program, and fund investments and acquisitions
  • actions of rating agencies, including changes in the ratings of debt and preferred stock, changes in general corporate ratings, and changes in the rating agencies' ratings criteria
  • changes in inflation and interest rates
  • the effect of litigation and government investigations
  • advances in technology
  • the potential effects of threatened or actual terrorism and war
  • Entergy's ability to attract and retain talented management and directors
  • changes in accounting standards and corporate governance
  • and the following transactional factors (in addition to others described elsewhere in this and in subsequent securities filings): (i) risks inherent in the contemplated Non-Utility Nuclear spin-off, joint venture and related transactions (including the level of debt incurred by the spun-off company and the terms and costs related thereto); (ii) legislative and regulatory actions; and (iii) conditions of the capital markets during the periods covered by the forward-looking statements.  Entergy Corporation cannot provide any assurances that the spin-off or any of the proposed transactions related thereto will be completed, nor can it give assurances as to the terms on which such transactions will be consummated. The transaction is subject to certain conditions precedent, including regulatory approvals and the final approval by the Board.

 

 

 

 

 

 

(Page left blank intentionally)

 

 

 

 

DEFINITIONS

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

Abbreviation or Acronym

Term

AEEC

Arkansas Electric Energy Consumers

AFUDC

Allowance for Funds Used During Construction

ALJ

Administrative Law Judge

ANO 1 and 2

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

APSC

Arkansas Public Service Commission

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

Enexus

Enexus Energy Corporation, a Delaware corporation created to hold Entergy's Non-Utility Nuclear business after its separation from Entergy

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-Koch

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

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 Texas Form 10

Registration Statement on Form 10 filed with the SEC by Entergy Texas, as amended August 28, 2008.

EPA

United States Environmental Protection Agency

EquaGen

EquaGen, LLC, a Delaware limited liability company that will become the successor to Entergy Nuclear, Inc. and will operate Non-Utility Nuclear's nuclear power plants as part of the plan to separate Non-Utility Nuclear from Entergy

ERCOT

Electric Reliability Council of Texas

FASB

Financial Accounting Standards Board

FERC

Federal Energy Regulatory Commission

firm LD

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

Form 10-K

Annual Report on Form 10-K for the calendar year ended December 31, 2007 filed by Entergy Corporation and its Registrant Subsidiaries (other than Entergy Texas) with the SEC

Grand Gulf

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

GWh

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

Independence

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

1

DEFINITIONS (Continued)

 

IRS

Internal Revenue Service

ISO

Independent System Operator

kW

Kilowatt

kWh

Kilowatt-hour(s)

LPSC

Louisiana Public Service Commission

MMBtu

One million British Thermal Units

MPSC

Mississippi Public Service Commission

MW

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

MWh

Megawatt-hour(s)

Net debt ratio

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

Net MW in operation

Installed capacity owned or operated

Non-Utility Nuclear

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

NRC

Nuclear Regulatory Commission

NYPA

New York Power Authority

PPA

Purchased power agreement

production cost

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

PUCT

Public Utility Commission of Texas

PUHCA 1935

Public Utility Holding Company Act of 1935, as amended

PUHCA 2005

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

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

SEC

Securities and Exchange Commission

SFAS

Statement of Financial Accounting Standards as promulgated by the FASB

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.

TIEC

Texas Industrial Energy Consumers

TWh

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

unit-contingent

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

Unit Power Sales Agreement

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

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

VDPS

Vermont Department of Public Service

VPSB

Vermont Public Service Board

Waterford 3

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

weather-adjusted usage

Electric usage excluding the effects of deviations from normal weather 

2

 

 

ENTERGY CORPORATION AND SUBSIDIARIES

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

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

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

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

Plan to Pursue Separation of Non-Utility Nuclear

In November 2007, the Board approved a plan to pursue a separation of the Non-Utility Nuclear business from Entergy through a tax-free spin-off of the Non-Utility Nuclear business to Entergy shareholders. Upon completion of the spin-off, Enexus Energy Corporation, a wholly-owned subsidiary of Entergy and formerly referred to as SpinCo, will be a new, separate, and publicly-traded company. In addition, under the plan, Enexus and Entergy are expected to enter into a nuclear services business joint venture, EquaGen LLC, with 50% ownership by Enexus and 50% ownership by Entergy. The EquaGen board of managers will be comprised of equal membership from both Entergy and Enexus.

Upon completion of the spin-off, Entergy Corporation's shareholders will own 100% of the common stock in both Enexus and Entergy. Entergy expects that Enexus' business will be substantially comprised of Non-Utility Nuclear's assets, including its six nuclear power plants, and Non-Utility Nuclear's power marketing operation. Entergy Corporation's remaining business will primarily be comprised of the Utility business. EquaGen is expected to operate the nuclear assets owned by Enexus, and provide certain services to the Utility's nuclear operations. EquaGen is also expected to offer nuclear services to third parties, including decommissioning, plant relicensing, plant operations, and ancillary services.

Entergy Nuclear Operations, Inc., the current NRC-licensed operator of the Non-Utility Nuclear plants, filed an application in July 2007 with the NRC seeking indirect transfer of control of the operating licenses for the six Non-Utility Nuclear power plants, and supplemented that application in December 2007 to incorporate the planned business separation. Entergy Nuclear Operations, Inc., which is expected to be wholly-owned by EquaGen, will remain the operator of the plants after the separation.  Entergy Operations, Inc., the current NRC-licensed operator of Entergy's five Utility nuclear plants, will remain a wholly-owned subsidiary of Entergy and will continue to be the operator of the Utility nuclear plants. In the December 2007 supplement to the NRC application, Entergy Nuclear Operations, Inc. provided additional information regarding the spin-off transaction, organizational structure, technical and financial qualifications, and general corporate information. The NRC published a notice in the Federal Register establishing a period for the public to submit a request for hearing or petition to intervene in a hearing proceeding. The NRC notice period expired on February 5, 2008 and two petitions to intervene in the hearing proceeding were filed before the deadline. Each of the petitions opposes the NRC's approval of the license transfer on various grounds, including contentions that the approval request is not adequately supported regarding the basis for the proposed structure, the adequacy of decommissioning funding, and the adequacy of financial qualifications. Entergy submitted answers to the petitions on March 31 and April 8. On August 22, 2008, the NRC issued an order denying all of the petitions to intervene based upon the petitioners' failure to demonstrate the requisite standing to pursue their hearing requests. One of the petitioner groups filed a motion for reconsideration on September 4, 2008 and on September 15,

 

3

 

2008, Entergy filed a response opposing the motion for reconsideration. On September 23, 2008, the NRC issued an order denying the motion for reconsideration based upon several procedural errors.

Because resolution of any hearing requests is not a prerequisite to obtaining the required NRC approval, on July 28, 2008, the NRC staff approved the license transfers associated with the new ownership structure of EquaGen, the licensed operator, as well as the transfers to Enexus of the NRC licenses for Big Rock Point, FitzPatrick, Indian Point Units 1, 2 and 3, Palisades, Pilgrim and Vermont Yankee. The review conducted by the NRC staff included matters such as the financial and technical qualifications of the new organizations, as well as decommissioning funding assurance . In connection with the NRC approvals, Enexus agreed to enter into a financial support agreement with the entities licensed to own the nuclear power plants in the total amount of $700 million to support the operating costs for all six operating nuclear power plants.

Pursuant to Federal Power Act Section 203, on February 21, 2008, an application was filed with the FERC requesting approval for the indirect disposition and transfer of control of jurisdictional facilities of a public utility. In June 2008 the FERC issued an order authorizing the requested indirect disposition and transfer of control.

On January 28, 2008, Entergy Nuclear Vermont Yankee, LLC and Entergy Nuclear Operations, Inc. requested approval from the Vermont Public Service Board (VPSB) for the indirect transfer of control, consent to pledge assets, issue guarantees and assign material contracts, amendment to certificate of public good, and replacement of guaranty and substitution of a credit support agreement for Vermont Yankee. Two Vermont utilities that buy power from Vermont Yankee, the regional planning commission for the area served by Vermont Yankee, a municipality in which the Vermont Yankee training center is located, the union that represents certain Vermont Yankee employees, and two unions that represent certain employees at the Pilgrim plant in Massachusetts petitioned to intervene. Although the Pilgrim unions' petition to intervene was denied, the Pilgrim unions filed for reconsideration or, in the alternative, for participation as amicus curiae, and the VPSB has allowed the unions to participate as amicus curiae. Discovery is underway in this proceeding, in which parties can ask questions about or request the production of documents related to the transaction.

In addition, the Vermont Department of Public Service (VDPS), which is the public advocate in proceedings before the VPSB, prefiled its initial and rebuttal testimony in the case in which the VDPS takes the position that Entergy Nuclear Vermont Yankee and Entergy Nuclear Operations, Inc. have not demonstrated that the restructuring promotes the public good because its benefits do not outweigh the risks, raising concerns that the target rating for Enexus' debt is below investment grade and that the company may not have the financial capability to withstand adverse financial developments, such as an extended outage. The VDPS testimony also expresses concern about the EquaGen joint venture structure and Enexus' ability, under the operating agreement between Entergy Nuclear Vermont Yankee and Entergy Nuclear Operations, Inc., to ensure that Vermont Yankee is well-operated. Two distribution utilities that buy Vermont Yankee power prefiled testimony that also expresses concerns about the structure but found that there was a small net benefit to the restructuring. The VPSB conducted hearings on July 28-30, 2008, during which it considered the testimony prefiled by Entergy Nuclear Vermont Yankee, Entergy Nuclear Operations, Inc., the VDPS, and the two distribution utilities. Post-hearing briefing is complete and a decision from the VPSB is pending.

On January 28, 2008, Entergy Nuclear FitzPatrick, LLC, Entergy Nuclear Indian Point 2, LLC, Entergy Nuclear Indian Point 3, LLC, and Entergy Nuclear Operations, Inc., and corporate affiliate NewCo (now named Enexus) filed a petition with the New York Public Service Commission (NYPSC) requesting a declaratory ruling regarding corporate reorganization or in the alternative an order approving the transaction and an order approving debt financing. Petitioners also requested confirmation that the corporate reorganization will not have an effect on Entergy Nuclear FitzPatrick's, Entergy Nuclear Indian Point 2's, Entergy Nuclear Indian Point 3's, and Entergy Nuclear Operations, Inc.'s status as lightly regulated entities in New York, given that they will continue to be competitive wholesale generators. The New York State Attorney General's Office, Westchester County, and Riverkeeper, Inc. have filed objections to the business separation and to the transfer of the FitzPatrick and Indian Point Energy Center nuclear power plants, arguing that the debt associated with the spin-off could threaten access to adequate financial resources for those nuclear power plants, that Entergy could potentially be able to terminate revenue

 

4

 

 

sharing agreements with the New York Power Authority (NYPA), the entity from which Entergy purchased the FitzPatrick and Indian Point 3 nuclear power plants, and because the New York State Attorney General's Office believes Entergy must file an environmental impact statement assessing the proposed corporate restructuring. In addition to the New York State Attorney General's Office, several other parties have also requested to be added to the service list for this proceeding.

On May 23, 2008, the NYPSC issued its Order Establishing Further Procedures in this matter. In the order, the NYPSC determined that due to the nuclear power plants' unique role in supporting the reliability of electric service in New York, and their large size and unique operational concerns, a more searching inquiry of the transaction will be conducted than if other types of lightly-regulated generation were at issue. Accordingly, the NYPSC assigned an ALJ to preside over this proceeding and prescribed a sixty (60) day discovery period. The order provided that after at least sixty (60) days, the ALJ would establish when the discovery period would conclude. The NYPSC stated that the scope of discovery will be tightly bounded by the public interest inquiry relevant to this proceeding; namely, adequacy and security of support for the decommissioning of the New York nuclear facilities; financial sufficiency of the proposed capital structure in supporting continued operation of the facilities; and, arrangements for managing, operating and maintaining the facilities. The NYPSC also stated that during the discovery period, the NYPSC Staff may conduct technical conferences to assist in the development of a full record in this proceeding.

On July 23, 2008, the ALJs issued a ruling concerning discovery and seeking comments on a proposed process and schedule. In the ruling, the ALJs proposed a process for completing a limited, prescribed discovery process, to be followed three weeks later by the filing of initial comments addressing defined issues, with reply comments due two weeks after the initial comment deadline. Following receipt of all comments, a ruling will be made on whether, and to what extent, an evidentiary hearing is required. The ALJs asked the parties to address three specific topic areas: (1) the financial impacts related to the specific issues previously outlined by the NYPSC; (2) other obligations associated with the arrangement for managing, operating and maintaining the facilities; and (3) the extent that NYPA revenues from value sharing payments under the value sharing agreement between Entergy and NYPA would decrease. The ALJs have indicated that the potential financial effect of the termination of the value sharing payments on NYPA and New York electric consumers are factors the ALJs believe should be considered by the NYPSC in making its public interest determination.

In August 2008, Non-Utility Nuclear entered into a resolution of a dispute with NYPA over the applicability of the value sharing agreements to the FitzPatrick and Indian Point 3 nuclear power plants after the separation. Under the resolution, Non-Utility Nuclear agreed not to treat the separation as a "Cessation Event" that would terminate its obligation to make the payments under the value sharing agreements. As a result, after the separation, Enexus will continue to be obligated to make payments to NYPA due under the amended and restated value sharing agreements described above. For further discussion of the value sharing agreements, see Note 1 to the financial statements herein.

Entergy continues to seek regulatory approval from the NYPSC in a timely manner. On October 23, 2008, the ALJs issued notification to all parties that from their review of the submissions, all issues of fact and policy material to the relief requested by the petitioners have been thoroughly addressed by the parties, an adequate record for decision is available to the NYPSC, and no further formal proceedings are warranted. The ALJs will now submit a recommendation to the NYPSC with respect to the transaction.

In connection with, but prior to completion of, the separation, Enexus is currently expected to incur up to $4.5 billion of debt in the form of debt securities. The debt will be incurred in the following transactions:

  • Enexus is expected to issue approximately $3.0 billion of debt securities in partial consideration of Entergy's transfer to it of the Non-Utility Nuclear business.
  • These debt securities are expected to be exchanged for approximately $3.0 billion of debt securities that Entergy plans to issue prior to the separation. As a result of the exchange (should the exchange occur), the holders of the debt securities that Entergy plans to issue prior to the separation will become holders of approximately $3.0 billion of Enexus debt securities.
     

5

 

  • Enexus is expected to incur the balance of the debt through the issuance of debt securities directly to third parties.

Out of the proceeds Enexus receives from the issuance of up to approximately $1.5 billion of debt securities to third parties, it expects to retain approximately $500 million, which it intends to use for working capital and other general corporate purposes. All of the remaining proceeds are expected to be transferred to Entergy to settle Enexus' intercompany indebtedness owed to Entergy, including indebtedness that Entergy will transfer to Enexus in the separation. Enexus will not receive any proceeds from either the issuance of the approximately $3.0 billion of its debt securities or the exchange of its debt securities for Entergy debt securities. Entergy expects to use the proceeds that it receives from the issuance of its debt securities to reduce outstanding Entergy debt or repurchase Entergy shares. The amount to be paid to Entergy, the amount and term of the debt Enexus will incur, and the type of debt and entity that will incur the debt have not been finally determined, but will be determined prior to the separation. A number of factors could affect this final determination, and the amount of debt ultimately incurred could be different from the amount disclosed. Additionally, Entergy expects Enexus to enter into a proposed senior secured credit facility and certain lien-based hedging arrangements and credit support facilities in respect of hedging, and may enter into other financing arrangements meant to support Enexus' working capital and general corporate needs and credit support obligations arising from hedging and normal course of business requirements.

Entergy continues to target receiving regulatory decisions regarding the spin-off transaction in the fourth quarter 2008. Due to unprecedented turmoil in the financial markets, however, it is uncertain whether financing fundamental to the spin-off transaction can be effected in the near-term. Entergy and Enexus intend to launch the financing when market conditions are favorable for such an issuance. Entergy expects the transaction to qualify for tax-free treatment for U.S. federal income tax purposes for both Entergy and its shareholders, and Entergy has received a private letter ruling from the IRS regarding the tax free treatment. Final terms of the transactions and spin-off completion are subject to several conditions, including the final approval of the Board.

Hurricane Gustav and Hurricane Ike

In September 2008, Hurricane Gustav and Hurricane Ike caused catastrophic damage to portions of Entergy's service territories in Louisiana and Texas, and to a lesser extent in Arkansas and Mississippi. The storms resulted in widespread power outages, significant damage to distribution, transmission, and generation infrastructure, and the loss of sales during the power outages. Total restoration costs for the repair and/or replacement of Entergy's electric facilities damaged by Hurricane Gustav and Hurricane Ike are estimated to be in the range of $1.025 billion to $1.225 billion, as follows:


Company

Hurricane Gustav Restoration Costs

Hurricane Ike Restoration Costs

($ in millions)

 

Entergy Arkansas

 

10-15

 

14-20

Entergy Gulf States Louisiana

 

210-250

 

65-75

Entergy Louisiana

 

230-270

 

10-15

Entergy Mississippi

 

10-15

 

-

Entergy New Orleans

 

40-50

 

1-5

Entergy Texas

 

-

 

435-510

Total

 

500-600

 

525-625

The Utility operating companies are considering all reasonable avenues to recover storm-related costs from Hurricane Gustav and Hurricane Ike, including, but not limited to, accessing funded storm reserves; federal and local cost recovery mechanisms, including requests for Community Development Block Grant funding; securitization; and insurance, to the extent deductibles are met. In October 2008, Entergy Gulf States Louisiana, Entergy Louisiana, and Entergy New Orleans drew a total of $229 million from their funded storm reserves. Entergy Arkansas has requested a surcharge to recover $26 million of its storm restoration costs, as discussed in Note 2 to the financial statements,

 

6

 

and the other affected Utility operating companies expect to file for recovery of their storm restoration costs no later than the spring 2009. Entergy is currently evaluating the amount of the losses covered by insurance for Entergy and each of the affected Utility operating companies. Because most of the Hurricane Gustav damage was to distribution and transmission facilities that are generally not covered by property insurance, Entergy does not expect to meet its deductibles for that storm. Because Hurricane Ike caused more damage by flooding and also caused more damage to generation facilities as compared to Hurricane Gustav, it is more likely that Entergy will meet its deductibles for that storm.

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 $550 million and construction work in progress of approximately $430 million. Entergy recorded the regulatory assets in accordance with its accounting policies and based on the historic treatment of such costs in its service territories (except for Entergy Arkansas), 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.

Results of Operations

Income Statement Variances

Third Quarter 2008 Compared to Third Quarter 2007

Following are income statement variances for Utility, Non-Utility Nuclear, Parent & Other, and Entergy comparing the third quarter 2008 to the third quarter 2007 showing how much the line item increased or (decreased) in comparison to the prior period:

 


Utility

 

Non-Utility
Nuclear

 

Parent & Other (1)


Entergy

(In Thousands)

 

 

 

 

 

 

 

3rd Quarter 2007 Consolidated Net Income

 

$333,098 

 

$160,913 

 

($32,852)

$461,159 

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

 



(117,038)



93,812 



(11,503)



(34,729)

Other operation and maintenance expenses

 

(38,108)

(13,051)

20,772 

(30,387)

Taxes other than income taxes

 

11,023 

427 

246 

11,696 

Depreciation and amortization

 

20,087 

4,263 

242 

24,592 

Other income

 

(372)

(12,828)

(7,780)

(20,980)

Interest charges

 

(4,723)

4,429 

(25,455)

(25,749)

Other expenses

 

8,787 

8,816 

17,610 

Income taxes

 

(39,190)

31,689 

(55,100)

(62,601)

3rd Quarter 2008 Consolidated Net Income

 

$257,812 

 

$205,324 

 

$7,153 

$470,289 

(1)

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

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

7

Net Revenue

Utility

Following is an analysis of the change in net revenue comparing the third quarter 2008 to the third quarter 2007.

  

 

Amount

  

 

(In Millions)

 

 

 

2007 net revenue

 

$1,415 

Volume/weather

 

(84)

Purchased power capacity

 

(16)

Fuel recovery

 

(13)

Retail electric price

 

(12)

Other

 

2008 net revenue

 

$1,298 

The volume/weather variance is primarily due to decreased electricity usage, including the effect of less favorable weather compared to the same period in 2007. Hurricane Gustav and Hurricane Ike, which hit the Utility's service territories in September 2008, also contributed an estimated $46 million to the decrease in electricity usage. Billed retail electricity usage decreased a total of 569 GWh in all sectors, a decrease of 2%.

The purchased power capacity variance is primarily due to higher purchased power capacity charges, including the Ouachita interim tolling agreement. The Ouachita acquisition is discussed in Note 2 to the financial statements in the Form 10-K and herein.

The fuel recovery variance resulted primarily from decreased recovery of higher fuel and purchased power costs from special rate customers and the timing of recovery of higher fuel and purchased power costs from retail customers.

The retail electric price variance is due to the following:

  • the absence of interim storm recoveries through the formula rate plans at Entergy Louisiana and Entergy Gulf States Louisiana which ceased upon the Act 55 financing of storm costs in the third quarter 2008;
  • a credit passed on to customers as a result of the Act 55 storm cost financings;
  • a base rate credit implemented effective January 2008 at Entergy New Orleans; and
  • an increase in the Attala power plant costs recovered through the power management rider by Entergy Mississippi. The net income effect of this recovery is limited to a portion representing an allowed return on equity with the remainder offset by Attala power plant costs in other operation and maintenance expenses, depreciation expenses, and taxes other than income taxes.

Refer to " Hurricane Rita and Hurricane Katrina " below and Note 2 to the financial statements in the Form 10-K and herein for a discussion of the interim recovery of storm costs and the Act 55 storm cost financings.

Non-Utility Nuclear

Net revenue increased for Non-Utility Nuclear from $505 million for the third quarter 2007 to $599 million for the third quarter 2008 primarily due to higher pricing in its contracts to sell power. Following are key performance measures for Non-Utility Nuclear for the third quarter 2008 and 2007:

8

 

 

2008

 

2007

 

 

 

 

 

Net MW in operation at September 30

 

4,998

 

4,998

Average realized price per MWh

 

$61.59

 

$53.11

GWh billed

 

10,316

 

10,105

Capacity factor

 

95%

 

93%

Refueling Outage Days:

   FitzPatrick

16

-

   Palisades

-

21

        Realized Price per MWh

When Non-Utility Nuclear acquired its six nuclear power plants it also entered into purchased power agreements with the sellers. For four of the plants, the 688 MW Pilgrim, 838 MW FitzPatrick, 1,028 MW Indian Point 2, and 1,041 MW Indian Point 3 plants, the original purchased power agreements with the sellers expired in 2004. The purchased power agreement with the seller of the 605 MW Vermont Yankee plant extends into 2012, and the purchased power agreement with the seller of the 798 MW Palisades plant extends into 2022. Prevailing market prices in the New York and New England power markets, where the five plants with original purchased power agreements that have expired or expire by 2012 are located, have increased since the purchase of these plants, and the contracts that Non-Utility Nuclear has entered after the original contracts expired, as well as realized day ahead and spot market sales, have generally been at higher prices. Non-Utility Nuclear's annual average realized price per MWh has increased from $39.40 for 2003 to $52.69 for 2007. In addition, as shown in the contracted sale of energy table in the Market and Credit Risk section below, Non-Utility Nuclear has sold forward 92% of its planned energy output for the remainder of 2008 for an average contracted energy price of $53 per MWh and 83% of its planned energy output for 2009 for an average contracted energy price of $61 per MWh. Power prices have increased primarily because of increases in the price of natural gas. Natural gas prices have increased primarily because of rising production costs and limited imports of liquefied natural gas, both caused by global demand and increases in the price of crude oil. In addition, increases in the price of power are secondarily because of rising heat rates, which in turn are caused primarily by load growth outpacing new unit additions. The majority of the existing long-term contracts on these five plants expire by the end of 2012. Most of these existing contracts have contract prices that are lower than currently prevailing market prices. For example, while the average contracted energy price for Non-Utility Nuclear's portfolio is $53 per MWh for the remainder of 2008, the twelve month rolling average price as of September 30, 2008 for the West and Hudson Valley regions of New York and the New England region were $61.93 per MWh, $89.75 per MWh and $83.10 per MWh, respectively.

Depreciation and Amortization

Depreciation and amortization expenses increased primarily due to a revision in the third quarter 2007 in the Utility related to depreciation on storm cost-related assets. Recoveries of the costs of those assets are now through the Act 55 financing of storm costs, as approved by the LPSC in the third quarter 2007. See " Hurricane Rita and Hurricane Katrina " below and Note 2 to the financial statements for a discussion of the Act 55 storm cost financing.

Other Operation and Maintenance Expenses

Utility

Other operation and maintenance expenses decreased from $458 million for the third quarter 2007 to $420 million for the third quarter 2008 primarily due to:

  • a decrease of $21 million in payroll-related costs;

 

9

 

  • a decrease of $11 million due to a provision for storm-related bad debts in 2007; and
  • a decrease of $7 million in customer service costs primarily as a result of the write-off of uncollectible customer accounts in 2007.

The other operation and maintenance variance includes a decrease of approximately $19 million as a result of the deferral or capitalization of storm restoration costs for Hurricane Gustav and Hurricane Ike, which hit the Utility's service territories in September 2008. This storm variance was offset, however, by approximately $19 million of higher storm damage charges at Entergy Arkansas. Entergy Arkansas discontinued regulatory storm reserve accounting beginning July 2007 as a result of the APSC order issued in Entergy Arkansas' rate case. As a result, non-capital storm expenses are charged to other operation and maintenance expenses.

Parent & Other

Other operation and maintenance expenses increased for the parent company, Entergy Corporation, primarily due to outside services costs of $23.8 million related to the planned spin-off of the Non-Utility Nuclear business.

Interest Charges

Interest charges decreased for Parent & Other primarily due to lower interest rates on borrowings under Entergy Corporation's revolving credit facility.

Income Taxes

The effective income tax rate for the third quarter 2008 was 26.1%. The difference in the effective income tax rate versus the statutory rate of 35% for the third quarter 2008 is primarily due to:

  • A capital loss recognized for income tax purposes on the liquidation of Entergy Power Generation, LLC in the third quarter 2008, which resulted in an income tax benefit of approximately $79.5 million. Entergy Power Generation, LLC was a holding company in Entergy's non-nuclear wholesale assets business; and
  • an adjustment to state income taxes for Non-Utility Nuclear to reflect the effect of a change in the methodology of computing Massachusetts state income taxes resulting from legislation passed in the third quarter 2008, which resulted in an income tax benefit of approximately $18.8 million.

These factors were partially offset by:

  • income taxes recorded by Entergy Power Generation, LLC, prior to its liquidation, resulting from the redemption payments it received in connection with its investment in Entergy Nuclear Power Marketing, LLC during the third quarter 2008, which resulted in an income tax expense of approximately $16.1 million; and
  • book and tax differences for utility plant items and state income taxes at the Utility operating companies.

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

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

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

 

10

 

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Following are income statement variances for Utility, Non-Utility Nuclear, Parent & Other, and Entergy comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007 showing how much the line item increased or (decreased) in comparison to the prior period:

 


Utility

 

Non-Utility
Nuclear

 

Parent & Other (1)


Entergy

(In Thousands)

 

 

 

 

 

 

 

2007 Consolidated Net Income

 

$585,741 

 

$397,808 

 

($42,593)

$940,956 

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

 



(37,418)



431,965 



(4,248)



390,299 

Other operation and maintenance expenses

 

(8,237)

47,130 

48,249 

87,142 

Taxes other than income taxes

 

2,505 

9,670 

(4,996)

7,179 

Depreciation and amortization

 

21,659 

24,333 

498 

46,490 

Other income

 

(13,943)

(34,515)

(13,708)

(62,166)

Interest charges

 

(16,645)

18,161 

(34,149)

(32,633)

Other expenses

 

16,584 

33,427 

50,020 

Income taxes

 

(16,158)

91,900 

(14,843)

60,899 

2008 Consolidated Net Income

 

$534,672 

 

$570,637 

 

($55,317)

$1,049,992 

(1)

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

Net Revenue

Utility

Following is an analysis of the change in net revenue comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007:

  

 

Amount

  

 

(In Millions)

 

 

 

2007 net revenue

 

$3,552 

Volume/weather

 

(37)

Purchased power capacity

 

(22)

Retail electric price

 

 10 

Other

 

12 

2008 net revenue

 

$3,515 

The volume/weather variance is primarily due to decreased electricity usage primarily during the unbilled sales period and the effect of less favorable weather compared to the same period in 2007. Hurricane Gustav and Hurricane Ike, which hit the Utility's service territories in September 2008, contributed an estimated $46 million to the decrease in electricity usage. This decrease in electricity usage was partially offset by an increase in electricity usage that had occurred through August 2008.

The purchased power capacity variance is primarily due to higher purchased power capacity charges, including the Ouachita interim tolling agreement. The Ouachita acquisition is discussed in Note 2 to the financial statements in the Form 10-K and herein.

 

11

 

The retail electric price variance is primarily due to:

  • an increase in the Attala power plant costs recovered through the power management rider by Entergy Mississippi. The net income effect of this recovery is limited to a portion representing an allowed return on equity with the remainder offset by Attala power plant costs in other operation and maintenance expenses, depreciation expenses, and taxes other than income taxes;
  • a storm damage rider that became effective in October 2007 at Entergy Mississippi; and
  • an Energy Efficiency rider that became effective in November 2007 at Entergy Arkansas.

The establishment of the storm damage rider and the Energy Efficiency rider results in an increase in rider revenue and a corresponding increase in other operation and maintenance expense with no impact on net income. The retail electric price variance was partially offset by:

  • the absence of interim storm recoveries through the formula rate plans at Entergy Louisiana and Entergy Gulf States Louisiana which ceased upon the Act 55 financing of storm costs in the third quarter 2008; and
  • a credit passed on to customers as a result of the Act 55 storm cost financings.

Refer to " Hurricane Rita and Hurricane Katrina " below and Note 2 to the financial statements in the Form 10-K and herein for a discussion of the interim recovery of storm costs and the Act 55 storm cost financings.

Non-Utility Nuclear

Net revenue increased for Non-Utility Nuclear from $1,346 million for the nine months ended September 30, 2007 to $1,778 million for the nine months ended September 30, 2008 primarily due to higher pricing in its contracts to sell power, additional production resulting from the acquisition of the Palisades plant in April 2007, and fewer outage days. See "Realized Price per MWh" in the third quarter results discussion above for a discussion of the increase in price.  In addition to refueling outages, second quarter 2007 was affected by a 28-day unplanned plant outage. Palisades contributed $228 million of net revenue for the nine months ended September 30, 2008 compared to $150 million of net revenue for the nine months ended September 30, 2007. Included in the Palisades net revenue is $57 million and $33 million for the nine months ended September 30, 2008 and 2007, respectively, of amortization of the Palisades purchased power agreement, which is non-cash revenue and is discussed in Note 15 to the financial statements in the Form 10-K. Following are key performance measures for Non-Utility Nuclear for the nine months ended September 30, 2008 and 2007:

 

 

2008

 

2007

 

 

 

 

 

Net MW in operation at September 30

 

4,998

 

4,998

Average realized price per MWh

 

$60.46

 

$53.12

GWh billed

 

31,221

 

27,315

Capacity factor

 

95%

 

88%

Refueling Outage Days:

   FitzPatrick

16

-

   Indian Point 2

26

-

   Indian Point 3

-

24

   Palisades

-

21

   Pilgrim

-

33

   Vermont Yankee

-

24

12

Depreciation and Amortization

Utility

Depreciation and amortization expenses increased primarily due to a revision in the third quarter 2007 in the Utility related to depreciation on storm cost-related assets. Recoveries of the costs of those assets are now through the Act 55 financing of storm costs, as approved by the LPSC in the third quarter 2007. See " Hurricane Rita and Hurricane Katrina " below and Note 2 to the financial statements for a discussion of the Act 55 storm cost financing.

Non-Utility Nuclear

Depreciation and amortization expenses increased primarily due to the acquisition of the Palisades power plant in April 2007.

Other Operation and Maintenance Expenses

Utility

Other operation and maintenance expenses were $1,327 million for the nine months ended September 30, 2007 and $1,319 million for the nine months ended September 30, 2008. The variance includes:

  • a decrease of $22 million in payroll-related costs;
  • a decrease of approximately $19 million as a result of the deferral or capitalization of storm restoration costs for Hurricane Gustav and Hurricane Ike, which hit the Utility's service territories in September 2008;
  • a decrease of $11 million due to a provision for storm-related bad debts in 2007;
  • a decrease of $7 million in customer service costs primarily as a result of the write-off of uncollectible customer accounts in 2007;
  • a reimbursement of $7 million of costs in 2008 in connection with a litigation settlement;
  • an increase of $13 million in fossil expenses primarily due to higher costs for plant maintenance outages as a result of differing outage schedules for 2008 compared to 2007; and
  • an increase of $38 million in storm damage charges as a result of several storms hitting Entergy Arkansas' service territory in 2008, including Hurricane Gustav and Hurricane Ike in the third quarter 2008. Entergy Arkansas discontinued regulatory storm reserve accounting beginning July 2007 as a result of the APSC order issued in Entergy Arkansas' rate case. As a result, non-capital storm expenses are charged to other operation and maintenance expenses.

Non-Utility Nuclear

Other operation and maintenance expenses increased from $520 million for the nine months ended September 30, 2007 to $567 million for the nine months ended September 30, 2008 primarily due to deferring costs from two refueling outages in 2008 compared to four refueling outages in 2007, in addition to the increase associated with owning the Palisades plant for the entire period. Other operation and maintenance expenses associated with the Palisades plant, which was acquired in April 2007, were $35 million higher for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.

Parent & Other

Other operation and maintenance expenses increased for the parent company, Entergy Corporation, primarily due to outside services costs of $47.5 million related to the planned spin-off of the Non-Utility Nuclear business.

 

13

 

Other Income

Other income decreased primarily due to approximately $35 million in charges to interest income in 2008 resulting from the recognition of the other than temporary impairment of certain securities held in Non-Utility Nuclear's decommissioning trust funds. Other factors contributing to the decrease were a reduction in the allowance for equity funds used during construction in the Utility due to a revision in the first quarter 2007 related to removal costs and a reduction in carrying charges on storm costs as recovery of some of those costs has been completed.

Interest Charges

Interest charges decreased for Parent & Other primarily due to lower interest rates on borrowings under Entergy Corporation's revolving credit facility.

Income Taxes

The effective income tax rate for the nine months ended September 30, 2008 was 33.8%. The difference in the effective income tax rate versus the statutory rate of 35% for the nine months ended September 30, 2008 is primarily due to:

  • A capital loss recognized for income tax purposes on the liquidation of Entergy Power Generation, LLC in the third quarter 2008, which resulted in an income tax benefit of approximately $79.5 million. Entergy Power Generation, LLC was a holding company in Entergy's non-nuclear wholesale assets business; and
  • an adjustment to state income taxes for Non-Utility Nuclear to reflect the effect of a change in the methodology of computing Massachusetts state income taxes resulting from legislation passed in the third quarter 2008, which resulted in an income tax benefit of approximately $18.8 million.

These factors were partially offset by:

  • income taxes recorded by Entergy Power Generation, LLC, prior to its liquidation, resulting from the redemption payments it received in connection with its investment in Entergy Nuclear Power Marketing, LLC during the third quarter 2008, which resulted in an income tax expense of approximately $16.1 million; and
  • book and tax differences for utility plant items and state income taxes at the Utility operating companies.

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

  • the resolution of tax audit issues in the 2002-2003 audit cycle;
  • an adjustment to state income taxes for Non-Utility Nuclear to reflect the effect of a change in the methodology of computing New York state income taxes as required by that state's taxing authority;
  • book and tax differences related to the allowance for equity funds used during construction; and
  • the amortization of investment tax credits.

 

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

Liquidity and Capital Resources

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

14

Hurricane Gustav and Hurricane Ike and Other Short-term Liquidity Sources and Uses

As discussed above, Entergy is currently evaluating various avenues of recovering its Hurricane Gustav and Hurricane Ike storm restoration costs. Entergy believes its total liquidity is sufficient to meet its current obligations, including the effects associated with Hurricane Gustav and Hurricane Ike. Nevertheless, each Utility operating company is responsible for its storm restoration cost obligations and for recovering its storm-related costs. At the end of the third quarter 2008, Entergy had $2.6 billion of cash and cash equivalents on hand on a consolidated basis, and believes that it has sufficient financing authority, subject to debt covenants, to meet its anticipated obligations. The Utility's short-term financing authorizations and credit facilities are discussed in more detail in Note 4 to the financial statements. As of September 30, 2008, Entergy had undrawn revolving credit facility capacity of $224 million at Entergy Corporation, $100 million at Entergy Arkansas, and $50 million at Entergy Mississippi, subject to debt covenants. Entergy Corporation's revolving credit facility requires it to maintain a consolidated debt ratio of 65 percent or less of its total capitalization. Some of the Utility operating company credit facilities have similar covenants. In addition, the Utility operating companies had a total of $262 million of funded storm reserves reflected in other property and investments as of September 30, 2008. In October 2008, Entergy Gulf States Louisiana, Entergy Louisiana, and Entergy New Orleans drew a total of $229 million from their funded storm reserves. Entergy also anticipates that operating cash flow in excess of storm restoration spending will remain a source of liquidity.

Long-term debt maturities in the fourth quarter 2008 include $160 million at Entergy Texas and $21 million at Non-Utility Nuclear. Long-term debt maturities in 2009 occur in the fourth quarter and include $219 million at the Utility, $30 million at Non-Utility Nuclear, and $267 million at Entergy Corporation. $500 million of Entergy Corporation notes associated with the equity units are subject to remarketing provisions in November or December 2008 or February 2009. In the event remarketing efforts fail, Entergy will issue shares of stock pursuant to the equity units conversion in February 2009 and retire $500 million of notes. Should the remarketing succeed, Entergy will receive $500 million of cash, issue shares of stock pursuant to the equity units and the $500 million of notes will remain outstanding. The Entergy Arkansas and Entergy Mississippi revolving credit facilities of $100 million and $50 million expire in April and May 2009, respectively. These facilities are generally renewed on an annual basis. The remaining Utility operating company credit facilities and the Entergy Corporation credit facility expire in 2012. See Note 5 to the financial statements in the Form 10-K and Note 4 to the financial statements herein for details regarding long-term debt.

Capital Structure

Entergy's capitalization is balanced between equity and debt, as shown in the following table. The increase in the debt to capital percentage from 2007 to 2008 is primarily the result of additional borrowings under Entergy Corporation's revolving credit facilities. The increase in the debt to capital percentage is in line with Entergy's financial and risk management aspirations.

 

 

September 30,
2008

 

December 31,
2007

 

 

 

 

 

Net debt to net capital

 

54.9%

 

54.7%

Effect of subtracting cash from debt

 

5.5%

 

2.9%

Debt to capital

 

60.4%

 

57.6%

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

As discussed in the Form 10-K, Entergy Corporation has in place a $3.5 billion credit facility that expires in August 2012. Entergy Corporation has the ability to issue letters of credit against the total borrowing capacity of the facility. As of September 30, 2008, amounts outstanding under the credit facility are:

15


Capacity

 


Borrowings

 

Letters
of Credit

 

Capacity
Available

(In Millions)

             

$3,500 

 

$3,208 

 

$68 

 

$224

Under covenants contained in Entergy Corporation's credit facility and in the indenture governing the Entergy Corporation senior notes and the Entergy Corporation equity units, Entergy is required 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 and in the indenture governing the Entergy Corporation senior notes and the Entergy Corporation equity units is different than the calculation of the debt to capital ratio above. Entergy is currently in compliance with this 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 Entergy Corporation credit facility's maturity date may occur and there may be an acceleration of amounts due under the Entergy Corporation senior notes and the Entergy Corporation equity units.

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 2008 through 2010. Following is an update to the discussion in the Form 10-K.

Little Gypsy Repowering Project

See the Form 10-K for a discussion of the Little Gypsy repowering project. The preconstruction and operating air permits for the Little Gypsy repowering project were issued by the Louisiana Department of Environmental Quality (LDEQ) in November 2007 under then-effective federal and state air regulations, including the EPA's Clean Air Mercury Rule that had been issued in 2005 (CAMR 2005). As discussed in more detail in Part I, Item 1, "Environmental Regulation, Clean Air Act and Subsequent Amendments, Hazardous Air Pollutants" in the Form 10-K, in February 2008 the U.S. Court of Appeals for the D.C. Circuit struck down CAMR 2005. The D.C. Circuit decision requires utilities that have not yet begun construction of the facility in question to undergo before beginning construction a case-by-case Maximum Achievable Control Technology (MACT) analysis for construction or reconstruction of emission units pursuant to the Clean Air Act. The Little Gypsy project as currently configured is expected to meet MACT standards. Little Gypsy received its construction permit before a formal MACT analysis was required, however, and Entergy Louisiana has sought a MACT determination from the LDEQ. The filing was made in June 2008, and the LDEQ has certified that the filing is complete. A decision on the MACT determination is expected by first quarter 2009. Entergy Louisiana also is awaiting permit determinations from several additional agencies. These permits are unrelated to CAMR 2005 and always have been part of the construction process. Onsite construction of the project was scheduled to begin in July 2008, but obtaining the MACT determination will cause a delay in the start of construction, which Entergy Louisiana now expects to begin in mid-year 2009. This delays the expected commercial operation date of the project to mid-year 2013.

The LPSC Phase I order has been appealed to the state district court in Baton Rouge, Louisiana by a group led by the Sierra Club and represented by the Tulane Environmental Law Clinic. A status conference is set for December 3, 2008, at which time a procedural schedule should be established for the appeal.

The LPSC had approved the temporary suspension of Phase II of the Little Gypsy proceedings because Entergy Louisiana must update its estimated project cost and schedule in order to support the request to recover cash earnings on its construction work in progress (CWIP) costs. On October 16, 2008, Entergy Louisiana, together with Entergy Gulf States Louisiana, filed an application to resume Phase II of the proceeding. The Phase II filing seeks certification for Entergy Gulf States Louisiana to participate in a one-third ownership share in the

 

16

 

 

repowering project. In addition, Entergy Louisiana and Entergy Gulf States Louisiana seek recovery of approximately 79% of their construction financing costs through the recovery of cash earnings on CWIP costs. The LPSC previously found that the recovery of CWIP for a large baseload project may be in the public interest as cash earnings may be needed to protect the utility's financial integrity, maintain an acceptable credit rating, prevent an undue increase in the utility's cost of capital, or to accomplish phasing in of the cost of a large capital project for the benefit of customers. In Phase II, the LPSC will rule on Entergy Gulf States Louisiana's certification request, determine the appropriate amount of CWIP costs, if any, to be recovered and will develop the allocation, accounting and rate recovery mechanisms for such recovery. The LPSC also will determine the appropriate procedure or mechanism for synchronizing base rate recovery of Little Gypsy's fixed or non-fuel costs with its commercial in-service date. A status conference is set for November 14, 2008, at which time a procedural schedule should be established for Phase II. Entergy Louisiana and Entergy Gulf States Louisiana have requested that the case be decided in time to permit the recovery of cash earnings on CWIP beginning in July 2009.

The delayed construction of the Little Gypsy repowering project is expected to increase the total project cost from approximately $1.55 billion to $1.76 billion, primarily due to price escalation on non-contracted equipment and material and increased carrying cost due to the extended construction period.

Waterford 3 Steam Generator Replacement Project

As discussed in more detail in the Form 10-K, Entergy Louisiana plans to replace the Waterford 3 steam generators, along with the reactor vessel closure head and control element drive mechanisms, in 2011.  In June 2008, Entergy Louisiana filed with the LPSC for approval of the project, including full cost recovery. Entergy Louisiana estimates in the filing that it will spend approximately $511 million on this project. The filing seeks relief in two phases. Phase I seeks certification within 120 days that the public convenience and necessity would be served by undertaking this project. Among other relief requested, Entergy Louisiana is also seeking approval for a procedure to synchronize permanent base rate recovery when the project is placed in service, either by a formula rate plan or base rate filing. In Phase II, Entergy Louisiana will seek cash earnings on construction work in progress. Entergy Louisiana and the LPSC staff filed a joint motion and a settlement that will resolve Phase I of the proceeding. The settlement also provides that Phase II of the proceeding will be consolidated with Phase II of the Little Gypsy proceeding described above. An ALJ will consider the settlement at a hearing scheduled for November 7, 2008.

White Bluff Environmental Project

The planned construction and other capital investments disclosure in the Form 10-K includes approximately $24 million for initial spending during the 2008-2010 period on installation of scrubbers and low NOx burners at Entergy Arkansas' White Bluff coal plant, which under current environmental regulations must be operational by September 2013. The project remains in the planning stages and has not been fully designed, but the latest conceptual cost estimate has gone up significantly from previous estimates due to increases in equipment, commodity, and labor costs. These estimates indicate that Entergy Arkansas' share of the project could cost approximately $630 million compared to the $375 million reported in the Form 10-K. Entergy continues to review potential environmental spending needs and financing alternatives for any such spending, and future spending estimates could change based on the results of this continuing analysis.

Sources of Capital

The short-term borrowings of the Registrant Subsidiaries and certain other Entergy subsidiaries are limited to amounts authorized by the FERC. The current FERC-authorized limits are effective through March 31, 2010, as established by a FERC order issued March 31, 2008 (except for the Entergy Gulf States Louisiana and Entergy Texas limits, which are effective through November 8, 2009, as established by an earlier FERC order). See Note 4 to the financial statements for further discussion of the Utility's short-term borrowing limits.

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Hurricane Katrina and Hurricane Rita

In August and September 2005, Hurricanes Katrina and Rita caused catastrophic damage to large portions of the Utility's service territories in Louisiana, Mississippi, and Texas, including the effect of extensive flooding that resulted from levee breaks in and around the greater New Orleans area. The storms and flooding resulted in widespread power outages, significant damage to electric distribution, transmission, and generation and gas infrastructure, and the loss of sales and customers due to mandatory evacuations and the destruction of homes and businesses. Entergy has pursued a broad range of initiatives to recover storm restoration and business continuity costs, including obtaining reimbursement of certain costs covered by insurance and pursuing recovery through existing or new rate mechanisms regulated by the FERC and local regulatory bodies, including the issuance of securitization bonds. Following are updates regarding Entergy's cost recovery efforts.

Storm Cost Financings

In March 2008, Entergy Gulf States Louisiana, Entergy Louisiana, and the Louisiana Utilities Restoration Corporation (LURC), an instrumentality of the State of Louisiana, filed at the LPSC an application requesting that the LPSC grant financing orders authorizing the financing of Entergy Gulf States Louisiana and Entergy Louisiana storm costs, storm reserves, and issuance costs pursuant to Act 55 of the Louisiana Legislature (Act 55 financings). The Act 55 financings are expected to produce additional customer benefits as compared to Act 64 traditional securitization.  Entergy Gulf States Louisiana and Entergy Louisiana also filed an application requesting LPSC approval for ancillary issues including the mechanism to flow charges and savings to customers via a Storm Cost Offset rider.  On April 3, 2008, the Louisiana State Bond Commission granted preliminary approval for the Act 55 financings.  On April 8, 2008, the Louisiana Public Facilities Authority (LPFA), which is the issuer of the bonds pursuant to the Act 55 financings, approved requests for the Act 55 financings.  On April 10, 2008, Entergy Gulf States Louisiana and Entergy Louisiana and the LPSC Staff filed with the LPSC an uncontested stipulated settlement that includes Entergy Gulf States Louisiana and Entergy Louisiana's proposals under the Act 55 financings, which includes a commitment to pass on to customers a minimum of $10 million and $30 million of customer benefits, respectively, through prospective annual rate reductions of $2 million and $6 million for five years. On April 16, 2008, the LPSC approved the settlement and issued two financing orders and one ratemaking order intended to facilitate implementation of the Act 55 financings.  In May 2008, the Louisiana State Bond Commission granted final approval of the Act 55 financings.

On July 29, 2008, the LPFA issued $687.7 million in bonds under the aforementioned Act 55. From the $679 million of bond proceeds loaned by the LPFA to the LURC, the LURC deposited $152 million in a restricted escrow account as a storm damage reserve for Entergy Louisiana and transferred $527 million directly to Entergy Louisiana. From the bond proceeds received by Entergy Louisiana from the LURC, Entergy Louisiana invested $545 million, including $17.8 million that was withdrawn from the restricted escrow account as approved by the April 16, 2008 LPSC orders, in exchange for 5,449,861.85 Class A preferred, non-voting, membership interest units of Entergy Holdings Company LLC, a company wholly-owned and consolidated by Entergy, that carry a 10% annual distribution rate. Distributions are payable quarterly commencing on September 15, 2008 and have a liquidation price of $100 per unit. The preferred membership interests are callable at the option of Entergy Holdings Company LLC after ten years. The terms of the membership interests include certain financial covenants to which Entergy Holdings Company LLC is subject, including the requirement to maintain a net worth of at least $1 billion.

On August 26, 2008, the LPFA issued $278.4 million in bonds under the aforementioned Act 55. From the $274.7 million of bond proceeds loaned by the LPFA to the LURC, the LURC deposited $87 million in a restricted escrow account as a storm damage reserve for Entergy Gulf States Louisiana and transferred $187.7 million directly to Entergy Gulf States Louisiana. From the bond proceeds received by Entergy Gulf States Louisiana from the LURC, Entergy Gulf States Louisiana invested $189.4 million, including $1.7 million that was withdrawn from the restricted escrow account as approved by the April 16, 2008 LPSC orders, in exchange for 1,893,918.39 Class A preferred, non-voting, membership interest units of Entergy Holdings Company LLC, a company wholly-owned and consolidated by Entergy, that carry a 10% annual distribution rate. Distributions are payable quarterly commencing on September 15, 2008 and have a liquidation price of $100 per unit.

 

18

 

The preferred membership interests are callable at the option of Entergy Holdings Company LLC after ten years. The terms of the membership interests include certain financial covenants to which Entergy Holdings Company LLC is subject, including the requirement to maintain a net worth of at least $1 billion.

Entergy, Entergy Gulf States Louisiana, and Entergy Louisiana will not report the bonds on their balance sheets because the bonds are the obligation of the LPFA, and there is no recourse against Entergy, Entergy Gulf States Louisiana or Entergy Louisiana in the event of a bond default.

Insurance Claims

See Note 8 to the financial statements in the Form 10-K for a discussion of Entergy's conventional property insurance program and its Hurricane Katrina and Hurricane Rita claims.

In April 2008, Entergy received from its primary insurer $53.6 million of additional insurance proceeds on its Hurricane Katrina claim, and almost all of the April 2008 proceeds were allocated to Entergy New Orleans. In the third quarter 2008, Entergy received from its primary insurer $17.5 million of additional insurance proceeds on its Hurricane Katrina and Hurricane Rita claims, which were allocated as follows: $1.8 million to Entergy Gulf States Louisiana, $2.2 million to Entergy Louisiana, $9.7 million to Entergy New Orleans, and $3.3 million to Entergy Texas, with the remainder allocated in smaller amounts to other Entergy subsidiaries.

Entergy has settled its lawsuit against one of its excess insurers on the Hurricane Katrina claim, and in July 2008 received $71.5 million in proceeds on the claim. The July 2008 proceeds were allocated as follows: $2.0 million to Entergy Arkansas, $3.0 million to Entergy Gulf States Louisiana, $12.4 million to Entergy Louisiana, $1.8 million to Entergy Mississippi, and $48.4 million to Entergy New Orleans, with the remainder allocated in smaller amounts to other Entergy subsidiaries.

Cash Flow Activity

As shown in Entergy's Consolidated Statements of Cash Flows, cash flows for the nine months ended September 30, 2008 and 2007 were as follows:

 

 

2008

 

2007

 

 

(In Millions)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$1,254 

 

$1,016 

 

 

 

 

 

Effect of reconsolidating Entergy New Orleans

17 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

2,693 

 

1,626 

 

Investing activities

 

(1,943)

 

(1,451)

 

Financing activities

 

551 

 

258 

Effect of exchange rates on cash and cash equivalents

Net increase in cash and cash equivalents

 

1,302 

 

433 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$2,556 

 

$1,466 

Operating Activities

Entergy's cash flow provided by operating activities increased by $1,067 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. Following are cash flows from operating activities by segment:

 

19

 

  • Utility provided $1,885 million in cash from operating activities in 2008 compared to providing $1,212 million in 2007 primarily due to proceeds of $954 million received from the Louisiana Utilities Restoration Corporation as a result of the Louisiana Act 55 storm cost financings. The Act 55 storm cost financings are discussed in more detail in Note 2 to the financial statements. A decrease in income tax payments of $118 million also contributed to the increase. Offsetting these factors were decreased collection of fuel costs in 2008, the receipt of $181 million of Community Development Block Grant funds by Entergy New Orleans in 2007, and a $100 million increase in pension contributions in 2008. Fuel prices have been increasing and, due to the time lag before the fuel recovery rates increase in response, the Utility has under-recovered fuel costs thus far in 2008.
  • Non-Utility Nuclear provided $970 million in cash from operating activities in 2008 compared to providing $535 million in 2007, primarily due to an increase in net revenue, partially offset by an increase in operation and maintenance costs, both of which are discussed in "Results of Operations."
  • Parent & Other used approximately $162 million in cash in operating activities in 2008 and used approximately $120 million in cash in operating activities in 2007.

Investing Activities

Net cash used in investing activities increased by $492 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. The following significant investing cash flow activity occurred in the nine months ended September 30, 2008 and 2007:

  • Construction expenditures were $373 million higher in 2008 than in 2007, primarily due to storm restoration spending caused by Hurricane Gustav and Hurricane Ike and increased spending on various projects by the Utility that are discussed further in "Capital Expenditure Plans" in the Form 10-K.
  • In April 2007, Non-Utility Nuclear purchased the 798 MW Palisades nuclear power plant located near South Haven, Michigan for a net cash payment of $336 million.
  • In March 2008, Entergy Gulf States Louisiana purchased the Calcasieu Generating Facility, a 322 MW simple-cycle, gas-fired power plant located near the city of Sulphur in southwestern Louisiana, for approximately $56 million.
  • In September 2008, Entergy Arkansas purchased the Ouachita Plant, a 789 MW gas-fired plant located 20 miles south of the Arkansas state line near Sterlington, Louisiana, for approximately $210 million.
  • Non-Utility Nuclear made a $72 million payment to NYPA in 2008 under the value sharing agreements associated with the acquisition of the Fitzpatrick and Indian Point 3 power plants. See Note 1 to the financial statements herein for additional discussion of the value sharing agreements.
  • The investment of a net total of $220 million in Entergy Gulf States Louisiana's and Entergy Louisiana's storm reserve escrow accounts as a result of the Act 55 storm cost financings. The Act 55 storm cost financings are discussed in more detail in Note 2 to the financial statements.
  • Entergy Mississippi realized proceeds in 2007 from $100 million of investments held in trust that were received from a bond issuance in 2006 and used to redeem bonds in 2007.

Financing Activities

Net cash provided by financing activities increased $293 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007. The following significant financing cash flow activity occurred in the nine months ended September 30, 2008 and 2007:

  • Entergy Corporation increased the net borrowings under its revolving credit facility by $957 million in the nine months ended September 30, 2008 and by $1,296 million in the nine months ended September 30, 2007. See Note 4 to the financial statements for a description of the Entergy Corporation credit facility.
  • Entergy Arkansas issued $300 million of 5.4% Series First Mortgage Bonds in July 2008.
  • Entergy Louisiana issued $300 million of 6.5% Series First Mortgage Bonds in August 2008.
  • Entergy Louisiana repurchased, prior to maturity, $60 million of Auction Rate governmental bonds in April 2008.
  • Entergy New Orleans paid, at maturity, its $30 million 3.875% Series first mortgage bonds in August 2008.

 

20

 

  • The Utility operating companies increased the borrowings outstanding on their long-term credit facilities by $400 million in the nine months ended September 30, 2008 and increased the borrowings outstanding on their short term credit facilities by $60 million in the nine months ended September 30, 2007.
  • A subsidiary of Entergy Texas issued $329.5 million of securitization bonds in June 2007. See Note 5 to the financial statements in the Form 10-K for additional information regarding the securitization bonds.
  • Entergy Corporation paid $237 million of notes payable at their maturities in 2008.
  • Entergy Mississippi redeemed $100 million of first mortgage bonds in 2007.
  • Entergy Corporation repurchased $468 million of its common stock in the nine months ended September 30, 2008 and $1,024 million of its common stock in the nine months ended September 30, 2007.
  • Entergy Corporation increased the dividend on its common stock in the third quarter 2007. The quarterly dividend was $0.54 per share for the first two quarters of 2007 and $0.75 per share for each quarter since then.

Significant Factors, Known Trends, and Uncertainties

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

State and Local Rate Regulation

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

Federal Regulation

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

System Agreement Proceedings

Production Cost Equalization Proceeding Commenced by the LPSC

See the Form 10-K for a discussion of the June 2005 FERC decision in the System Agreement litigation that had been commenced by the LPSC, which was essentially affirmed in the FERC's decision in a December 2005 order on rehearing. The LPSC, APSC, MPSC, and the AEEC appealed the FERC's decision to the United States Court of Appeals for the D.C. Circuit. Entergy and the City of New Orleans intervened in the various appeals. The D.C. Circuit issued its decision in April 2008. The D.C. Circuit affirmed the FERC's decision in most respects, but remanded the case to the FERC for further proceedings and reconsideration of its conclusion that it was prohibited from ordering refunds and its determination to implement the bandwidth remedy commencing with calendar year 2006 production costs (with the first payments/receipts commencing in June 2007), rather than commencing the remedy on June 1, 2005. The D.C. Circuit concluded the FERC had failed so far in the proceeding to offer a reasoned explanation regarding these issues. On July 17, 2008, the Utility operating companies filed with FERC a motion proposing additional procedures on the remanded issues. The proceeding is pending at the FERC.

Rough Production Cost Equalization Rates

2007 Rate Filing Based on Calendar Year 2006 Production Costs

See the Form 10-K for a discussion of the proceeding in which Entergy filed the rates to implement the FERC's orders in the production cost equalization proceeding. Intervenor testimony was filed in which the intervenors and also the FERC Staff advocate a number of positions on issues that affect the level of production costs the individual Utility operating companies are permitted to reflect in the bandwidth calculation, including the level of depreciation and decommissioning expense for nuclear facilities. The effect of the various positions would be to reallocate

 

21

 

 costs among the Utility operating companies. Additionally, the APSC, while not taking a position on whether Entergy Arkansas was imprudent for not exercising its right of first refusal to repurchase a portion of the Independence plant in 1996 and 1997 as alleged by the LPSC, alleges that if the FERC finds Entergy Arkansas to be imprudent for not exercising this option, the FERC should disallow recovery from customers by Entergy of approximately $43 million of increased costs. The Utility operating companies filed rebuttal testimony refuting the allegations of imprudence concerning the decision not to acquire the portion of the Independence plant, explaining why the bandwidth payments are properly recoverable under the AmerenUE contract, and explaining why the positions of FERC Staff and intervenors on the other issues should be rejected. A hearing in this proceeding concluded in July 2008, and the ALJ issued an initial decision in September 2008. The ALJ's initial decision concludes, among other things, that: (1) the decisions to not exercise Entergy Arkansas' option to purchase the Independence plant in 1996 and 1997 were prudent; (2) Entergy Arkansas properly flowed a portion of the bandwidth payments through to AmerenUE in accordance with the wholesale power contract; and (3) the level of nuclear depreciation and decommissioning expense reflected in the bandwidth calculation should be calculated based on NRC-authorized license life, rather than the nuclear depreciation and decommissioning expense authorized by the retail regulators for purposes of retail ratemaking. Following briefing by the parties, the matter will be submitted to the FERC for decision.

As discussed in the Form 10-K, the Utility operating companies had also filed with the FERC during 2007 certain proposed modifications to the rough production cost equalization calculation. The FERC rejected certain of the proposed modifications, accepted certain of the proposed modifications without further proceedings, and set two of the proposed modifications for hearing and settlement procedures. With respect to the proceeding involving changes to the functionalization of costs to the production function, a hearing was held in March 2008 and the ALJ issued an Initial Decision in June 2008 finding the modifications proposed by the Utility operating companies to be just and reasonable. The matter is now pending before the FERC for decision. In the second proceeding, a contested settlement supported by the Utility operating companies is now pending before the FERC. In conjunction with the second proceeding, the LPSC has appealed to the Court of Appeals for the D.C. Circuit the FERC's determination that changes proposed by the Utility operating companies and accepted by the FERC can become effective for the next bandwidth calculation even though such bandwidth calculation may include production costs incurred prior to the date the change is proposed by the Utility operating companies. In August 2008, the D.C. Circuit dismissed the LPSC's appeal.

The intervenor AmerenUE has argued that its current wholesale power contract with Entergy Arkansas, pursuant to which Entergy Arkansas sells power to AmerenUE, does not permit Entergy Arkansas to flow through to AmerenUE any portion of Entergy Arkansas' bandwidth payment.  According to AmerenUE, Entergy Arkansas has sought to collect from AmerenUE approximately $14.5 million of the 2007 Entergy Arkansas bandwidth payment.  The AmerenUE contract is scheduled to expire in August 2009. In April 2008, AmerenUE filed a complaint with the FERC seeking refunds of this amount, plus interest, in the event the FERC ultimately determines that bandwidth payments are not properly recovered under the AmerenUE contract.

On March 31, 2008, the LPSC filed a complaint with the FERC seeking, among other things, three amendments to the rough production cost equalization bandwidth formula. On April 22, 2008, the Utility operating companies filed an answer to the LPSC complaint urging the FERC to reject two of the proposed amendments and not opposing the third. On July 2, 2008, the FERC issued an order that, among other things, ordered the Utility operating companies to implement the LPSC's proposed amendment that they did not oppose and setting two of the LPSC's proposed amendments for hearing and settlement proceedings. Settlement procedures have been terminated, and a hearing is set for March 2009.

2008 Rate Filing Based on Calendar Year 2007 Production Costs

In May 2008, Entergy filed with the FERC the rates for the second year to implement the FERC's orders in the System Agreement proceeding that are discussed in the Form 10-K. The filing shows the following payments/receipts among the Utility operating companies for 2008, based on calendar year 2007 production costs, commencing for service in June 2008, are necessary to achieve rough production cost equalization under the FERC's orders:

 

22

 

Payments or
(Receipts)

 

(In Millions)

Entergy Arkansas

$252

Entergy Gulf States Louisiana

($124)

Entergy Louisiana

($35)

Entergy Mississippi

($20)

Entergy New Orleans

($7)

Entergy Texas

($66)

Several parties intervened in the proceeding at the FERC, including the APSC, the LPSC, and AmerenUE, which have also filed protests. Several other parties, including the MPSC and the City Council, have intervened in the proceeding without filing a protest. On July 29, 2008, the FERC set the proceeding for hearing and settlement procedures. Settlement procedures were terminated on October 22, 2008. A procedural schedule has not yet been established in the proceeding.

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

Interruptible Load Proceeding

In April 2007 the U.S. Court of Appeals for the D.C. Circuit issued its opinion in the LPSC's appeal of the FERC's March 2004 and April 2005 orders related to the treatment under the System Agreement of the Utility operating companies' interruptible loads.  In its opinion, the D.C. Circuit concluded that the FERC (1) acted arbitrarily and capriciously by allowing the Utility operating companies to phase-in the effects of the elimination of the interruptible load over a 12-month period of time; (2) failed to adequately explain why refunds could not be ordered under Section 206(c) of the Federal Power Act; and (3) exercised appropriately its discretion to defer addressing the cost of sulfur dioxide allowances until a later time.  The D.C. Circuit remanded the matter to the FERC for a more considered determination on the issue of refunds. The FERC issued its order on remand in September 2007, in which it directs Entergy to make a compliance filing removing all interruptible load from the computation of peak load responsibility commencing April 1, 2004 and to issue any necessary refunds to reflect this change. In addition, the order directs the Utility operating companies to make refunds for the period May 1995 through July 1996. Entergy, the APSC, the MPSC, and the City Council have requested rehearing of the FERC's order on remand. The FERC granted the Utility operating companies' request to delay the payment of refunds for the period May 1995 through July 1996 until 30 days following a FERC order on rehearing. The FERC issued in September 2008 an order denying rehearing. The refunds were made to the Utility operating companies that were due a refund on October 15, 2008. The APSC has appealed the FERC decisions to the D.C. Circuit.

AEEC Complaint Regarding the Ouachita Acquisition

In August 2008 the AEEC also filed a complaint at the FERC seeking a review by the FERC of "Entergy Corporation's efforts" to acquire the Ouachita plant, alleging that the acquisition violates the System Agreement and the Federal Power Act and that the plant should be an "[Entergy Arkansas] only resource." The AEEC complaint also states that it seeks clarity on whether Entergy Arkansas' termination of its participation in the System Agreement will affect Entergy Arkansas' rights to the Ouachita facility. The APSC, LPSC, MPSC, and City Council have intervened in the proceeding. Entergy filed in September 2008 its answer to the complaint and asked the FERC to dismiss the proceeding.

23

Independent Coordinator of Transmission

In the FERC's April 2006 order that approved Entergy's ICT proposal, the FERC stated that the weekly procurement process (WPP) must be operational within approximately 14 months of the FERC order, or June 24, 2007, or the FERC may reevaluate all approvals to proceed with the ICT.  The Utility operating companies have been working with the ICT and a software vendor to develop the software and systems necessary to implement the WPP. The Utility operating companies also filed with the FERC in April 2007 a request to make certain corrections and limited modifications to the current WPP tariff provisions. The Utility operating companies have filed status reports with the FERC notifying the FERC that, due to unexpected issues with the development of the WPP software and testing, the WPP is still not operational. The Utility operating companies filed a revised tariff with the FERC on January 31, 2008 to address issues identified during the testing of the WPP. The Utility operating companies requested the FERC to rule on the proposed amendments by April 30, 2008 and allow them to go into effect May 11, 2008, following which the WPP would be expected to become operational. In May 2008, the FERC determined it would be premature to implement the WPP on May 11, 2008 as the WPP has not been shown to be just and reasonable. Accordingly, the FERC conditionally accepted and suspended Entergy's proposed tariff amendments for five months from the requested effective date, to become effective October 11, 2008, or on an earlier date, subject to refund and subject to a further order on proposed tariff revisions directed to be filed in the order. Entergy submitted a proposed tariff amendment in August 2008, and on October 10, 2008 the FERC issued an order accepting the amendment. The amendment establishes that the WPP shall take effect at a date to be determined, after completion of successful simulation trials and the ICT's endorsement of the WPP's implementation.

Market and Credit Risk Sensitive Instruments

Commodity Price Risk

Power Generation

As discussed more fully in the Form 10-K, the sale of electricity from the power generation plants owned by Entergy's Non-Utility Nuclear business, unless otherwise contracted, is subject to the fluctuation of market power prices. Following is an updated summary of the amount of the Non-Utility Nuclear business' output that is sold forward as of September 30, 2008 under physical or financial contracts (2008 represents the remaining quarter of the year):

   

2008

 

2009

 

2010

 

2011

 

2012

Non-Utility Nuclear :

                   

Percent of planned energy output sold forward:

                   
 

Unit-contingent

 

53%

 

48%

 

31%

 

29%

 

18%

 

Unit-contingent with availability guarantees (1)

 

35%

 

35%

 

28%

 

14%

 

7%

 

Firm LD

 

4%

 

0%

 

0%

 

0%

 

0%

 

Total

 

92%

 

83%

 

59%

 

43%

 

25%

Planned energy output (TWh)

 

10

 

41

 

40

 

41

 

41

Average contracted price per MWh (2)

 

$53

 

$61

 

$58

 

$55

 

$54

(1)

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

(2)

The Vermont Yankee acquisition included a 10-year PPA under which the former owners will buy most of the power produced by the plant, which is through the expiration in 2012 of the current operating license for the plant. The PPA includes an adjustment clause under which the prices specified in the PPA will be adjusted downward monthly, beginning in November 2005, if power market prices drop below PPA prices, which has not happened thus far and is not expected in the foreseeable future.

24

Entergy's Non-Utility Nuclear business' purchase of the FitzPatrick and Indian Point 3 plants from NYPA included value sharing agreements with NYPA. In October 2007, NYPA and the subsidiaries that own the FitzPatrick and Indian Point 3 plants amended and restated the value sharing agreements to clarify and amend certain provisions of the original terms. Under the amended value sharing agreements, Entergy's Non-Utility Nuclear business agreed to make annual payments to NYPA based on the generation output of the Indian Point 3 and FitzPatrick plants from January 2007 through December 2014. Entergy's Non-Utility Nuclear business will pay NYPA $6.59 per MWh for power sold from Indian Point 3, up to an annual cap of $48 million, and $3.91 per MWh for power sold from FitzPatrick, up to an annual cap of $24 million. The annual payment for each year is due by January 15 of the following year. In August 2008, Non-Utility Nuclear entered into a resolution of a dispute with NYPA over the applicability of the value sharing agreements to its FitzPatrick and Indian Point 3 nuclear power plants after the planned spin-off of the Non-Utility Nuclear business. Under the resolution, Non-Utility Nuclear agreed not to treat the separation as a "Cessation Event" that would terminate its obligation to make the payments under the value sharing agreements. As a result, after the spin-off transaction, Non-Utility Nuclear will continue to be obligated to make payments to NYPA under the amended and restated value sharing agreements.

Some of the agreements to sell the power produced by Entergy's Non-Utility Nuclear power plants contain provisions that require an Entergy subsidiary to provide collateral to secure its obligations under the agreements. The Entergy subsidiary is required to provide collateral based upon the difference between the current market and contracted power prices in the regions where Non-Utility Nuclear sells power. The primary form of collateral to satisfy these requirements is an Entergy Corporation guaranty.  Cash and letters of credit are also acceptable forms of collateral.  At September 30, 2008, based on power prices at that time, Entergy had in place as collateral $631 million of Entergy Corporation guarantees for wholesale transactions, including $60 million of guarantees that support letters of credit and $11 million of cash collateral. The assurance requirement associated with Non-Utility Nuclear is estimated to increase by an amount of up to $217 million if gas prices increase $1 per MMBtu in both the short- and long-term markets. In the event of a decrease in Entergy Corporation's credit rating to below investment grade, Entergy will be required to replace Entergy Corporation guarantees with cash or letters of credit under some of the agreements.

For the planned energy output under contract through 2012, 56% of the planned energy output is under contract with counterparties with public investment grade credit ratings; 28% is with counterparties with public non-investment grade credit ratings, primarily Consumers Energy, the BB+ rated company from which Entergy purchased the Palisades power plant and entered into a long-term fixed-price purchased power agreement; and 16% is with load-serving entities without public credit ratings.

In addition to selling the power produced by its plants, the Non-Utility Nuclear business sells installed capacity to load-serving distribution companies in order for those companies to meet requirements placed on them by the ISO in their area. Following is a summary of the amount of the Non-Utility Nuclear business' installed capacity that is currently sold forward, and the blended amount of the Non-Utility Nuclear business' planned generation output and installed capacity that is currently sold forward as of September 30, 2008 (2008 represents the remaining quarter of the year):

   

2008

 

2009

 

2010

 

2011

 

2012

Non-Utility Nuclear :

                   

Percent of capacity sold forward:

                   
 

Bundled capacity and energy contracts

 

27%

 

27%

 

26%

 

27%

 

19%

 

Capacity contracts

 

60%

 

45%

 

31%

 

15%

 

2%

 

Total

 

87%

 

72%

 

57%

 

42%

 

21%

Planned net MW in operation

 

4,998

 

4,998

 

4,998

 

4,998

 

4,998

Average capacity contract price per kW per month

 

$2.0

 

$2.1

 

$3.4

 

$3.7

 

$3.5

Blended Capacity and Energy (based on revenues)

                   

% of planned generation and capacity sold forward

 

89%

 

80%

 

53%

 

35%

 

18%

Average contract revenue per MWh

 

$55

 

$62

 

$61

 

$57

 

$54

25

Critical Accounting Estimates

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

Qualified Pension and Other Postretirement Benefits

Costs and Funding

As discussed in the Form 10-K, the intent of the Pension Protection Act of 2006 is to require companies to fund 100% of their pension liability; and then for companies to fund, on a going-forward basis, an amount generally estimated to be the amount that the pension liability increases each year due to an additional year of service by the employees eligible for pension benefits. The legislation requires that funding shortfalls be eliminated by companies over a seven-year period, beginning in 2008. The Pension Protection Act also extended the provisions of the Pension Funding Equity Act that would have expired in 2006 had the Pension Protection Act not been enacted, which increased the allowed discount rate used to calculate the pension funding liability.

The recent decline in stock market prices may affect Entergy's planned levels of contributions.  Minimum required funding calculations as determined under Pension Protection Act guidance are performed annually as of January 1 of each year and are based on measurements of the market-related values of assets and funding liabilities as measured at that date.  An excess of the funding liability over the market-related value of assets, as determined under the Pension Protection Act, would result in a funding shortfall which, under the Pension Protection Act, must be funded over a seven-year rolling period.  Entergy's minimum required contributions for the 2009 plan year are generally payable in installments throughout 2009 and 2010 and will be based on the funding calculations as of January 1, 2009.  The final date at which 2009 plan year contributions may be made is September 15, 2010.  Absent a significant recovery in stock market prices by January 1, it is likely that the minimum required contributions for the 2009 plan year, payable in 2009 or 2010, will increase although the level of increase or timing of that increase cannot be determined until the January 1, 2009 valuation is performed.  If the required discount rate to calculate the funding liabilities  increases , it would result in a decrease in the liability, which would somewhat offset the increase in the level of the minimum required contributions caused by the decline in the market related values of assets. Entergy does not anticipate any significant additional pension funding contributions in 2008, and contributions for the 2008 plan year that remain to be paid in 2009 are not expected to increase significantly as a result of the current market conditions.

New Accounting Pronouncements

In March 2008 the FASB issued Statement of Financial Accounting Standards No. 161 "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which requires enhanced disclosures about an entity's derivative and hedging activities. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

 

26

 

ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
                 
    Three Months Ended   Nine Months Ended
    2008   2007   2008   2007
   

  (In Thousands, Except Share Data)

                 
OPERATING REVENUES                
Electric   $3,209,000    $2,646,546    $7,779,450    $6,952,648 
Natural gas   41,981    30,154    185,361    158,014 
Competitive businesses   712,903    612,387    2,128,077    1,641,836 
TOTAL   3,963,884    3,289,087    10,092,888    8,752,498 
                 
OPERATING EXPENSES                
Operating and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   1,270,160    809,283    2,537,498    2,192,296 
  Purchased power   764,122    520,622    2,132,967    1,565,861 
  Nuclear refueling outage expenses   58,079    44,387    165,177    131,977 
  Other operation and maintenance   636,989    667,376    1,958,566    1,871,424 
Decommissioning   47,515    43,597    140,327    123,507 
Taxes other than income taxes   140,819    129,123    375,332    368,153 
Depreciation and amortization   263,656    239,064    756,617    710,127 
Other regulatory charges - net   30,452    25,303    99,970    62,187 
TOTAL   3,211,792    2,478,755    8,166,454    7,025,532 
                 
OPERATING INCOME   752,092    810,332    1,926,434    1,726,966 
                 
OTHER INCOME                
Allowance for equity funds used during construction   10,411    9,367    28,782    34,084 
Interest and dividend income   30,400    63,754    108,080    174,811 
Equity in earnings (loss) of unconsolidated equity affiliates   1,459    1,432    (2,042)   3,533 
Miscellaneous - net   5,200    (6,103)   (2,439)   (17,881)
TOTAL   47,470    68,450    132,381    194,547 
                 
INTEREST AND OTHER CHARGES                
Interest on long-term debt   128,746    133,165    371,793    380,321 
Other interest - net   33,229    52,503    93,795    118,270 
Allowance for borrowed funds used during construction   (5,939)   (5,260)   (15,992)   (20,175)
Preferred dividend requirements and other   4,998    6,375    14,971    18,784 
TOTAL   161,034    186,783    464,567    497,200 
                 
INCOME BEFORE INCOME TAXES   638,528    691,999    1,594,248    1,424,313 
                 
Income taxes   168,239    230,840    544,256    483,357 
                 
CONSOLIDATED NET INCOME   $470,289    $461,159    $1,049,992    $940,956 
                 
                 
Earnings per average common share:                
  Basic   $2.47    $2.37    $5.48    $4.77 
  Diluted   $2.41    $2.30    $5.33    $4.63 
Dividends declared per common share   $0.75    $0.75    $2.25    $1.83 
                 
Basic average number of common shares outstanding   190,379,009    194,864,359    191,444,611    197,443,652 
Diluted average number of common shares outstanding   194,960,830    200,532,942    197,064,629    203,362,110 
                 
See Notes to Financial Statements.                

27

 

ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
    2008   2007
    (In Thousands)
   
OPERATING ACTIVITIES        
Consolidated net income   $1,049,992    $940,956 
Adjustments to reconcile consolidated net income to net cash flow        
provided by operating activities:        
  Reserve for regulatory adjustments   (1,861)   (18,337)
  Other regulatory charges - net   99,970    62,187 
  Depreciation, amortization, and decommissioning   896,945    833,634 
  Deferred income taxes, investment tax credits, and non-current taxes accrued   561,704    510,435 
  Equity in earnings of unconsolidated equity affiliates - net of dividends   2,042    (3,533)
  Changes in working capital:        
    Receivables   (265,349)   (317,454)
    Fuel inventory   (19,881)   390 
    Accounts payable   126,665    (155,736)
    Taxes accrued     (176,790)
    Interest accrued   (8,152)   8,180 
    Deferred fuel   (395,618)   (89,558)
    Other working capital accounts   (88,417)   (53,977)
  Provision for estimated losses and reserves   230,834    24,753 
  Changes in other regulatory assets   941,625    124,102 
  Other   (437,685)   (62,500)
Net cash flow provided by operating activities   2,692,814    1,626,752 
         
INVESTING ACTIVITIES        
Construction/capital expenditures   (1,455,657)   (1,083,090)
Allowance for equity funds used during construction   28,782    34,084 
Nuclear fuel purchases   (327,606)   (272,137)
Proceeds from sale/leaseback of nuclear fuel   250,447    128,292 
Proceeds from sale of assets and businesses   30,725    13,063 
Payment for purchase of plant   (266,823)   (336,211)
Insurance proceeds received for property damages   130,120    82,648 
Changes in transition charge account   (2,151)  
NYPA value sharing payment   (72,000)  
Decrease (increase) in other investments   (227,976)   71,770 
Proceeds from nuclear decommissioning trust fund sales   1,228,760    1,299,685 
Investment in nuclear decommissioning trust funds   (1,259,288)   (1,388,806)
Net cash flow used in investing activities   (1,942,667)   (1,450,702)
         
See Notes to Financial Statements.        
         

2

 
         
ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
    2008   2007
    (In Thousands)
     
FINANCING ACTIVITIES        
Proceeds from the issuance of:        
  Long-term debt   3,433,184    2,437,163 
  Common stock and treasury stock   35,841    59,175 
Retirement of long-term debt   (2,004,118)   (889,813)
Repurchase of common stock   (468,079)   (1,024,185)
Redemption of preferred stock     (3,450)
Changes in credit line borrowings - net     60,000 
Dividends paid:        
  Common stock   (431,032)   (361,574)
  Preferred stock   (15,028)   (19,532)
Net cash flow provided by financing activities   550,768    257,784 
         
Effect of exchange rates on cash and cash equivalents   1,245    (394)
         
Net increase in cash and cash equivalents   1,302,160    433,440 
         
Cash and cash equivalents at beginning of period   1,253,728    1,016,152 
         
Effect of the reconsolidation of Entergy New Orleans on cash and cash equivalents     17,093 
         
Cash and cash equivalents at end of period   $2,555,888    $1,466,685 
         
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
  Cash paid during the period for:        
    Interest - net of amount capitalized   $455,791    $449,038 
    Income taxes   $127,953    $349,058 
         
See Notes to Financial Statements.        
         

29

 

ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2008 and December 31, 2007
(Unaudited)
    2008   2007
    (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents:        
  Cash   $132,169    $126,652 
  Temporary cash investments - at cost,        
   which approximates market   2,423,719    1,127,076 
     Total cash and cash equivalents   2,555,888    1,253,728 
Securitization recovery trust account   21,424    19,273 
Accounts receivable:        
  Customer   939,028    610,724 
  Allowance for doubtful accounts   (23,025)   (25,789)
  Other   249,808    303,060 
  Accrued unbilled revenues   275,605    288,076 
     Total accounts receivable   1,441,416    1,176,071 
Deferred fuel costs   342,924   
Accumulated deferred income taxes   -     38,117 
Fuel inventory - at average cost   228,465    208,584 
Materials and supplies - at average cost   755,220    692,376 
Deferred nuclear refueling outage costs   187,394    172,936 
System agreement cost equalization   108,048    268,000 
Prepayments and other   246,185    129,162 
TOTAL   5,886,964    3,958,247 
         
OTHER PROPERTY AND INVESTMENTS        
Investment in affiliates - at equity   78,116    78,992 
Decommissioning trust funds   3,002,792    3,307,636 
Non-utility property - at cost (less accumulated depreciation)   232,213    220,204 
Other   309,587    82,563 
TOTAL   3,622,708    3,689,395 
         
PROPERTY, PLANT AND EQUIPMENT        
Electric   34,196,682    32,959,022 
Property under capital lease   738,129    740,095 
Natural gas   301,535    300,767 
Construction work in progress   1,453,227    1,054,833 
Nuclear fuel under capital lease   450,961    361,502 
Nuclear fuel   652,986    665,620 
TOTAL PROPERTY, PLANT AND EQUIPMENT   37,793,520    36,081,839 
Less - accumulated depreciation and amortization   15,741,373    15,107,569 
PROPERTY, PLANT AND EQUIPMENT - NET   22,052,147    20,974,270 
         
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  SFAS 109 regulatory asset - net   604,553    595,743 
  Other regulatory assets   2,830,088    2,971,399 
  Deferred fuel costs   168,122    168,122 
Goodwill   377,172    377,172 
Other   916,210    908,654 
TOTAL   4,896,145    5,021,090 
         
TOTAL ASSETS   $36,457,964    $33,643,002 
         
See Notes to Financial Statements.        
 

30

 
 
ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2008 and December 31, 2007
(Unaudited)
    2008   2007
    (In Thousands)
         
CURRENT LIABILITIES        
Currently maturing long-term debt   $217,563    $996,757 
Notes payable   25,034    25,037 
Accounts payable   1,919,113    1,031,300 
Customer deposits   302,116    291,171 
Accumulated deferred income taxes   42,418    -  
Interest accrued   179,809    187,968 
Deferred fuel costs   2,254    54,947 
Obligations under capital leases   151,721    152,615 
Pension and other postretirement liabilities   35,765    34,795 
System agreement cost equalization   149,397    268,000 
Other   294,167    214,164 
TOTAL   3,319,357    3,256,754 
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   6,764,567    6,379,679 
Accumulated deferred investment tax credits   330,058    343,539 
Obligations under capital leases   308,826    220,438 
Other regulatory liabilities   389,721    490,323 
Decommissioning and asset retirement cost liabilities   2,633,331    2,489,061 
Accumulated provisions   365,427    133,406 
Pension and other postretirement liabilities   1,138,677    1,361,326 
Long-term debt   11,952,591    9,728,135 
Other   967,463    1,066,508 
TOTAL   24,850,661    22,212,415 
         
Commitments and Contingencies        
         
Preferred stock without sinking fund   311,023    311,162 
         
SHAREHOLDERS' EQUITY        
Common stock, $.01 par value, authorized 500,000,000        
 shares; issued 248,174,087 shares in 2008 and in 2007   2,482    2,482 
Paid-in capital   4,864,968    4,850,769 
Retained earnings   7,354,147    6,735,965 
Accumulated other comprehensive income (loss)   (111,338)   8,320 
Less - treasury stock, at cost (58,319,245 shares in 2008 and        
 55,053,847 shares in 2007)   4,133,336    3,734,865 
TOTAL   7,976,923    7,862,671 
         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $36,457,964    $33,643,002 
         
See Notes to Financial Statements.        

31

 

ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME, AND PAID-IN CAPITAL
For the Three Months Ended September 30, 2008 and 2007
(Unaudited)
                     
        2008   2007
        (In Thousands)
                     
RETAINED EARNINGS                    
                     
Retained Earnings - Beginning of period       $7,027,630        $6,372,687     
                     
  Add: Consolidated net income       470,286    $470,286    461,159    $461,159
                     
  Deduct:                    
    Dividends declared on common stock       143,769        145,891     
                     
Retained Earnings - End of period       $7,354,147        $6,687,955     
                     
                     
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                    
Balance at beginning of period:                    
  Accumulated derivative instrument fair value changes       ($476,586)       ($59,562)    
                     
  Pension and other postretirement liabilities       (109,034)       (105,770)    
                     
  Net unrealized investment gains       67,838        116,897     
                     
  Foreign currency translation       6,824        6,666     
     Total       (510,958)       (41,769)    
                     
Net derivative instrument fair value changes                    
 arising during the period (net of tax expense of $245,497 and $24,296)       439,852    439,852    42,201    42,201
                     
Pension and other postretirement liabilities (net of tax expense (benefit) of ($1,317) and $682)       (547)   (547)   69    69
                     
Net unrealized investment gains (losses) (net of tax expense (benefit) of ($33,716) and $24,586)       (38,009)   (38,009)   7,541    7,541
                     
Foreign currency translation (net of tax expense (benefit) of ($902) and $82)       (1,676)   (1,676)   152    152
                     
Balance at end of period:                    
  Accumulated derivative instrument fair value changes       (36,734)       (17,361)    
                     
  Pension and other postretirement liabilities       (109,581)       (105,701)    
                     
  Net unrealized investment gains       29,829        124,438     
                     
  Foreign currency translation       5,148        6,818     
     Total       ($111,338)       $8,194     
Comprehensive Income (Loss)           $869,906        $511,122
                     
PAID-IN CAPITAL                    
                     
Paid-in Capital - Beginning of period       $4,860,481        $4,841,059     
                     
  Add:                    
    Common stock issuances related to stock plans       4,487        5,775     
                     
Paid-in Capital - End of period       $4,864,968        $4,846,834     
                     
                     
See Notes to Financial Statements.                    
                     

32

 

ENTERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE INCOME, AND PAID-IN CAPITAL
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
                     
        2008   2007
        (In Thousands)
                     
RETAINED EARNINGS                    
                     
Retained Earnings - Beginning of period       $6,735,965        $6,113,042     
                     
  Add:                    
    Consolidated net income       1,049,992    $1,049,992    940,956    $940,956
    Adjustment related to FIN 48 implementation             (4,600)    
      Total       1,049,992        936,356     
                     
  Deduct:                    
    Dividends declared on common stock       431,810        361,443     
                     
Retained Earnings - End of period       $7,354,147        $6,687,955     
                     
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                    
Balance at beginning of period:                    
  Accumulated derivative instrument fair value changes       ($12,540)       ($105,578)    
                     
  Pension and other postretirement liabilities       (107,145)       (105,909)    
                     
  Net unrealized investment gains       121,611        104,551     
                     
  Foreign currency translation       6,394        6,424     
     Total       8,320         (100,512)    
                     
                     
Net derivative instrument fair value changes                    
 arising during the period (net of tax expense (benefit) of ($14,377) and $54,472)       (24,194)   (24,194)   88,217    88,217
                     
Pension and other postretirement liabilities (net of tax expense of $3,008 and $2,048)       (2,436)   (2,436)   208    208
                     
Net unrealized investment gains (losses) (net of tax expense (benefit) of ($68,247) and $10,968)       (91,782)   (91,782)   19,887    19,887
                     
Foreign currency translation (net of tax expense (benefit) of ($671) and $442)       (1,246)   (1,246)   394    394
                     
Balance at end of period:                    
  Accumulated derivative instrument fair value changes       (36,734)       (17,361)    
                     
  Pension and other postretirement liabilities       (109,581)       (105,701)    
                     
  Net unrealized investment gains       29,829        124,438     
                     
  Foreign currency translation       5,148        6,818     
     Total       ($111,338)       $8,194     
Comprehensive Income           $930,334        $1,049,662
                     
PAID-IN CAPITAL                    
                     
Paid-in Capital - Beginning of period       $4,850,769        $4,827,265     
                     
  Add (Deduct):                    
    Common stock issuances related to stock plans       14,199        19,569     
                     
                     
Paid-in Capital - End of period       $4,864,968        $4,846,834     
                     
                     
See Notes to Financial Statements.                    
                     
                     

 

33

 

ENTERGY CORPORATION AND SUBSIDIARIES
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Utility Electric Operating Revenues:                
  Residential   $1,295     $1,076   $219     20  
  Commercial   867     684   183     27  
  Industrial   897     646   251     39  
  Governmental   74     60   14     23  
     Total retail   3,133     2,466   667     27  
  Sales for resale   91     106   (15)   (14)
  Other   (15)   75   (90)   (120)
     Total   $3,209     $2,647   $562     21  
                 
Utility Billed Electric Energy                
 Sales (GWh):                 
  Residential   10,671     11,128   (457)   (4)
  Commercial   7,997     8,111   (114)   (1)
  Industrial   10,110     10,120   (10)   -  
  Governmental   649     637   12     2  
     Total retail   29,427     29,996   (569)   (2)
  Sales for resale   1,431     1,413   18     1  
     Total   30,858     31,409   (551)   (2)
                 
Non-Utility Nuclear:                
Operating Revenues   $654     $554   $100     18  
Billed Electric Energy Sales (GWh)   10,316     10,105   211     2  
                 
                 
    Nine Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Utility Electric Operating Revenues:                
  Residential   $2,833     $2,512   $321     13  
  Commercial   2,076     1,816   260     14  
  Industrial   2,241     1,920   321     17  
  Governmental   186     163   23     14  
     Total retail   7,336     6,411   925     14  
  Sales for resale   277     295   (18)   (6)
  Other   166     247   (81)   (33)
     Total   $7,779     $6,953   $826     12  
                 
Utility Billed Electric Energy                
 Sales (GWh):                
  Residential   26,055     25,905   150     1  
  Commercial   20,922     20,708   214     1  
  Industrial   29,217     29,256   (39)   -  
  Governmental   1,805     1,749   56     3  
     Total retail   77,999     77,618   381     -  
  Sales for resale   4,160     4,479   (319)   (7)
     Total   82,159     82,097   62     -  
                 
Non-Utility Nuclear:                
Operating Revenues   $1,945     $1,484   $461     31  
Billed Electric Energy Sales (GWh)   31,221     27,315   3,906     14  
                 
                 

34

 

 

ENTERGY CORPORATION AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 1. COMMITMENTS AND CONTINGENCIES

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 herein. Entergy discusses regulatory proceedings in Note 2 to the financial statements in the Form 10-K, the Entergy Texas Form 10, and herein and discusses tax proceedings in Note 3 to the financial statements in the Form 10-K and the Entergy Texas Form 10, and in Note 10 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 and Note 6 to the financial statements in the Entergy Texas Form 10 for information regarding Entergy's non-nuclear property insurance program. In April 2008, Entergy received from its primary insurer $53.6 million of additional insurance proceeds on its Hurricane Katrina claim, and almost all of the April 2008 proceeds were allocated to Entergy New Orleans. In the third quarter 2008, Entergy received from its primary insurer $17.5 million of additional insurance proceeds on its Hurricane Katrina and Hurricane Rita claims, which were allocated as follows: $1.8 million to Entergy Gulf States Louisiana, $2.2 million to Entergy Louisiana, $9.7 million to Entergy New Orleans, and $3.3 million to Entergy Texas, with the remainder allocated in smaller amounts to other Entergy subsidiaries.

Entergy has settled its lawsuit against one of its excess insurers on the Hurricane Katrina claim, and in July 2008 received $71.5 million in proceeds on the claim. The July 2008 proceeds were allocated as follows: $2.0 million to Entergy Arkansas, $3.0 million to Entergy Gulf States Louisiana, $12.4 million to Entergy Louisiana, $1.8 million to Entergy Mississippi, and $48.4 million to Entergy New Orleans, with the remainder allocated in smaller amounts to other Entergy subsidiaries.

NYPA Value Sharing Agreements

Entergy's Non-Utility Nuclear business' purchase of the FitzPatrick and Indian Point 3 plants from NYPA included value sharing agreements with NYPA. In October 2007, NYPA and the subsidiaries that own the FitzPatrick and Indian Point 3 plants amended and restated the value sharing agreements to clarify and amend certain provisions of the original terms. Under the amended value sharing agreements, Entergy's Non-Utility Nuclear business agreed to make annual payments to NYPA based on the generation output of the Indian Point 3 and FitzPatrick plants from January 2007 through December 2014. Entergy's Non-Utility Nuclear business will pay NYPA $6.59 per MWh for power sold from Indian Point 3, up to an annual cap of $48 million, and $3.91 per MWh for power sold from FitzPatrick, up to an annual cap of $24 million. The annual payment for each year is due by January 15 of the following year. In August 2008, Non-Utility Nuclear entered into a resolution of a dispute with NYPA over the applicability of the value sharing agreements to its FitzPatrick and Indian Point 3 nuclear power plants after the planned spin-off of the Non-Utility Nuclear business. Under the resolution, Non-Utility Nuclear agreed not to treat the separation as a

 

35

 

"Cessation Event" that would terminate its obligation to make the payments under the value sharing agreements. As a result, after the spin-off transaction, Non-Utility

Nuclear will continue to be obligated to make payments to NYPA under the amended and restated value sharing agreements.

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 suits and proceedings and deny liability to the claimants.

Asbestos and Hazardous Material Litigation (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 and hazardous material litigation involving Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, and Entergy New Orleans and see Note 6 to the financial statements in the Entergy Texas Form 10 for information regarding asbestos and hazardous material litigation involving Entergy Texas.

 

NOTE 2. RATE AND REGULATORY MATTERS

Regulatory Assets

Other Regulatory Assets

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

Hurricane Gustav and Hurricane Ike

As a result of Hurricane Gustav and Hurricane Ike, which caused catastrophic damage to portions of Entergy's service territories in Louisiana and Texas, and to a lesser extent in Arkansas and Mississippi, 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 $550 million and construction work in progress of approximately $430 million. Entergy recorded the regulatory assets in accordance with its accounting policies and based on the historic treatment of such costs in its service territories (except for Entergy Arkansas), 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. The construction work in progress that has not been paid as of September 30, 2008, approximately $117 million, including $47 million for Entergy Gulf States Louisiana, $11 million for Entergy Louisiana, $13 million for Entergy New Orleans, and $44 million for Entergy Texas, represents non-cash investing activity not reported in the statement of cash flows.

Fuel and purchased power cost recovery

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

 

36

 

Entergy Arkansas

Production Cost Allocation Rider

In its June 2007 decision on Entergy Arkansas' August 2006 rate filing, the APSC approved a production cost allocation rider for recovery from customers of the retail portion of the costs allocated to Entergy Arkansas as a result of the System Agreement proceedings, but set a termination date of December 31, 2008 for the rider. In December 2007, the APSC issued a subsequent order stating the production cost allocation rider will remain in effect, and any future termination of the rider will be subject to eighteen months advance notice by the APSC, which would occur following notice and hearing. On March 18, 2008, the Arkansas attorney general and the AEEC filed a notice of appeal of the December 2007 APSC order. The appellants' and appellees' briefs have been filed with the court of appeals.

In June 2008, Entergy Arkansas filed with the APSC its annual redetermination of the production cost allocation rider. The redetermination resulted in a slight increase in the rates beginning with the first billing cycle of July 2008.

See Entergy Corporation and Subsidiaries' " MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends - Federal Regulation - System Agreement Proceedings " in the Form 10-K and herein for a discussion of the System Agreement proceedings.

Energy Cost Recovery Rider

Entergy Arkansas' retail rates include an energy cost recovery rider. In December 2007, the APSC issued an order stating that Entergy Arkansas' energy cost recovery rider will remain in effect, and any future termination of the rider will be subject to eighteen months advance notice by the APSC, which would occur following notice and hearing. On March 18, 2008, the Arkansas attorney general and the AEEC filed a notice of appeal of the December 2007 APSC order. The appellants' and appellees' briefs have been filed with the court of appeals.

In March 2008, Entergy Arkansas filed with the APSC its annual energy cost rate for the period April 2008 through March 2009. The filed energy cost rate increased from $0.01179/kWh to $0.01869/kWh. The increase was caused by the following: 1) all three of the nuclear power plants from which Entergy Arkansas obtains power, ANO 1 and 2 and Grand Gulf, will have refueling outages in 2008, and the energy cost rate is adjusted to account for the replacement power costs that will be incurred while these units are down; 2) Entergy Arkansas has a deferred fuel cost balance from under-recovered fuel costs at December 31, 2007; and 3) fuel and purchased power prices have increased.

In August 2008, as provided for by its energy cost recovery rider, Entergy Arkansas filed with the APSC an interim revision to its energy cost rate. The revised energy cost rate is an increase from $0.01869/kWh to $0.02456/kWh. The increase was caused by the continued increase in natural gas and purchased power prices from the levels used in setting the rate in March 2008. The interim revised energy cost rate went into effect for the first billing cycle of September 2008. In October 2008 the APSC issued an order that requires Entergy Arkansas to file for investigative purposes only monthly updates of its actual and projected over/under-recovery of fuel and purchased power costs. The APSC order also states that the interim revised energy cost rate will remain in effect pending further investigation and order of the APSC, and the APSC reserves the right after notice and hearing to prospectively modify the energy cost rate.

APSC Investigations

See the Form 10-K for a discussion of the APSC's investigation of Entergy Arkansas' energy cost recovery practices. In January 2007, the APSC issued an order in its review of Entergy Arkansas' September 2005 interim rate. The APSC found that Entergy Arkansas failed to maintain an adequate coal inventory level going into the summer of 2005 and that Entergy Arkansas should be responsible for any incremental

 

37

 

energy costs resulting from two outages caused by employee and contractor error. The coal plant generation curtailments were caused by railroad delivery problems and Entergy has since resolved litigation with the railroad regarding the delivery problems. The APSC staff was directed to perform an analysis with Entergy Arkansas' assistance to determine the additional fuel and purchased energy costs associated with these findings and file the analysis within 60 days of the order. After a final determination of the costs is made by the APSC, Entergy Arkansas would be directed to refund that amount with interest to its customers as a credit on the energy cost recovery rider. The order also stated that the APSC would address any additional issues regarding the energy cost recovery rider in Entergy Arkansas' rate case filed in August 2006. Entergy Arkansas requested rehearing of the order. In March 2007, in order to allow further consideration by the APSC, the APSC granted Entergy Arkansas' petition for rehearing and for stay of the APSC order. In October 2008, Entergy Arkansas filed a motion to lift the stay and asks for rescission of the APSC's January 2007 order in light of the arguments advanced in Entergy Arkansas' rehearing petition and because the value for the Entergy Arkansas' customers obtained through the resolved railroad litigation is significantly greater than the incremental cost of actions identified by the APSC as imprudent. The APSC staff, the AEEC, and the Arkansas attorney general support the lifting of the stay but request additional proceedings. The APSC staff submitted a proposed procedural schedule that calls for a hearing in April 2009.

Entergy Mississippi

In May 2008, Entergy Mississippi filed its quarterly fuel adjustment factor for the third quarter 2008, effective beginning with July 2008 bills. The third quarter 2008 factor is $0.038861/kWh, which is an increase from the $0.010878/kWh factor for the second quarter 2008. The increase is due to a significant increase in fuel prices, and Entergy Mississippi has gone from an over-recovery to an under-recovery position during 2008. After a decline in fuel prices, Entergy Mississippi filed on August 13, 2008 a mid-quarter revision to its fuel adjustment factor. The revised factor is $0.024058/kWh, effective for September 2008 bills. On August 15, 2008, Entergy Mississippi filed its quarterly fuel adjustment factor for the fourth quarter 2008, effective beginning with October 2008 bills. Under an agreement with the Mississippi Public Utilities staff, approved by the MPSC, the fourth quarter 2008 rate will be set at the September 2008 rate of $0.024058/kWh.

In July 2008, the MPSC began a proceeding to investigate the fuel procurement practices and fuel adjustment schedules of the Mississippi utility companies, including Entergy Mississippi. A two-day public hearing was held in July 2008, and after a recess during which the MPSC reviewed information, the hearing resumed on August 5, 2008 for additional testimony by an expert witness retained by the MPSC. The expert witness presented testimony regarding a review of the utilities' fuel adjustment clauses. The MPSC stated that the goal of the proceeding is fact-finding so that the MPSC may decide whether to amend the current fuel cost recovery process.

The Mississippi attorney general has also issued a civil investigative demand directed at Entergy Corporation, Entergy Mississippi, and Entergy Services regarding information related to Entergy Mississippi's fuel adjustment clause. The Mississippi attorney general states that he is investigating whether Entergy has violated Mississippi's consumer protection laws. Entergy opposes the civil investigative demand of the Mississippi attorney general on several grounds, including that the proper jurisdiction for the Mississippi attorney general's request for information is through the MPSC and the FERC. On October 29, 2008, the MPSC issued a subpoena to Entergy Mississippi and Entergy Services requesting documents associated with fuel adjustment clause litigation in Louisiana involving Entergy Louisiana and Entergy New Orleans.

Entergy Texas

In January 2008, Entergy Texas made a compliance filing with the PUCT describing how its 2007 Rough Production Cost Equalization receipts under the System Agreement were allocated between Entergy Gulf States, Inc.'s Texas and Louisiana jurisdictions. Several parties have intervened in the proceeding. A hearing was held at the end of July 2008, and in October 2008 the ALJ issued a proposal for decision recommending an additional $18.6 million allocation to Texas retail customers. Entergy Texas will file exceptions to the ALJ's proposal for decision. Because the PUCT allocation to Texas retail customers is inconsistent with the LPSC allocation to Louisiana retail customers, adoption of the proposal for decision by the PUCT would result in trapped costs between the Texas and Louisiana jurisdictions.

 

38

 

Entergy will seek relief from the FERC or other appropriate relief if that occurs. The PUCT will consider final action on the proposal for decision and exceptions thereto at a future meeting.

In October 2007, Entergy Texas filed a request with the PUCT to refund $45.6 million, including interest, of fuel cost recovery over-collections through September 2007. In January 2008, Entergy Texas filed with the PUCT a stipulation and settlement agreement among the parties that updated the over-collection balance through November 2007 and establishes a refund amount, including interest, of $71 million. The PUCT approved the agreement in February 2008. The refund was made over a two-month period beginning February 2008, but was reduced by $10.3 million of under-recovered incremental purchased capacity costs. Amounts refunded through the interim fuel refund are subject to final reconciliation in a future fuel reconciliation proceeding.

Storm Cost Recovery Filings

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

Entergy Gulf States Louisiana and Entergy Louisiana - Storm Cost Financings

In March 2008, Entergy Gulf States Louisiana, Entergy Louisiana, and the Louisiana Utilities Restoration Corporation (LURC), an instrumentality of the State of Louisiana, filed at the LPSC an application requesting that the LPSC grant financing orders authorizing the financing of Entergy Gulf States Louisiana and Entergy Louisiana storm costs, storm reserves, and issuance costs pursuant to Act 55 of the Louisiana Legislature (Act 55 financings). The Act 55 financings are expected to produce additional customer benefits as compared to Act 64 traditional securitization.  Entergy Gulf States Louisiana and Entergy Louisiana also filed an application requesting LPSC approval for ancillary issues including the mechanism to flow charges and savings to customers via a Storm Cost Offset rider.  On April 3, 2008, the Louisiana State Bond Commission granted preliminary approval for the Act 55 financings.  On April 8, 2008, the Louisiana Public Facilities Authority (LPFA), which is the issuer of the bonds pursuant to the Act 55 financings, approved requests for the Act 55 financings.  On April 10, 2008, Entergy Gulf States Louisiana and Entergy Louisiana and the LPSC Staff filed with the LPSC an uncontested stipulated settlement that includes Entergy Gulf States Louisiana and Entergy Louisiana's proposals under the Act 55 financings, which includes a commitment to pass on to customers a minimum of $10 million and $30 million of customer benefits, respectively, through prospective annual rate reductions of $2 million and $6 million for five years. On April 16, 2008, the LPSC approved the settlement and issued two financing orders and one ratemaking order intended to facilitate implementation of the Act 55 financings.  In May 2008, the Louisiana State Bond Commission granted final approval of the Act 55 financings.

On July 29, 2008, the LPFA issued $687.7 million in bonds under the aforementioned Act 55. From the $679 million of bond proceeds loaned by the LPFA to the LURC, the LURC deposited $152 million in a restricted escrow account as a storm damage reserve for Entergy Louisiana and transferred $527 million directly to Entergy Louisiana. From the bond proceeds received by Entergy Louisiana from the LURC, Entergy Louisiana invested $545 million, including $17.8 million that was withdrawn from the restricted escrow account as approved by the April 16, 2008 LPSC orders, in exchange for 5,449,861.85 Class A preferred, non-voting, membership interest units of Entergy Holdings Company LLC, a company wholly-owned and consolidated by Entergy, that carry a 10% annual distribution rate. Distributions are payable quarterly commencing on September 15, 2008 and have a liquidation price of $100 per unit. The preferred membership interests are callable at the option of Entergy Holdings Company LLC after ten years. The terms of the membership interests include certain financial covenants to which Entergy Holdings Company LLC is subject, including the requirement to maintain a net worth of at least $1 billion.

On August 26, 2008, the LPFA issued $278.4 million in bonds under the aforementioned Act 55. From the $274.7 million of bond proceeds loaned by the LPFA to the LURC, the LURC deposited $87 million in a restricted escrow account as a storm damage reserve for Entergy Gulf States Louisiana and transferred $187.7 million directly to Entergy Gulf States Louisiana. From the bond proceeds received by Entergy Gulf States Louisiana from the LURC, Entergy Gulf States Louisiana invested $189.4 million, including $1.7 million that was withdrawn from

 

39

 

the restricted escrow account as approved by the April 16, 2008 LPSC orders, in exchange for 1,893,918.39 Class A preferred, non-voting, membership interest units of Entergy Holdings Company LLC, a company wholly-owned and consolidated by Entergy, that carry a 10% annual distribution rate. Distributions are payable quarterly commencing on September 15, 2008 and have a liquidation price of $100 per unit. The preferred membership interests are callable at the option of Entergy Holdings Company LLC after ten years. The terms of the membership interests include certain financial covenants to which Entergy Holdings Company LLC is subject, including the requirement to maintain a net worth of at least $1 billion.

Entergy, Entergy Gulf States Louisiana, and Entergy Louisiana will not report the bonds on their balance sheets because the bonds are the obligation of the LPFA, and there is no recourse against Entergy, Entergy Gulf States Louisiana or Entergy Louisiana in the event of a bond default.

Retail Rate Proceedings

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

Filings with the APSC (Entergy Arkansas)

Retail Rates

See the Form 10-K for a discussion of the proceedings in Entergy Arkansas' August 2006 request for a change in base rates. Oral argument on Entergy Arkansas' appeal to the Arkansas Court of Appeals has been scheduled for November 19, 2008.

Ouachita Acquisition

Entergy Arkansas filed with the APSC in September 2007 for its approval of the Ouachita plant acquisition, including full cost recovery.  The APSC Staff and the Arkansas attorney general supported Entergy Arkansas' acquisition of the plant, but oppose the sale of one-third of the capacity and energy to Entergy Gulf States Louisiana.  The industrial group AEEC opposed Entergy Arkansas' purchase of the plant.  The Arkansas attorney general opposed recovery of the non-fuel costs of the plant through a separate rider, while the APSC Staff recommended revisions to the rider. In December 2007, the APSC issued an order approving recovery through a rider of the capacity costs associated with the interim tolling agreement, which was in effect until the APSC took action on the acquisition of the plant. A hearing before the APSC was held in April 2008 to address Entergy Arkansas' request for acquisition of the plant and concurrent cost recovery. In June 2008 the APSC approved Entergy Arkansas' acquisition of the Ouachita plant and approved recovery of the acquisition and ownership costs through a rate rider. The APSC also approved the planned sale of one-third of the capacity and energy to Entergy Gulf States Louisiana. The Arkansas attorney general, the AEEC, and Entergy Arkansas requests for rehearing of the APSC order were denied. Entergy Arkansas' request for rehearing concerned the 7.61% before-tax return on rate base approved by the APSC, which reflects significant sources of zero-cost capital already reflected in base rates. Entergy Arkansas had requested a 10.87% before-tax return on rate base reflecting the cost of the debt and equity capital resources available to finance the Ouachita plant acquisition.

On March 18, 2008 the Arkansas attorney general and the AEEC filed a notice of appeal of the December 2007 APSC order that approved recovery through a rider of the capacity costs associated with the interim tolling agreement. This order also rejected various annual earnings review proposals. The Arkansas attorney general and the AEEC filed their appeal briefs in October 2008, and the appellees' briefs, including Entergy Arkansas', are due November 12, 2008.

In August 2008 the AEEC also filed a complaint at the FERC seeking a review by the FERC of "Entergy Corporation's efforts" to acquire the Ouachita plant, alleging that the acquisition violates the System Agreement and the Federal Power Act and that the plant should be an "[Entergy Arkansas] only resource." The AEEC complaint also states that it seeks clarity on whether Entergy Arkansas' termination of its participation in the System Agreement will affect Entergy Arkansas' rights to the Ouachita facility. The APSC, LPSC, MPSC, and City

 

40

 

Council have intervened in the proceeding. Entergy filed in September 2008 its answer to the complaint and asked the FERC to dismiss the proceeding.

Entergy Arkansas purchased the Ouachita plant on September 30, 2008.

Storm Cost Recovery in Arkansas

In June 2008, together with other Arkansas utilities, Entergy Arkansas filed a joint application for approval of storm cost recovery accounting and a storm damage rider. To enable recovery of 2008 storm cost expenditures through the rider and storm reserve accounting, the applicants requested that the APSC establish a procedural schedule that would allow resolution of this proceeding no later than December 15, 2008. In light of a separate docket established by the APSC in September 2008 to consider "innovative approaches to utility regulation," including approaches to address "recovery of extraordinary storm damage restoration expenses," the utilities withdrew their joint application in October 2008.

The utilities noted in their withdrawal that the new APSC docket is unlikely to be concluded in 2008, and Entergy Arkansas has experienced extraordinary storm costs in 2008 and requires APSC action to address their effects. Therefore, on October 15, 2008, Entergy Arkansas filed a petition for an accounting order authorizing a regulatory asset and storm damage rider.  In the petition, Entergy Arkansas requests the deferral of $26 million in a regulatory asset that represents extraordinary storm restoration costs for the year 2008 that are in excess of the $14.4 million included in base rates. The regulatory asset would be recovered through a surcharge over a 12-month period beginning in January 2009. A public hearing has been set for December 5, 2008 to consider the petition.

Filings with the LPSC

Retail Rates - Electric

(Entergy Louisiana)

In May 2008, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2007 test year, seeking an $18.4 million rate increase, comprised of $12.6 million of recovery of incremental and deferred capacity costs and $5.8 million based on a cost of service revenue deficiency related to continued lost contribution to fixed costs associated with the loss of customers due to Hurricane Katrina. The filing includes two alternative versions of the calculated revenue requirement, one that reflects Entergy Louisiana's full request for recovery of the loss of fixed cost contribution and the other that reflects the anticipated rate implementation in September 2008, subject to refund, of only a portion of the full request, with the remainder deferred, until the lost fixed cost contribution issue is resolved. Under the first alternative, Entergy Louisiana's earned return on common equity was 9.44%, whereas under the other alternative, its earned return on common equity was 9.04%. The LPSC staff and intervenors issued their reports on Entergy Louisiana's filing on July 31, 2008 and, with minor exceptions, primarily raised proposed disallowance issues that were previously raised with regard to Entergy Louisiana's May 2007 filing and remain at issue in that proceeding. Entergy Louisiana disagrees with the majority of the proposed adjustments. In August 2008, Entergy Louisiana implemented a $43.9 million formula rate plan decrease to remove interim storm cost recovery and to reduce the storm damage accrual. Entergy Louisiana then implemented a $16.9 million formula rate plan increase, subject to refund, effective the first billing cycle in September 2008, comprised of $12.6 million of recovery of incremental and deferred capacity costs and $4.3 million based on a cost of service deficiency. A procedural schedule has not been established yet for further consideration of the issues raised regarding the formula rate plan filing.

In May 2007, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2006 test year, indicating a 7.6% earned return on common equity. That filing included Entergy Louisiana's request to recover $39.8 million in unrecovered fixed costs associated with the loss of customers that resulted from Hurricane Katrina, a request that was recently reduced to $31.7 million. In September 2007, Entergy Louisiana modified its formula rate plan filing to reflect its implementation of certain adjustments proposed by the LPSC Staff in its review of Entergy

 

41

 

Louisiana's original filing with which Entergy Louisiana agreed, and to reflect its implementation of an $18.4 million annual formula rate plan increase comprised of (1) a $23.8 million increase representing 60% of Entergy Louisiana's revenue deficiency, and (2) a $5.4 million decrease for reduced incremental and deferred capacity costs. The LPSC authorized Entergy Louisiana to defer for accounting purposes the difference between its $39.8 million claim, now at $31.7 million, for unrecovered fixed cost and 60% of the revenue deficiency to preserve Entergy Louisiana's right to pursue that claim in full during the formula rate plan proceeding. In October 2007, Entergy Louisiana implemented a $7.1 million formula rate plan decrease that was due primarily to the reclassification of certain franchise fees from base rates to collection via a line item on customer bills pursuant to an LPSC Order. The LPSC staff and intervenors have recommended disallowance of certain costs included in Entergy Louisiana's filing. Entergy Louisiana disagrees with the majority of the proposed disallowances and a hearing on the disputed issues was held in late-September/early-October 2008. Post-hearing briefing is scheduled to conclude in mid-December 2008.

In May 2006, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2005 test year. Entergy Louisiana modified the filing in August 2006 to reflect a 9.45% return on equity which is within the allowed bandwidth. The modified filing includes an increase of $24.2 million for interim recovery of storm costs from Hurricanes Katrina and Rita and a $119.2 million rate increase to recover LPSC-approved incremental deferred and ongoing capacity costs. The filing requested recovery of approximately $50 million for the amortization of capacity deferrals over a three-year period, including carrying charges, and approximately $70 million for ongoing capacity costs. The increase was implemented, subject to refund, with the first billing cycle of September 2006. Entergy Louisiana subsequently updated its formula rate plan rider to reflect adjustments proposed by the LPSC Staff with which it agrees. The adjusted return on equity of 9.56% remains within the allowed bandwidth. Ongoing and deferred incremental capacity costs were reduced to $118.7 million. The updated formula rate plan rider was implemented, subject to refund, with the first billing cycle of October 2006. An uncontested stipulated settlement was filed in February 2008 that will leave the current base rates in place, and the LPSC approved the settlement in March 2008. In the settlement Entergy Louisiana agreed to credit customers $7.2 million, plus $0.7 million of interest, for customer contributions to the Central States Compact in Nebraska that was never completed and agreed to a one-time $2.6 million deduction from the deferred capacity cost balance. The credit, for which Entergy Louisiana had previously recorded a provision, was made in May 2008.

(Entergy Gulf States Louisiana)

In May 2008, Entergy Gulf States Louisiana made its formula rate plan filing with the LPSC for the 2007 test year. The filing reflected a 9.26% return on common equity, which is below the allowed earnings bandwidth, and indicated a $5.4 million revenue deficiency, offset by a $4.1 million decrease in required additional capacity costs. Entergy Gulf States Louisiana implemented a $20.7 million formula rate plan decrease, subject to refund, effective the first billing cycle in September 2008. The decrease includes removal of interim storm cost recovery and a reduction in the storm damage accrual. Entergy Gulf States Louisiana then implemented a $16.0 million formula rate plan increase, subject to refund, effective the first billing cycle in October 2008 to collect previously deferred and ongoing costs associated with LPSC approved additional capacity, including the Ouachita power plant. Consideration of the formula rate plan filing is pending.

In May 2007, Entergy Gulf States Louisiana made its formula rate plan filing with the LPSC for the 2006 test year. The filing reflected a 10.0% return on common equity, which is within the allowed earnings bandwidth, and an anticipated formula rate plan decrease of $23 million annually attributable to adjustments outside of the formula rate plan sharing mechanism related to capacity costs and the anticipated securitization of storm costs related to Hurricane Katrina and Hurricane Rita and the securitization of a storm reserve. In September 2007, Entergy Gulf States Louisiana modified the formula rate plan filing to reflect a 10.07% return on common equity, which is still within the allowed bandwidth. The modified filing also reflected implementation of a $4.1 million rate increase, subject to refund, attributable to recovery of additional LPSC-approved incremental deferred and ongoing capacity costs. The rate decrease anticipated in the original filing did not occur because of the additional capacity costs approved by the LPSC, and because securitization of storm costs associated with Hurricane Katrina and Hurricane Rita and the establishment of a storm reserve had not yet occurred. In October 2007, Entergy Gulf States Louisiana implemented a $16.4 million formula rate plan decrease that is due to the reclassification of certain franchise fees from base rates to collection via a line item on customer bills pursuant to an LPSC order. The LPSC staff issued its final report in December 2007, indicating a $1.6 million decrease in

 

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formula rate plan revenues for which interim rates were already in effect. In addition, the LPSC staff recommended that the LPSC give a one-year extension of Entergy Gulf States Louisiana's formula rate plan to synchronize with the final year of Entergy Louisiana's formula rate plan, or alternatively, to extend the formula rate plan for a longer period. Entergy Gulf States Louisiana indicated it is amenable to a one-year extension. An uncontested stipulated settlement was filed in February 2008 that will leave the current base rates in place and extend the formula rate plan for one year, and the LPSC approved the settlement in March 2008.

Retail Rates - Gas (Entergy Gulf States Louisiana)

In January 2008, Entergy Gulf States Louisiana filed with the LPSC its gas rate stabilization plan for the test year ending September 30, 2007.  The filing showed a revenue deficiency of $3.7 million based on a return on common equity mid-point of 10.5%. Entergy Gulf States Louisiana implemented a $3.4 million rate increase in April 2008 pursuant to an uncontested agreement with the LPSC staff.

Filings with the PUCT and Texas Cities

Entergy Texas made a rate filing in September 2007 with the PUCT requesting an annual rate increase totaling $107.5 million, including a base rate increase of $64.3 million and riders totaling $43.2 million. The base rate increase request includes a $12.2 million annual increase for the storm damage reserve. Entergy Texas requested an 11% return on common equity. In December 2007 the PUCT issued an order setting September 26, 2008 (which it subsequently moved to November 27, 2008) as the effective date for the rate change proposed in this matter. In May 2008, Entergy Texas and certain parties in the rate case filed a non-unanimous settlement that provides for a $42.5 million base rate increase beginning in October 2008 and an additional $17 million base rate increase beginning in October 2009. The non-unanimous settlement also provides that $25 million of System Agreement rough production cost equalization payments will offset the effect on customers of the rate increase. The non-unanimous settlement further provides that an additional $17 million on an annual basis of System Agreement rough production cost equalization payments will be retained by Entergy Texas from January 2009 through September 2009. The non-unanimous settlement also resolves the fuel reconciliation portion of the proceeding with a $4.5 million disallowance. The PUCT staff, the Texas Industrial Energy Consumers (TIEC), and the state of Texas did not join in the settlement and filed a separate agreement among them that provides for a rate decrease, later revised to a slight increase, and a $4.7 million fuel cost disallowance. In May 2008 the ALJs issued an order stating that the proceeding will continue with Entergy Texas having the burden of proof to show that the non-unanimous settlement results in reasonable rates. The hearing on the merits of the non-unanimous settlement was held from June 23 through July 2, 2008, and in September 2008 the ALJs issued a proposal for decision recommending approval of the non-unanimous settlement. On November 5, 2008, the PUCT rejected the non-unanimous settlement and remanded the case for further hearings on the merits of the rate request. The hearings on remand are expected to begin by early December 2008. Entergy Texas agreed to extend until March 2, 2009 the PUCT's jurisdictional deadline to render a decision. In accordance with applicable law, after the requisite number of hearing days occurs, Entergy Texas will have the right to implement rates, up to the level of the requested rates, under bond and subject to refund.

Filings with the MPSC

In March 2008, Entergy Mississippi made its annual scheduled formula rate plan filing for the 2007 test year with the MPSC.  The filing showed that a $10.1 million increase in annual electric revenues is warranted. In June 2008, Entergy Mississippi reached a settlement with the Mississippi Public Utilities Staff that results in a $3.8 million rate increase. An MPSC decision on the settlement is pending.

Filings with the New Orleans City Council

Retail Rates

In January 2008, Entergy New Orleans voluntarily implemented a 6.15% base rate credit (the recovery credit) for electric customers, which Entergy New Orleans estimates will return approximately $10.6 million to electric customers in 2008. Entergy New Orleans was able to

 

43

 

implement this credit because during 2007 the recovery of New Orleans after Hurricane Katrina was occurring faster than expected in 2006 projections. In addition, Entergy New Orleans committed to set aside $2.5 million for an energy efficiency program focused on community education and outreach and weatherization of homes.

On July 31, 2008, Entergy New Orleans filed an electric and gas base rate case with the City Council. The filing requests an 11.75% return on common equity. The filing calls for a $23.0 million decrease in electric base rates, which includes keeping the recovery credit in effect, as well as realigning approximately $12.3 million of capacity costs from recovery through the fuel adjustment clause to electric base rates. The filing also calls for a $9.1 million increase in gas base rates to fund ongoing operations. This request is unrelated to the ongoing rebuild of Entergy New Orleans' natural gas system. The procedural schedule calls for a hearing on the filing to commence on March 2, 2009, with certification of the evidentiary record by a hearing officer on or before March 16, 2009, and a decision by the City Council on or before April 30, 2009.

Fuel Adjustment Clause Litigation

See Note 2 to the financial statements in the Form 10-K for a discussion of the complaint filed in April 1999 by a group of ratepayers against Entergy New Orleans, Entergy Corporation, Entergy Services, and Entergy Power in state court in Orleans Parish purportedly on behalf of all Entergy New Orleans ratepayers and a corresponding complaint filed with the City Council. In February 2004, the City Council approved a resolution that resulted in a refund to customers of $11.3 million, including interest, during the months of June through September 2004. In May 2005 the Civil District Court for the Parish of Orleans affirmed the City Council resolution, finding no support for the plaintiffs' claim that the refund amount should be higher. In June 2005, the plaintiffs appealed the Civil District Court decision to the Louisiana Fourth Circuit Court of Appeal. On February 25, 2008, the Fourth Circuit Court of Appeal issued a decision affirming in part, and reversing in part, the Civil District Court's decision.  Although the Fourth Circuit Court of Appeal did not reverse any of the substantive findings and conclusions of the City Council or the Civil District Court, the Fourth Circuit found that the amount of the refund was arbitrary and capricious and increased the amount of the refund to $34.3 million.  Entergy New Orleans believes that the increase in the refund ordered by the Fourth Circuit is not justified. Entergy New Orleans, the City Council, and the plaintiffs requested rehearing, and in April 2008, the Fourth Circuit granted the plaintiffs' request for rehearing. In addition to changing the basis for the court's decision in the manner requested by the plaintiffs, the court also granted the plaintiffs' request that it provide for interest on the refund amount. The court denied the motions for rehearing filed by the City Council and Entergy New Orleans. In May 2008, Entergy New Orleans and the City Council filed with the Louisiana Supreme Court applications for a writ of certiorari seeking, among other things, reversal of the Fourth Circuit decision. The Louisiana Supreme Court granted these writ applications in October 2008 and will review the Fourth Circuit's decision.

System Energy Rate Proceeding

In March 2008, the LPSC filed a complaint at the FERC under Federal Power Act section 206 against System Energy and Entergy Services. The complaint requests that the FERC set System Energy's rate of return on common equity at no more than 9.75%. The LPSC's complaint further requests that System Energy base its decommissioning and depreciation expenses on a 60-year useful life for Grand Gulf as opposed to the 40-year life specified in the existing NRC operating license. The APSC, the City of New Orleans, the MPSC, and other parties have intervened in the proceeding. System Energy filed its answer to the complaint in April 2008, in which it denies the allegations of the LPSC and requests that the FERC dismiss the complaint without a hearing. On July 1, 2008, the FERC issued an order denying the relief requested by the LPSC.

Electric Industry Restructuring in Texas

Refer to Note 2 to the financial statements in the Form 10-K and Entergy Texas Form 10 for a discussion of electric industry restructuring activity that involves Entergy Texas.

 

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NOTE 3. COMMON EQUITY

Common Stock

Earnings per Share

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

 

 

For the Three Months Ended September 30,

 

 

2008

 

2007

 

 

(In Millions, Except $/share Data)

 

 

 

 

$/share

 

 

 

$/share

Consolidated net income

 

$470.3

 

 

 

$461.2

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares
 outstanding - basic

 


190.4

 


$2.47 

 

194.9

 


$2.37 

Average dilutive effect of:

 

 

 

 

 

 

 

 

 

Stock Options

 

3.8

 

(0.048)

 

4.6

 

(0.055)

 

Equity Units

 

0.8

 

(0.010)

 

0.9

 

(0.011)

 

Deferred Units

 

 

(0.000)

 

0.1

 

(0.001)

Average number of common shares
 outstanding - diluted

 


195.0

 


$2.41 

 


200.5

 


$2.30 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30,

 

 

2008

 

2007

 

 

(In Millions, Except $/share Data)

 

 

 

 

$/share

 

 

 

$/share

Consolidated net income

 

$1,050

 

 

 

$941.0

 

 

 

 

 

 

 

 

 

 

 

Average number of common shares
 outstanding - basic

 


191.4

 


$5.48

 

197.4

 


$4.77 

Average dilutive effect of:

 

 

 

 

 

 

 

 

 

Stock Options

 

4.5

 

(0.124)

 

4.9

 

(0.115)

 

Equity Units

 

1.2

 

(0.033)

 

1.0

 

(0.023)

 

Deferred Units

 

 

(0.001)

 

0.1

 

(0.003)

Average number of common shares
 outstanding - diluted

 


197.1

 


$5.33 

 

203.4

 


$4.63 

 

 

 

 

 

 

 

 

 

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

Treasury Stock

During the nine months ended September 30, 2008, Entergy Corporation issued 996,901 shares of its previously repurchased common stock to satisfy stock option exercises and other stock-based awards. Also, during the nine months ended September 30, 2008, Entergy Corporation purchased 4,262,299 shares of common stock for a total purchase price of $468.1 million.

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Retained Earnings

On October 31, 2008, Entergy Corporation's Board of Directors declared a common stock dividend of $0.75 per share, payable on December 1, 2008 to holders of record as of November 12, 2008.

Accumulated Other Comprehensive Income (Loss)

Based on market prices as of September 30, 2008, cash flow hedges with net unrealized losses of approximately $10.8 million net-of-tax at September 30, 2008 are expected to be reclassified from accumulated other comprehensive income to operating revenues during the next twelve months. The actual amount reclassified from accumulated other comprehensive income, however, could vary due to future changes in market prices. See Note 1 (Derivative Financial Instruments and Commodity Derivatives) and Note 16 to the financial statements in the Form 10-K for additional discussion of the accounting treatment of cash flow hedges.

 

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

Entergy Corporation has in place a credit facility that expires in August 2012 and has a borrowing capacity of $3.5 billion. Entergy Corporation also has the ability to issue letters of credit against the total borrowing capacity of the credit facility. The facility fee is currently 0.09% of the commitment amount. Facility fees and interest rates on loans under the credit facility can fluctuate depending on the senior unsecured debt ratings of Entergy Corporation. The weighted average interest rate as of September 30, 2008 was 2.969% 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, 2008.


Capacity

 


Borrowings

 

Letters
of Credit

 

Capacity
Available

(In Millions)

             

$3,500 

 

$3,208 

 

$68 

 

$224

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 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.

Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, and Entergy Texas each had credit facilities available as of September 30, 2008 as follows:



Company

 



Expiration Date

 


Amount of
Facility

 


Interest Rate (a)

 

Amount Drawn
as of
September 30, 2008

 

 

 

 

 

 

     

Entergy Arkansas

 

April 2009

 

$100 million (b)

 

4.50%

 

-

Entergy Gulf States Louisiana

 

August 2012

 

$100 million (c)

 

5.05%

 

$100 million

Entergy Louisiana

 

August 2012

 

$200 million (d)

 

5.05%

 

$200 million

Entergy Mississippi

 

May 2009

 

$30 million (e)

 

4.2875%

 

-

Entergy Mississippi

 

May 2009

 

$20 million (e)

 

4.2875%

 

-

Entergy Texas

 

August 2012

 

$100 million (f)

 

5.05%

 

$100 million

(a)

The interest rate is the weighted average interest rate as of September 30, 2008 applied or that would be applied to the 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.

 

46

(c)

The credit facility allows Entergy Gulf States Louisiana to issue letters of credit against the borrowing capacity of the facility. As of September 30, 2008, 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. Pursuant to the terms of the credit agreement, the amount of debt assumed by Entergy Texas ($930 million as of September 30, 2008 and $1.079 billion as of December 31, 2007) is excluded from debt and capitalization in calculating the debt ratio.

(d)

The credit facility allows Entergy Louisiana to issue letters of credit against the borrowing capacity of the facility. As of September 30, 2008, 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.

(e)

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

(f)

The credit facility allows Entergy Texas to issue letters of credit against the borrowing capacity of the facility. As of September 30, 2008, 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. Pursuant to the terms of the credit agreement, the transition bonds issued by Entergy Gulf States Reconstruction Funding I, LLC, a subsidiary of Entergy Texas, are excluded from debt and capitalization in calculating the debt ratio.

The facility fees on the credit facilities range from 0.09% to 0.15% of the commitment amount.

The short-term borrowings of the Registrant Subsidiaries and certain other Entergy subsidiaries are limited to amounts authorized by the FERC. The current FERC-authorized limits are effective through March 31, 2010 (except the Entergy Gulf States Louisiana and Entergy Texas limits, which are effective through November 8, 2009). In addition to borrowings from commercial banks, these companies are authorized under a FERC order to borrow from the Entergy System money pool. The money pool is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries' dependence on external short-term borrowings. Borrowings from the money pool and external short-term borrowings combined may not exceed the FERC authorized limits. As of September 30, 2008, Entergy's subsidiaries' aggregate money pool and external short-term borrowings authorized limit was $2.1 billion, the aggregate outstanding borrowing from the money pool was $365 million, and Entergy's subsidiaries' had no outstanding short-term borrowing from external sources.

The following are the FERC-authorized limits for short-term borrowings and the outstanding short-term borrowings for the Registrant Subsidiaries as of September 30, 2008:

 

 

Authorized

 

Borrowings

 

 

(In Millions)

 

 

 

 

 

Entergy Arkansas

 

$250

 

$5.7

Entergy Gulf States Louisiana

 

$200

 

-

Entergy Louisiana

 

$250

 

-

Entergy Mississippi

 

$175

 

$28.2

Entergy New Orleans

 

$100

 

-

Entergy Texas

 

$200

 

-

System Energy

 

$200

 

-

Debt Issuances and Redemptions

(Entergy Arkansas)

In July 2008, Entergy Arkansas issued $300 million of 5.4% Series First Mortgage Bonds due August 2013. Entergy Arkansas used a portion of the net proceeds to fund the purchase of the Ouachita power plant on September 30, 2008, and the remaining net proceeds will be used to fund improvements relating to the Ouachita power plant and for general corporate purposes. Prior to their application, the remaining net proceeds will be used for working capital purposes, including repayment of short-term debt, and may be invested in temporary cash investments or the Entergy System money pool.

47

(Entergy Gulf States Louisiana)

In May 2008, Entergy Gulf States Louisiana issued $375 million of 6.00% Series First Mortgage Bonds due May 2018. The proceeds were used to pay at maturity the portion of the $325 million of the 3.6% Series First Mortgage Bonds due June 2008 that had not been assumed by Entergy Texas and to redeem, prior to maturity, $189.7 million of the $350 million Floating Rate series of First Mortgage Bonds due December 2008, and for other general corporate purposes.

The portion of the $325 million of 3.6% Series First Mortgage Bonds due June 2008 that had been assumed by Entergy Texas was paid at maturity by Entergy Texas in June 2008, and that bond series is no longer outstanding. The remainder of the $350 million Floating Rate series of First Mortgage Bonds due December 2008 had been assumed by Entergy Texas, and management expects Entergy Texas to redeem those bonds by their maturity date.

(Entergy Louisiana)

In April 2008, Entergy Louisiana repurchased, prior to maturity, $60 million of Auction Rate governmental bonds, which are being held for possible remarketing at a later date.

In August 2008, Entergy Louisiana issued $300 million of 6.50% Series First Mortgage Bonds due September 2018. The net proceeds of the issuance will be used for capital expenditures, working capital needs, and general corporate purposes. Prior to their application, the remaining net proceeds may be invested in temporary cash investments or the Entergy System money pool.

(Entergy Mississippi)

In April 2008, Entergy Mississippi repurchased its $30 million series of Independence County Pollution Control Revenue Bonds due July 2022. In June 2008, Entergy Mississippi remarketed the series and fixed the interest rate to maturity at 4.90%. Entergy Mississippi used the proceeds from the remarketing to repay short-term borrowings that were drawn on its credit facilities to repurchase the bonds in April 2008.

(Entergy New Orleans)

In August 2008, Entergy New Orleans paid, at maturity, its $30 million 3.875% Series first mortgage bonds.

Tax Exempt Bond Audit

The IRS completed an audit of certain Tax Exempt Bonds (Bonds) issued by St. Charles Parish, State of Louisiana (the Issuer). The Bonds were issued to finance previously unfinanced acquisition costs expended by Entergy Louisiana to acquire certain radioactive solid waste disposal facilities (the Facilities) at the Waterford Steam Electric Generating Station. In March and April 2005, the IRS issued proposed adverse determinations that the Issuer's 7.0% Series bonds due 2022, 7.5% Series bonds due 2021, and 7.05% Series bonds due 2022 were not tax exempt. The stated basis for these determinations was that radioactive waste did not constitute "solid waste" within the provisions of the Internal Revenue Code and therefore the Facilities did not qualify as solid waste disposal facilities. The three series of Bonds are the only series of bonds issued by the Issuer for the benefit of Entergy Louisiana that were the subject of audits by the IRS. Because the Issuer, Entergy Louisiana, and IRS Office of Appeals desired to settle the issue that was raised, Entergy Louisiana made a $1.25 million payment to the IRS. The terms of the settlement have no effect on the Issuer or the bondholders.

 

NOTE 5. STOCK-BASED COMPENSATION

Entergy grants stock options, which are described more fully in Note 12 to the consolidated financial statements in the Form 10-K. Entergy adopted SFAS 123R, "Share-Based Payment" on January 1, 2006. The adoption of the standard did not materially affect Entergy's financial position, results of operations, or cash flows because Entergy adopted the fair value based method of accounting for stock options prescribed

 

48

 

by SFAS 123, "Accounting for Stock-Based Compensation" on January 1, 2003. Prior to 2003, Entergy applied the recognition and measurement principles of APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for those plans. Awards under Entergy's plans generally vest over three years.

The following table includes financial information for stock options for the third quarter and nine months ended September 30 for each of the years presented:

 

2008

 

2007

 

(In Millions)

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

$4.7

 

$3.9

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

$1.8

 

$1.5

       

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


$13.8

 


$11.0

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

$5.3

 

$4.2

Compensation cost capitalized as part of fixed assets and inventory for the nine months
  ended September 30,


$2.6

 


$1.8

Entergy granted 1,617,400 stock options during the first quarter 2008 with a weighted-average fair value of $14.43. At September 30, 2008, there were 11,132,319 stock options outstanding with a weighted-average exercise price of $66.37. The aggregate intrinsic value of the stock options outstanding was $252 million.

 

NOTE 6. RETIREMENT AND OTHER POSTRETIREMENT BENEFITS

Components of Net Pension Cost

Entergy's qualified pension cost, including amounts capitalized, for the third quarters of 2008 and 2007, included the following components:

 

 

2008

 

2007

 

 

(In Thousands)

 

 

 

 

 

Service cost - benefits earned during the period

 

$22,598 

 

$24,263 

Interest cost on projected benefit obligation

 

51,647 

 

46,508 

Expected return on assets

 

(57,639)

 

(51,008)

Amortization of prior service cost

 

1,266 

 

1,383 

Amortization of loss

 

6,708 

 

11,444 

Net pension costs

 

$24,580 

 

$32,590 

Entergy's qualified pension cost, including amounts capitalized, for the nine months ended September 30, 2008 and 2007, included the following components:

 

 

2008

 

2007

 

 

(In Thousands)

 

 

 

 

 

Service cost - benefits earned during the period

 

$67,794 

 

$72,301 

Interest cost on projected benefit obligation

 

154,941 

 

138,662 

Expected return on assets

 

(172,917)

 

(152,514)

Amortization of prior service cost

 

3,798 

 

4,149 

Amortization of loss

 

20,124 

 

34,332 

Net pension costs

 

$73,740 

 

$96,930 

49

The Registrant Subsidiaries' qualified pension cost, including amounts capitalized, for the third quarters of 2008 and 2007, included the following components:

Entergy

 

 

Entergy

 

Gulf States

 

Entergy

 

Entergy

 

Entergy

 

Entergy

System

2008

 

Arkansas

 

Louisiana

 

Louisiana

 

Mississippi

 

New Orleans

 

Texas

Energy

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

 during the period

 

$3,584 

 

$1,841 

 

$2,058 

 

$1,063 

 

$445 

 

$968 

$930 

Interest cost on projected

 

 

 

 

 

 

 

 

 

 

 

 

 

 benefit obligation

 

11,616 

 

5,047 

 

6,784 

 

3,627 

 

1,415 

 

3,882 

1,937 

Expected return on assets

 

(11,765)

 

(7,165)

 

(8,134)

 

(4,075)

 

(1,839)

 

(5,047)

(2,452)

Amortization of prior service

 

 cost

223 

 

110 

 

119 

 

90 

 

52 

 

80 

Amortization of loss

 

2,303 

 

115 

 

920 

 

485 

 

319 

 

156 

90 

Net pension cost/(income)

 

$5,961 

 

($52)

 

$1,747 

 

$1,190 

 

$392 

 

$39 

$514 

Entergy

 

 

Entergy

 

Gulf States

 

Entergy

 

Entergy

 

Entergy

 

Entergy

System

2007

 

Arkansas

 

Louisiana

 

Louisiana

 

Mississippi

 

New Orleans

 

Texas

Energy

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

 during the period

 

$3,638 

 

$3,011 

 

$2,231 

 

$1,089 

 

$470 

 

$1,012 

$1,021 

Interest cost on projected

 

 

 

 

 

 

 

 

 

 

 

 

 

 benefit obligation

 

10,498 

 

8,139 

 

6,251 

 

3,371 

 

1,260 

 

3,439 

1,710 

Expected return on assets

 

(11,009)

 

(10,750)

 

(7,808)

 

(3,837)

 

(1,446)

 

(4,536)

(2,136)

Amortization of prior service

 

 cost

412 

 

304 

 

160 

 

114 

 

44 

 

133 

12 

Amortization of loss

 

2,721 

 

623 

 

1,433 

 

749 

 

368 

 

262 

151 

Net pension cost

 

$6,260 

 

$1,327 

 

$2,267 

 

$1,486 

 

$696 

 

$310 

$758 

50

The Registrant Subsidiaries' qualified pension cost, including amounts capitalized, for the nine months ended September 30, 2008 and 2007, included the following components:

Entergy

 

 

Entergy

 

Gulf States

 

Entergy

 

Entergy

 

Entergy

 

Entergy

System

2008

 

Arkansas

 

Louisiana

 

Louisiana

 

Mississippi

 

New Orleans

 

Texas

Energy

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

 during the period

 

$10,752 

 

$5,523 

 

$6,174 

 

$3,189 

 

$1,335 

 

$2,904 

$2,790 

Interest cost on projected

 

 

 

 

 

 

 

 

 

 

 

 

 

 benefit obligation

 

34,848 

 

15,141 

 

20,352 

 

10,881 

 

4,245 

 

11,646 

5,811 

Expected return on assets

 

(35,295)

 

(21,495)

 

(24,402)

 

(12,225)

 

(5,517)

 

(15,141)

(7,356)

Amortization of prior service

 

 cost

669 

 

330 

 

357 

 

270 

 

156 

 

240 

27 

Amortization of loss

 

6,909 

 

345 

 

2,760 

 

1,455 

 

957 

 

468 

270 

Net pension cost/(income)

 

$17,883 

 

($156)

 

$5,241 

 

$3,570 

 

$1,176 

 

$117 

$1,542 

Entergy

 

 

Entergy

 

Gulf States

 

Entergy

 

Entergy

 

Entergy

 

Entergy

System

2007

 

Arkansas

 

Louisiana

 

Louisiana

 

Mississippi

 

New Orleans

 

Texas

Energy

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

 during the period

 

$10,914 

 

$9,033 

 

$6,693 

 

$3,267 

 

$1,410 

 

$3,036 

$3,063 

Interest cost on projected

 

 

 

 

 

 

 

 

 

 

 

 

 

 benefit obligation

 

31,494 

 

24,417 

 

18,753 

 

10,113 

 

3,780 

 

10,317 

5,130 

Expected return on assets

 

(33,027)

 

(32,250)

 

(23,424)

 

(11,511)

 

(4,338)

 

(13,608)

(6,408)

Amortization of prior service

 

 cost

1,236 

 

912 

 

480 

 

342 

 

132 

 

399 

36 

Amortization of loss

 

8,163 

 

1,869 

 

4,299 

 

2,247 

 

1,104 

 

786 

453 

Net pension cost

 

$18,780 

 

$3,981 

 

$6,801 

 

$4,458 

 

$2,088 

 

$930 

$2,274 

Entergy recognized $4.3 million and $4.0 million in pension cost for its non-qualified pension plans in the third quarters of 2008 and 2007, respectively. Entergy recognized $12.8 million and $12.0 million in pension cost for its non-qualified pension plans for the nine months ended September 30, 2008 and 2007, respectively.

The Registrant Subsidiaries recognized the following pension cost for their non-qualified pension plans in the third quarters of 2008 and 2007:

Entergy

 

 

Entergy

 

Gulf States

 

Entergy

 

Entergy

 

Entergy

Entergy

 

 

Arkansas

 

Louisiana

 

Louisiana

 

Mississippi

 

New Orleans

Texas

(In Thousands)

Non-Qualified Pension Cost
 Third Quarter 2008

 

$133 

 

$78 

 

$7 

 

$54 

 

$12 

$227 

Non-Qualified Pension Cost
 Third Quarter 2007

 

$123 

 

$317 

 

$6 

 

$44 

 

$57 

$231 

51

The Registrant Subsidiaries recognized the following pension cost for their non-qualified pension plans for the nine months ended September 30, 2008 and 2007:

Entergy

 

 

Entergy

 

Gulf States

 

Entergy

 

Entergy

 

Entergy

Entergy

 

 

Arkansas

 

Louisiana

 

Louisiana

 

Mississippi

 

New Orleans

Texas

(In Thousands)

Non-Qualified Pension Cost
  Nine Months Ended
  September 30, 2008

 



$399 

 



$234 

 



$21 

 



$162 

 



$36 



$681 

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

 



$369 

 



$951 

 



$19 

 



$131 

 



$171 



$693 

Components of Net Other Postretirement Benefit Cost

Entergy's other postretirement benefit cost, including amounts capitalized, for the third quarters of 2008 and 2007, included the following components:

 

 

2008

 

2007

 

 

(In Thousands)

 

 

 

 

 

Service cost - benefits earned during the period

 

$11,800 

 

$11,105 

Interest cost on APBO

 

17,824 

 

15,869 

Expected return on assets

 

(7,027)

 

(6,358)

Amortization of transition obligation

 

957 

 

958 

Amortization of prior service cost

 

(4,104)

 

(3,959)

Amortization of loss

 

3,890 

 

4,743 

Net other postretirement benefit cost

 

$23,340 

 

$22,358 

Entergy's other postretirement benefit cost, including amounts capitalized, for the nine months ended September 30, 2008 and 2007, included the following components:

 

 

2008

 

2007

 

 

(In Thousands)

 

 

 

 

 

Service cost - benefits earned during the period

 

$35,400 

 

$33,032 

Interest cost on APBO

 

53,472 

 

47,363 

Expected return on assets

 

(21,081)

 

(18,943)

Amortization of transition obligation

 

2,871 

 

2,874 

Amortization of prior service cost

 

(12,312)

 

(11,877)

Amortization of loss

 

11,670 

 

14,230 

Net other postretirement benefit cost

 

$70,020 

 

$66,679 

52

The Registrant Subsidiaries' other postretirement benefit cost, including amounts capitalized, for the third quarters of 2008 and 2007, included the following components:

Entergy

 

 

Entergy

 

Gulf States

 

Entergy

 

Entergy

 

Entergy

 

Entergy

System

2008

 

Arkansas

 

Louisiana

 

Louisiana

 

Mississippi

 

New Orleans

 

Texas

Energy

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

 during the period

 

$1,706 

 

$1,251 

 

$1,099 

 

$514 

 

$295 

 

$606 

$513 

Interest cost on APBO

 

3,443 

 

1,917 

 

2,187 

 

1,141 

 

953 

 

1,440 

531 

Expected return on assets

 

(2,492)

 

 

 

(905)

 

(789)

 

(1,885)

(511)

Amortization of transition

 

 obligation

205 

 

84 

 

96 

 

88 

 

415 

 

66 

Amortization of prior service

 

 cost

(197)

 

146 

 

117 

 

(62)

 

90 

 

72 

(283)

Amortization of loss

1,440 

 

494 

 

677 

 

534 

 

291 

 

357 

177 

Net other postretirement
 benefit cost

 

$4,105 

 

$3,892 

 

$4,176 

 

$1,310 

 

$1,255 

 

$656 

$429 

 

 

Entergy

 

 

Entergy

 

Gulf States

 

Entergy

 

Entergy

 

Entergy

 

Entergy

System

2007

 

Arkansas

 

Louisiana

 

Louisiana

 

Mississippi

 

New Orleans

 

Texas

Energy

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

 during the period

 

$1,525 

 

$1,547 

 

$973 

 

$476 

 

$255 

 

$500 

$451 

Interest cost on APBO

 

3,037 

 

2,876 

 

1,941 

 

1,049 

 

870 

 

1,260 

433 

Expected return on assets

 

(2,231)

 

(1,697)

 

 

(819)

 

(682)

 

(1,697)

(470)

Amortization of transition

 

 obligation

205 

 

151 

 

96 

 

88 

 

416 

 

67 

Amortization of prior service

 

 cost

(197)

 

218 

 

117 

 

(62)

 

90 

 

72 

(283)

Amortization of loss

1,500 

 

793 

 

764 

 

613 

 

282 

 

349 

149 

Net other postretirement benefit
 cost

 

$3,839 

 

$3,888 

 

$3,891 

 

$1,345 

 

$1,231 

 

$551 

$282 

53

The Registrant Subsidiaries' other postretirement benefit cost, including amounts capitalized, for the nine months ended September 30, 2008 and 2007, included the following components:

Entergy

 

 

Entergy

 

Gulf States

 

Entergy

 

Entergy

 

Entergy

 

Entergy

System

2008

 

Arkansas

 

Louisiana

 

Louisiana

 

Mississippi

 

New Orleans

 

Texas

Energy

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

 during the period

 

$5,118 

 

$3,753 

 

$3,297 

 

$1,542 

 

$885 

 

$1,818 

$1,539 

Interest cost on APBO

 

10,329 

 

5,751 

 

6,561 

 

3,423 

 

2,859 

 

4,320 

1,593 

Expected return on assets

 

(7,476)

 

 

 

(2,715)

 

(2,367)

 

(5,655)

(1,533)

Amortization of transition

 

 obligation

615 

 

252 

 

288 

 

264 

 

1,245 

 

198 

Amortization of prior service

 

 cost

(591)

 

438 

 

351 

 

(186)

 

270 

 

216 

(849)

Amortization of loss

4,320 

 

1,482 

 

2,031 

 

1,602 

 

873 

 

1,071 

531 

Net other postretirement benefit
 cost

 

$12,315 

 

$11,676 

 

$12,528 

 

$3,930 

 

$3,765 

 

$1,968 

$1,287 

Entergy

 

 

Entergy

 

Gulf States

 

Entergy

 

Entergy

 

Entergy

 

Entergy

System

2007

 

Arkansas

 

Louisiana

 

Louisiana

 

Mississippi

 

New Orleans

 

Texas

Energy

(In Thousands)

Service cost - benefits earned

 

 

 

 

 

 

 

 

 

 

 

 

 during the period

 

$4,575 

 

$4,641 

 

$2,919 

 

$1,428 

 

$765 

 

$1,500 

$1,353 

Interest cost on APBO

 

9,111 

 

8,628 

 

5,823 

 

3,147 

 

2,610 

 

3,780 

1,299 

Expected return on assets

 

(6,693)

 

(5,091)

 

 

(2,457)

 

(2,046)

 

(5,091)

(1,410)

Amortization of transition

 

 obligation

615 

 

453 

 

288 

 

264 

 

1,248 

 

201 

Amortization of prior service

 

 cost

(591)

 

654 

 

351 

 

(186)

 

270 

 

216 

(849)

Amortization of loss

4,500 

 

2,379 

 

2,292 

 

1,839 

 

846 

 

1,047 

447 

Net other postretirement benefit
 cost

 

$11,517 

 

$11,664 

 

$11,673 

 

$4,035 

 

$3,693 

 

$1,653 

$846 

Employer Contributions

As of the end of October 2008, Entergy had contributed $288 million to its pension plans. Entergy does not anticipate making additional contributions to its qualified pension plans in 2008.

54

The Registrant Subsidiaries had contributed the following to qualified pension plans through October 2008 and do not anticipate additional contributions in 2008:

Entergy

 

Entergy

 

Gulf States

 

Entergy

 

Entergy

 

Entergy

 

Entergy

System

 

 

Arkansas

 

Louisiana

 

Louisiana

 

Mississippi

 

New Orleans

 

Texas

Energy

(In Thousands)

Pension contributions made
  through October 2008

 

$38,866

 

$34,260

 


$ 53

 

$11,688

 


$ -

 


$18,882


$5,812

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

Based on actuarial analysis, the estimated effect of future Medicare subsidies reduced the December 31, 2007 Accumulated Postretirement Benefit Obligation (APBO) by $182 million, and reduced the third quarter 2008 and 2007 other postretirement benefit cost by $6.2 million and $6.6 million, respectively. It reduced the nine months ended September 30, 2008 and 2007 other postretirement benefit cost by $18.6 million and $19.9 million, respectively. In the third quarter 2008 and the nine months ended September 30, 2008, Entergy received $2.1 million in Medicare subsidies for prescription drug claims.

Based on actuarial analysis, the estimated effect of future Medicare subsidies reduced the December 31, 2007 APBO, the third quarters 2008 and 2007 other postretirement benefit cost and the nine months ended September 30, 2008 and 2007 other postretirement benefit cost for the Registrant Subsidiaries as follows:

Entergy

Entergy

 

 

Entergy

 

Gulf States

 

Entergy

 

Entergy

 

New

 

Entergy

System

 

 

Arkansas

 

Louisiana

 

Louisiana

 

Mississippi

 

Orleans

 

Texas

Energy

(In Thousands)

Reduction in 12/31/2007 APBO

 

($39,653)

 

($19,662)

 

($21,797)

 

($13,223)

 

($9,487)

 

($15,270)

($6,185)

Reduction in third quarter 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 other postretirement benefit cost

 

($1,266)

 

($876)

 

($706)

 

($406)

 

($279)

 

($263)

($236)

Reduction in third quarter 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 other postretirement benefit cost

 

($1,376)

 

($1,222)

 

($762)

 

($438)

 

($311)

 

($172)

($246)

Reduction in nine months ended

 

 

 

 

 

 September 30, 2008 other

 postretirement benefit cost

($3,798)

 

($2,628)

 

($2,118)

 

($1,218)

 

($837)

 

($789)

($708)

Reduction in nine months ended

 

 

 

 

 

 September 30, 2007 other

 postretirement benefit cost

($4,128)

 

($3,666)

 

($2,286)

 

($1,314)

 

($933)

 

($516)

($738)

Medicare subsidies received in the

 third quarter 2008 & the nine

 months ended September 30,
 2008

$495 

$291 

$316 

$169 

$188 

$229 

$41 

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

 

55

 

 

 

NOTE 7. BUSINESS SEGMENT INFORMATION

Entergy Corporation

Entergy's reportable segments as of September 30, 2008 are Utility and Non-Utility Nuclear. Utility generates, transmits, distributes, and sells electric power in portions of Arkansas, Louisiana, Mississippi, and Texas, and provides natural gas utility service in portions of Louisiana. Non-Utility Nuclear owns and operates six nuclear power plants and is primarily focused on selling electric power produced by those plants to wholesale customers. "All Other" includes the parent company, Entergy Corporation, and other business activity, including the non-nuclear wholesale assets business and earnings on the proceeds of sales of previously-owned businesses.

Entergy's segment financial information for the third quarters of 2008 and 2007 is as follows:

 


Utility

 

Non-Utility
Nuclear*

 


All Other*

 


Eliminations

 


Consolidated

(In Thousands)

2008

 

 

 

 

 

 

 

 

 

Operating Revenues

$3,251,796

 

$654,432

 

$64,125 

 

($6,469)

 

$3,963,884 

Equity in earnings of

 

 

 

 

 

 unconsolidated equity affiliates

$-

 

$-

 

$1,459 

 

$- 

 

$1,459 

Income Taxes (Benefit)

$155,392

 

$93,552

 

($80,705)

 

$- 

 

$168,239 

Net Income

$257,812

 

$205,324

 

$7,153 

 

$- 

 

$470,289 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

Operating Revenues

$2,677,291

 

$554,128

 

$64,460 

 

($6,792)

 

$3,289,087 

Equity in earnings of

 

 

 

 

 

 unconsolidated equity affiliates

$-

 

$-

 

$1,432 

 

$- 

 

$1,432 

Income Taxes (Benefit)

$189,062

 

$61,863

 

($20,085)

 

$- 

 

$230,840 

Net Income (Loss)

$333,098

 

$160,913

 

($32,852)

 

$- 

 

$461,159 

Entergy's segment financial information for the nine months ended September 30, 2008 and 2007 is as follows:


Utility

Non-Utility
Nuclear*


All Other*


Eliminations


Consolidated

(In Thousands)

2008

 

 

 

 

 

 

 

 

 

Operating Revenues

$7,967,429 

 

$1,944,647

 

$201,014 

 

($20,202)

 

$10,092,888 

Equity in earnings (loss) of

 

 

 

 

 

 unconsolidated equity affiliates

$- 

 

$-

 

($2,042)

 

$- 

 

($2,042)

Income Taxes (Benefit)

$352,057 

 

$302,427

 

($110,228)

 

$- 

 

$544,256 

Net Income (Loss)

$534,672 

 

$570,637

 

($55,317)

 

$- 

 

$1,049,992 

Total Assets

$28,200,131 

$7,672,826

$1,881,122 

($1,296,115)

$36,457,964 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

Operating Revenues

$7,112,945 

 

$1,483,900

 

$175,326 

 

($19,673)

 

$8,752,498 

Equity in earnings (loss) of

 

 

 

 

 

 unconsolidated equity affiliates

($1)

 

$-

 

$3,534 

 

$- 

 

$3,533 

Income Taxes (Benefit)

$368,215 

 

$210,527

 

($95,385)

 

$- 

 

$483,357 

Net Income (Loss)

$585,741 

 

$397,808

 

($42,593)

 

$- 

 

$940,956 

Total Assets

$26,472,335 

$6,863,007

$1,931,799 

($1,508,624)

$33,758,517 

56

Businesses marked with * are sometimes referred to as the "competitive businesses," with the exception of the parent company, Entergy Corporation. Eliminations are primarily intersegment activity. Almost all of Entergy's goodwill is related to the Utility segment.

Registrant Subsidiaries

Each of the Registrant Subsidiaries have 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 their business processes, cost structures, and operating results.

 

 

NOTE 8. ACQUISITIONS

Ouachita (Entergy Arkansas)

In September 2008, Entergy Arkansas purchased the Ouachita Plant, a 789 MW three-train gas-fired combined cycle generating turbine (CCGT) electric power plant located 20 miles south of the Arkansas state line near Sterlington, Louisiana, for approximately $210 million from a subsidiary of Cogentrix Energy, Inc. Entergy Arkansas received the plant, materials and supplies, SO 2 emission allowances, and related real estate in the transaction. The FERC and the APSC approved the acquisition. The APSC also approved the recovery of the acquisition and ownership costs through a rate rider and the planned sale of one-third of the capacity and energy to Entergy Gulf States Louisiana.

Calcasieu (Entergy Gulf States Louisiana)

In March 2008, Entergy Gulf States Louisiana purchased the Calcasieu Generating Facility, a 322 MW simple-cycle gas-fired power plant located near the city of Sulphur in southwestern Louisiana, for approximately $56.4 million from Dynegy, Inc. Entergy Gulf States Louisiana received the plant, materials and supplies, SO 2 emission allowances, and related real estate in the transaction. The FERC and the LPSC approved the acquisition.

 

NOTE 9. RISK MANAGEMENT AND FAIR VALUE

Fair Values

See Note 16 to the financial statements in the Form 10-K for a discussion of Entergy's and the Registrant Subsidiaries' exposure to market and commodity risks. See Note 17 to the financial statements in the Form 10-K for a discussion of Entergy's and the Registrant Subsidiaries' decommissioning trust funds.

Effective January 1, 2008, Entergy and the Registrant Subsidiaries adopted Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" (SFAS 157), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 generally does not require any new fair value measurements. However, in some cases, the application of SFAS 157 in the future may change Entergy's and the Registrant Subsidiaries' practice for measuring and disclosing fair values under other accounting pronouncements that require or permit fair value measurements.

SFAS 157 defines 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 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.

57

 

 

SFAS 157 establishes 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 fair value hierarchy defined in SFAS 157 are as follows:

  • 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. 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.

  • 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 unregulated power plants.

The values for the cash flow hedges that are recorded as derivative contract assets or liabilities are based on both observable inputs including public market prices and unobservable inputs such as model-generated prices for longer-term markets and are classified as Level 3 assets and liabilities. The amounts reflected as the fair value of derivative assets or liabilities 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 from or payable to 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 Entergy's Non-Utility Nuclear 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 a combination of quoted forward power market prices for the period for which such curves are available, and model-generated prices using quoted forward gas market curves and estimates regarding heat rates to convert gas to power and the costs associated with the transportation of the power from the plants' bus bar to the contract's point of delivery, generally a power market hub, for the period thereafter. The difference 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. Included in the $52 million net liability at September 30, 2008 are approximately $30 million of in-the-money contracts with counterparties who are currently all investment grade.

The following table sets forth, by level within the fair value hierarchy established by SFAS 157, Entergy's assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2008. 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.

58

   

Level 1

 

Level 2

 

Level 3

 

Total

   

(In Millions)

Assets:

               

Temporary cash investments

 

$2,424

 

$-

 

$-

 

$2,424

Decommissioning trust funds

 

532

 

2,471

 

-

 

3,003

Securitization recovery trust account

 

21

 

-

 

-

 

21

Other investments

 

262

 

-

 

-

 

262

   

$3,239

 

$2,471

 

$-

 

$5,710

                 

Liabilities:

               

Gas hedge contracts

 

$61

 

$-

 

$-

 

$61

Power contracts

 

-

 

-

 

52

 

52

   

$61

 

$-

 

$52

 

$113

The following table sets forth a reconciliation of changes in the liabilities for the fair value of derivatives classified as level 3 in the SFAS 157 fair value hierarchy (in millions):

   


Third Quarter 2008

 

Nine Months Ended September 30, 2008

         

Balance as of beginning of period

 

$734 

 

$12 

         

Price changes

 

(638)

 

39 

Originated

 

(6)

 

70 

Settlements

 

(38)

 

(69)

         

Balance as of September 30, 2008

 

$52 

 

$52 

The following table sets forth, by level within the fair value hierarchy established by SFAS 157, the Registrant Subsidaries' assets and liabilities that are accounted for at fair value on a recurring basis as of September 30, 2008. 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.

   

Level 1

 

Level 2

 

Level 3

 

Total

   

(In Millions)

Entergy Arkansas:

               

Assets:

               

  Decommissioning trust funds

 

$22.4

 

$398.1

 

$-

 

$420.5

                 

Entergy Gulf States Louisiana:

               

Assets:

               

  Temporary cash investments

 

$124.0

 

$-

 

$-

 

$124.0

  Decommissioning trust funds

 

17.6

 

312.3

 

-

 

329.9

  Other investments

 

85.3

 

-

 

-

 

85.3

   

$226.9

 

$312.3

 

$-

 

$539.2

                 

Liabilities:

               

  Gas hedge contracts

 

$17.9

 

$-

 

$-

 

$17.9

 

 

59

 

 

Entergy Louisiana:

               

Assets:

               

  Temporary cash investments

 

$186.1

 

$-

 

$-

 

$186.1

  Decommissioning trust funds

 

47.8

 

152.0

 

-

 

199.8

  Other investments

 

134.4

 

-

 

-

 

134.4

   

$368.3

 

$152.0

 

$-

 

$520.3

                 

Liabilities:

               

  Gas hedge contracts

 

$24.7

 

$-

 

$-

 

$24.7

                 

Entergy Mississippi:

               

Assets:

               

  Other investments

 

$31.5

 

$-

 

$-

 

$31.5

                 

Liabilities:

               

  Gas hedge contracts

 

$12.3

 

$-

 

$-

 

$12.3

                 

Entergy New Orleans:

               

Assets:

               

  Other investments

 

$10.9

 

$-

 

$-

 

$10.9

                 

Liabilities:

               

  Gas hedge contracts

 

$5.7

 

$-

 

$-

 

$5.7

                 

Entergy Texas:

               

Assets:

               

  Securitization recovery trust account

 

$21.4

 

$-

 

$-

 

$21.4

                 

System Energy:

               

Assets:

               

  Temporary cash investments

 

$135.8

 

$-

 

$-

 

$135.8

  Decommissioning trust funds

 

62.9

 

229.2

 

-

 

292.1

   

$198.7

 

$229.2

 

$-

 

$427.9

Other Than Temporary Impairment

Non-Utility Nuclear recorded a $3.7 million charge in the first quarter 2008, a $24.4 million charge in the second quarter 2008, and a $7.1 million charge in the third quarter 2008, all to interest income, resulting from the recognition of the other than temporary impairment of certain securities held in its decommissioning trust funds.

 

NOTE 10. INCOME TAXES

Income Tax Audits and Litigation

In 2003, Entergy implemented an accounting method change regarding the capitalization of certain indirect production costs. Entergy's deductions related to the simplified service cost method totaled $601 million over the two year period 2003 and 2004. In 2005 the IRS issued new regulations that precluded the use of this method. The likely impact of the new regulations is to increase taxable income by $361 million for 2005 and $240 million for 2006. Because Entergy has a consolidated net operating loss carryover into these years, there was no cash tax impact from this law change, and it will not have a material effect on the Registrant Subsidiaries' net income. Of the total $601 million increase to taxable income, the taxable income of the Registrant Subsidiaries will increase as follows: Entergy Arkansas, $173 million; Entergy Gulf States Louisiana, $200 million, of which Entergy Texas is accountable for $104 million in accordance with the jurisdictional separation plan; Entergy Louisiana, $15 million; Entergy Mississippi, $89 million; Entergy New Orleans, $15 million; and System Energy, $20 million.

 

60

 

 

NOTE 11. ENTERGY GULF STATES LOUISIANA AND ENTERGY TEXAS BASIS OF PRESENTATION

Effective December 31, 2007, Entergy Gulf States, Inc. completed a jurisdictional separation into two vertically integrated utility companies, one operating under the sole retail jurisdiction of the PUCT, Entergy Texas, and the other operating under the sole retail jurisdiction of the LPSC, Entergy Gulf States Louisiana. Entergy Texas now owns all Entergy Gulf States, Inc. distribution and transmission assets located in Texas, the gas-fired generating plants located in Texas, undivided 42.5% ownership shares of Entergy Gulf States, Inc.'s 70% ownership interest in Nelson 6 and 42% ownership interest in Big Cajun 2, Unit 3, which are coal-fired generating plants located in Louisiana, and other assets and contract rights to the extent related to utility operations in Texas. Entergy Gulf States Louisiana now owns all of the remaining assets that were owned by Entergy Gulf States, Inc.  On a book value basis, approximately 58.1% of the Entergy Gulf States, Inc. assets were allocated to Entergy Gulf States Louisiana and approximately 41.9% were allocated to Entergy Texas.

As the successor to Entergy Gulf States, Inc. for financial reporting purposes, Entergy Gulf States Louisiana's income statements for the three and nine months ended September 30, 2007 and cash flow statement for the nine months ended September 30, 2007 include the operations of Entergy Texas. Entergy Gulf States Louisiana's income statements for the three and nine months ended September 30, 2008, cash flow statement for the nine months ended September 30, 2008, and balance sheets as of December 31, 2007 and September 30, 2008 reflect the effects of the separation of the Texas business.

Because the jurisdictional separation was a transaction involving entities under common control, Entergy Texas recognized the assets and liabilities allocated to it at their carrying amounts in the accounts of Entergy Gulf States, Inc. at the time of the jurisdictional separation. Entergy Texas' financial statements herein report results of operations for 2007 as though the jurisdictional separation had occurred at the beginning of 2007.

 

NOTE 12. NEW ACCOUNTING PRONOUNCEMENTS

In March 2008 the FASB issued Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (SFAS 161), which requires enhanced disclosures about an entity's derivative and hedging activities. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

__________________________________

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.

61

 

Part I, Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of September 30, 2008, 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 Chief Executive Officers (CEO) and Chief Financial Officers (CFO). The evaluations assessed the effectiveness of the Registrants' disclosure controls and procedures. Based on the evaluations, each CEO and CFO has concluded that, as to the Registrant or Registrants for which they serve as CEO or CFO, the Registrant's or Registrants' disclosure controls and procedures are effective to ensure that information required to be disclosed by each Registrant in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms; and that the Registrant's or Registrants' disclosure controls and procedures are also effective in reasonably assuring that such information is accumulated and communicated to the Registrant's or Registrants' management, including their respective CEOs and CFOs, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

Under the supervision and with the participation of the Registrants' management, including their respective CEOs and CFOs, the Registrants evaluated changes in internal control over financial reporting that occurred during the quarter ended September 30, 2008 and found no change that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

 

62

 

 

ENTERGY ARKANSAS, INC.

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

Results of Operations

Net Income

Third Quarter 2008 Compared to Third Quarter 2007

Net income decreased $33.4 million primarily due to lower net revenue, higher other operation and maintenance expenses, higher taxes other than income taxes, and a higher effective income tax rate.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net income decreased $42.7 million primarily due to lower net revenue, higher other operation and maintenance expenses, higher taxes other than income taxes, higher depreciation and amortization expenses, lower other income, and a higher effective income tax rate, partially offset by lower interest and other charges.

Net Revenue

Third Quarter 2008 Compared to Third Quarter 2007

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 2008 to the third quarter 2007.

  

 

Amount

 

 

(In Millions)

 

 

 

2007 net revenue

 

$356.1  

Volume/weather

 

(21.9)

Purchased power capacity

 

(7.0)

Other

 

3.4 

2008 net revenue

 

$330.6 

The volume/weather variance is primarily due to the effect of less favorable weather during the billed and unbilled sales periods compared to the same period in 2007. Billed electricity usage decreased 257 GWh in all sectors.

The purchased power capacity variance is primarily due to higher purchased power capacity charges, including the Ouachita interim tolling agreement and higher reserve equalization expenses. The Ouachita acquisition is discussed in Note 2 to the financial statements in the Form 10-K and herein.

Gross operating revenues and fuel and purchased power expenses

Gross operating revenues increased primarily due to:

  • an increase of $50.5 million in fuel cost recovery revenues due to changes in the energy cost recovery rider effective April 2008 and September 2008. The energy cost recovery rider filings are discussed in Note 2 to the financial statements; and
  • an increase of $49.9 million in gross wholesale revenue due to an increase in the average price of energy available for resale sales and an increase in sales to affiliated customers.

 

63

 

 

The increase was partially offset by a decrease of $21.9 million related to volume/weather, as discussed above.

Fuel and purchased power expenses increased primarily due to an increase of $49.9 million in deferred fuel expense related to higher energy cost recovery rates effective April 2008 and September 2008, as discussed above and an increase in the average market price of purchased power.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

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, 2008 to the nine months ended September 30, 2007.

  

 

Amount

 

 

(In Millions)

 

 

 

2007 net revenue

 

$877.0  

Volume/weather

 

(22.9)

Purchased power capacity

 

(8.3)

Net wholesale revenue

 

4.4 

Other

 

8.5 

2008 net revenue

 

$858.7 

The volume/weather variance is primarily due to the effect of less favorable weather during the billed and unbilled sales periods compared to 2007. Billed electricity usage decreased 140 GWh in all sectors.

The purchased power capacity variance is primarily due to higher purchased power capacity charges, including the Ouachita interim tolling agreement. The Ouachita acquisition is discussed in Note 2 to the financial statements in the Form 10-K and herein.

The net wholesale revenue variance is primarily due to improved results from wholesale contracts.

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

Gross operating revenues increased primarily due to:

  • an increase of $120.6 million in gross wholesale revenue due to an increase in the average price of energy available for resale sales and an increase in sales to affiliated customers; and
  • an increase of $107 million in production cost allocation rider revenues which became effective in July 2007 as a result of the System Agreement proceedings. As a result of the System Agreement proceedings, Entergy Arkansas also has a corresponding increase in deferred fuel expense for payments to other Entergy system companies such that there is no effect on net income. Entergy Arkansas made payments based on the 2006 test year over a seven-month period in 2007 but collections from customers occurred over a twelve-month period. The production cost allocation rider and System Agreement proceedings are discussed in Note 2 to the financial statements in the Form 10-K.

The increase was partially offset by a decrease of $22.9 million related to volume/weather, as discussed above.

Fuel and purchased power expenses increased primarily due to an increase of $107 million in deferred System Agreement payments, as discussed above and increases in the average market prices of natural gas and purchased power, partially offset by a decrease in deferred fuel expense due to a lower energy cost recovery rate.

 

Other regulatory credits decreased primarily due to increased recovery of Grand Gulf costs due higher rates.

 

64

 

 

Other Income Statement Variances

Third Quarter 2008 Compared to Third Quarter 2007

Other operation and maintenance expenses increased primarily due to an increase of $18 million in storm damage charges as a result of Hurricane Gustav and Hurricane Ike hitting Entergy Arkansas' service territory in September 2008. Entergy Arkansas discontinued regulatory storm reserve accounting beginning July 2007 as a result of the APSC order issued in Entergy Arkansas' rate case. As a result, non-capital storm expenses are charged to other operation and maintenance expenses. The increase was partially offset by a decrease of $4.0 million in payroll-related costs and lower fossil maintenance expenses of $3.3 million compared to 2007.

Taxes other than income taxes increased primarily due to a tax contingency recorded for sales and use tax audits and an increase in local franchise taxes as a result of higher residential and commercial revenue.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Other operation and maintenance expenses increased primarily due to an increase in storm damage charges of $38.1 million as a result of Hurricane Gustav and Hurricane Ike hitting Energy Arkansas's service territory in the third quarter 2008 and several storms hitting Entergy Arkansas' service territory in the first quarter 2008. Entergy Arkansas discontinued regulatory storm reserve accounting beginning July 2007 as a result of the APSC order issued in Entergy Arkansas' rate case. As a result, non-capital storm expenses are charged to other operation and maintenance expenses. The increase was partially offset by a reimbursement of $7 million of costs in connection with a litigation settlement and a decrease of $5.1 million in payroll-related costs compared to 2007.

Taxes other than income taxes increased primarily due to an increase in local franchise taxes as a result of higher residential and commercial revenue and an increase in ad valorem taxes due to a higher millage rate and a higher 2008 assessment.

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

Other income decreased primarily due to a revision in 2007 to the allowance for equity funds used during construction related to removal costs.

Interest and other charges decreased primarily due to interest expense of $6.5 million recorded on advances from independent power producers in 2007 per a FERC order.

Income Taxes

The effective income tax rate was 44.3% for the third quarter of 2008 and 44.8% for the nine months ended September 30, 2008. The difference in the effective income tax rates for the third quarter 2008 and the nine months ended September 30, 2008 versus the federal statutory rate of 35.0% is primarily due to book and tax differences related to utility plant items and state income taxes.

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

65

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2008 and 2007 were as follows:

 

 

2008

 

2007

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$212 

 

$34,815 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

255,136 

 

262,234 

 

Investing activities

 

(466,585)

 

(196,893)

 

Financing activities

 

213,811 

 

(96,831)

Net increase (decrease) in cash and cash equivalents

 

2,362 

 

(31,490)

 

 

 

 

 

Cash and cash equivalents at end of period

 

$2,574 

 

$3,325 

Investing Activities

Net cash flow used in investing activities increased $269.7 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to:

  • the purchase of the Ouachita plant for $210 million in September 2008;
  • an increase in fossil plant expenditures resulting from a coal plant equipment purchase in 2008; and
  • an increase in distribution and transmission construction expenditures in 2008 due to Hurricane Gustav and Hurricane Ike, as well as several storms hitting Entergy Arkansas' service territory in the first quarter of 2008.

Financing Activities

Financing activities provided $213.8 million of cash for the nine months ended September 30, 2008 compared to using $96.8 million of cash for the nine months ended September 30, 2007 primarily due to the issuance of $300 million of 5.4% Series First Mortgage Bonds in July 2008 and a decrease of $174.7 million in common stock dividends paid in 2008, partially offset by money pool activity and borrowings of $60 million on a credit facility in 2007.

Decreases in Entergy Arkansas' payable to the money pool are a use of cash flow, and Entergy Arkansas' payable to the money pool decreased by $72.1 million for the nine months ended September 30, 2008 compared to increasing by $29.9 million for the nine months ended September 30, 2007. The money pool is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries' need for external short-term borrowings.

Capital Structure

Entergy Arkansas' capitalization is balanced between equity and debt, as shown in the following table. The increase in the debt to capital ratio for Entergy Arkansas as of September 30, 2008 is primarily due to the issuance of $300 million of 5.4% Series First Mortgage Bonds in July 2008.

 

 

September 30,
2008

 

December 31,
2007

 

 

 

 

 

Net debt to net capital

 

52.3%

 

49.0%

Effect of subtracting cash from debt

 

0.1%

 

0.0%

Debt to capital

 

52.4%

 

49.0%

66

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

Uses and Sources of Capital

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

The planned construction and other capital investments disclosure in the Form 10-K includes approximately $24 million for initial spending during the 2008-2010 period on installation of scrubbers and low NOx burners at Entergy Arkansas' White Bluff coal plant, which under current environmental regulations must be operational by September 2013. The project remains in the planning stages and has not been fully designed, but the latest conceptual cost estimate has gone up significantly from previous estimates due to increases in equipment, commodity, and labor costs. These estimates indicate that Entergy Arkansas' share of the project could cost approximately $630 million compared to the $375 million reported in the Form 10-K. Entergy Arkansas continues to review potential environmental spending needs and financing alternatives for any such spending, and future spending estimates could change based on the results of this continuing analysis.

In July 2008, Entergy Arkansas issued $300 million of 5.4% Series First Mortgage Bonds due August 2013. Entergy Arkansas used a portion of the net proceeds to fund the purchase of the Ouachita power plant on September 30, 2008, and the remaining net proceeds will be used to fund improvements relating to the Ouachita power plant and for general corporate purposes. Prior to their application, the remaining net proceeds will be used for working capital purposes, including repayment of short-term debt, and may be invested in temporary cash investments or the Entergy System money pool.

In April 2008, Entergy Arkansas renewed its $100 million credit facility through April 2009. No borrowings were outstanding under the credit facility as of September 30, 2008.

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

September 30,
2008

 

December 31,
2007

 

September 30,
2007

 

December 31,
2006

(In Thousands)

 

 

 

 

 

 

 

($5,747)

 

($77,882)

 

($29,924)

 

$16,109

In May 2007, $1.8 million of Entergy Arkansas' receivable from the money pool was replaced by a note receivable from Entergy New Orleans. See Note 4 to the financial statements in the Form 10-K for a description of the money pool.

Significant Factors, Known Trends, and Uncertainties

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

67

State and Local Rate Regulation

Retail Rates

See the Form 10-K for a discussion of the proceedings in Entergy Arkansas' August 2006 request for a change in base rates. Oral argument on Entergy Arkansas' appeal to the Arkansas Court of Appeals has been scheduled for November 19, 2008.

Ouachita Acquisition

Entergy Arkansas filed with the APSC in September 2007 for its approval of the Ouachita plant acquisition, including full cost recovery.  The APSC Staff and the Arkansas attorney general supported Entergy Arkansas' acquisition of the plant, but oppose the sale of one-third of the capacity and energy to Entergy Gulf States Louisiana.  The industrial group AEEC opposed Entergy Arkansas' purchase of the plant.  The Arkansas attorney general opposed recovery of the non-fuel costs of the plant through a separate rider, while the APSC Staff recommended revisions to the rider. In December 2007, the APSC issued an order approving recovery through a rider of the capacity costs associated with the interim tolling agreement, which was in effect until the APSC took action on the acquisition of the plant. A hearing before the APSC was held in April 2008 to address Entergy Arkansas' request for acquisition of the plant and concurrent cost recovery. In June 2008 the APSC approved Entergy Arkansas' acquisition of the Ouachita plant and approved recovery of the acquisition and ownership costs through a rate rider. The APSC also approved the planned sale of one-third of the capacity and energy to Entergy Gulf States Louisiana. The Arkansas attorney general, the AEEC, and Entergy Arkansas requests for rehearing of the APSC order were denied. Entergy Arkansas' request for rehearing concerned the 7.61% before-tax return on rate base approved by the APSC, which reflects significant sources of zero-cost capital already reflected in base rates. Entergy Arkansas had requested a 10.87% before-tax return on rate base reflecting the cost of the debt and equity capital resources available to finance the Ouachita plant acquisition.

On March 18, 2008 the Arkansas attorney general and the AEEC filed a notice of appeal of the December 2007 APSC order that approved recovery through a rider of the capacity costs associated with the interim tolling agreement. This order also rejected various annual earnings review proposals. The Arkansas attorney general and the AEEC filed their appeal briefs in October 2008, and the appellees' briefs, including Entergy Arkansas', are due November 12, 2008.

In August 2008 the AEEC also filed a complaint at the FERC seeking a review by the FERC of "Entergy Corporation's efforts" to acquire the Ouachita plant, alleging that the acquisition violates the System Agreement and the Federal Power Act and that the plant should be an "[Entergy Arkansas] only resource." The AEEC complaint also states that it seeks clarity on whether Entergy Arkansas' termination of its participation in the System Agreement will affect Entergy Arkansas' rights to the Ouachita facility. The APSC, LPSC, MPSC, and City Council have intervened in the proceeding. Entergy filed in September 2008 its answer to the complaint and asked the FERC to dismiss the proceeding.

Entergy Arkansas purchased the Ouachita plant on September 30, 2008.

Production Cost Allocation Rider

In its June 2007 decision on Entergy Arkansas' August 2006 rate filing, the APSC approved a production cost allocation rider for recovery from customers of the retail portion of the costs allocated to Entergy Arkansas as a result of the System Agreement proceedings, but set a termination date of December 31, 2008 for the rider. In December 2007, the APSC issued a subsequent order stating the production cost allocation rider will remain in effect, and any future termination of the rider will be subject to eighteen months advance notice by the APSC, which would occur following notice and hearing. On March 18, 2008 the Arkansas attorney general and the AEEC filed a notice of appeal of the December 2007 APSC order. The appellants' and appellees' briefs have been filed with the court of appeals.

68

In June 2008, Entergy Arkansas filed with the APSC its annual redetermination of the production cost allocation rider. The redetermination resulted in a slight increase in the rates beginning with the first billing cycle of July 2008.

Energy Cost Recovery Rider

Entergy Arkansas' retail rates include an energy cost recovery rider. In December 2007, the APSC issued an order stating that Entergy Arkansas' energy cost recovery rider will remain in effect, and any future termination of the rider will be subject to eighteen months advance notice by the APSC, which would occur following notice and hearing. On March 18, 2008 the Arkansas attorney general and the AEEC filed a notice of appeal of the December 2007 APSC order. The appellants' and appellees' briefs have been filed with the court of appeals.

In March 2008, Entergy Arkansas filed with the APSC its annual energy cost rate for the period April 2008 through March 2009. The filed energy cost rate increased from $0.01179/kWh to $0.01869/kWh. The increase was caused by the following: 1) all three of the nuclear power plants from which Entergy Arkansas obtains power, ANO 1 and 2 and Grand Gulf, will have refueling outages in 2008, and the energy cost rate is adjusted to account for the replacement power costs that will be incurred while these units are down; 2) Entergy Arkansas has a deferred fuel cost balance from under-recovered fuel costs at December 31, 2007; and 3) fuel and purchased power prices have increased.

In August 2008, as provided for by its energy cost recovery rider, Entergy Arkansas filed with the APSC an interim revision to its energy cost rate. The revised energy cost rate is an increase from $0.01869/kWh to $0.02456/kWh. The increase was caused by the continued increase in natural gas and purchased power prices from the levels used in setting the rate in March 2008. The interim revised energy cost rate went into effect for the first billing cycle of September 2008. In October 2008 the APSC issued an order that requires Entergy Arkansas to file for investigative purposes only monthly updates of its actual and projected over/under-recovery of fuel and purchased power costs. The APSC order also states that the interim revised energy cost rate will remain in effect pending further investigation and order of the APSC, and the APSC reserves the right after notice and hearing to prospectively modify the energy cost rate.

APSC Investigations

See the Form 10-K for a discussion of the APSC's investigation of Entergy Arkansas' energy cost recovery practices. In January 2007, the APSC issued an order in its review of Entergy Arkansas' September 2005 interim rate. The APSC found that Entergy Arkansas failed to maintain an adequate coal inventory level going into the summer of 2005 and that Entergy Arkansas should be responsible for any incremental energy costs resulting from two outages caused by employee and contractor error. The coal plant generation curtailments were caused by railroad delivery problems and Entergy has since resolved litigation with the railroad regarding the delivery problems. The APSC staff was directed to perform an analysis with Entergy Arkansas' assistance to determine the additional fuel and purchased energy costs associated with these findings and file the analysis within 60 days of the order. After a final determination of the costs is made by the APSC, Entergy Arkansas would be directed to refund that amount with interest to its customers as a credit on the energy cost recovery rider. The order also stated that the APSC would address any additional issues regarding the energy cost recovery rider in Entergy Arkansas' rate case filed in August 2006. Entergy Arkansas requested rehearing of the order. In March 2007, in order to allow further consideration by the APSC, the APSC granted Entergy Arkansas' petition for rehearing and for stay of the APSC order. In October 2008, Entergy Arkansas filed a motion to lift the stay and asks for rescission of the APSC's January 2007 order in light of the arguments advanced in Entergy Arkansas' rehearing petition and because the value for the Entergy Arkansas' customers obtained through the resolved railroad litigation is significantly greater than the incremental cost of actions identified by the APSC as imprudent. The APSC staff, the AEEC, and the Arkansas attorney general support the lifting of the stay but request additional proceedings. The APSC staff submitted a proposed procedural schedule that calls for a hearing in April 2009.

69

Storm Cost Recovery in Arkansas

In June 2008, together with other Arkansas utilities, Entergy Arkansas filed a joint application for approval of storm cost recovery accounting and a storm damage rider. To enable recovery of 2008 storm cost expenditures through the rider and storm reserve accounting, the applicants requested that the APSC establish a procedural schedule that would allow resolution of this proceeding no later than December 15, 2008. In light of a separate docket established by the APSC in September 2008 to consider "innovative approaches to utility regulation," including approaches to address "recovery of extraordinary storm damage restoration expenses," the utilities withdrew their joint application in October 2008.

The utilities noted in their withdrawal that the new APSC docket is unlikely to be concluded in 2008, and Entergy Arkansas has experienced extraordinary storm costs in 2008 and requires APSC action to address their effects. Therefore, on October 15, 2008, Entergy Arkansas filed a petition for an accounting order authorizing a regulatory asset and storm damage rider.  In the petition, Entergy Arkansas requests the deferral of $26 million in a regulatory asset that represents extraordinary storm restoration costs for the year 2008 that are in excess of the $14.4 million included in base rates. The regulatory asset would be recovered through a surcharge over a 12-month period beginning in January 2009. A public hearing has been set for December 5, 2008 to consider the petition.

Federal Regulation

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

Critical Accounting Estimates

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

New Accounting Pronouncements

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

 

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ENTERGY ARKANSAS, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
         
    Three Months Ended   Nine Months Ended
    2008   2007   2008   2007
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Electric   $711,835    $624,664    $1,791,671    $1,561,428 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   49,268    (6,674)   216,533    114,173 
  Purchased power   336,048    277,627    725,890    587,122 
  Nuclear refueling outage expenses   7,438    7,137    21,655    21,410 
  Other operation and maintenance   119,207     111,723     342,878     326,781  
Decommissioning   8,843    8,271    26,091    24,405 
Taxes other than income taxes   27,106    23,011    65,325    59,245 
Depreciation and amortization   59,716    57,278    176,020    170,107 
Other regulatory credits - net   (4,084)   (2,405)   (9,477)   (16,896)
TOTAL   603,542    475,968    1,564,915    1,286,347 
                 
OPERATING INCOME   108,293    148,696    226,756    275,081 
                 
OTHER INCOME                
Allowance for equity funds used during construction   1,583    1,794    4,924    9,191 
Interest and dividend income   3,377    3,687    14,180    15,420 
Miscellaneous - net   (492)   (594)   (2,226)   (2,400)
TOTAL   4,468    4,887    16,878    22,211 
                 
INTEREST AND OTHER CHARGES  
Interest on long-term debt   21,340    19,325    58,175    58,456 
Other interest - net   2,122    6,396    5,968    13,211 
Allowance for borrowed funds used during construction   (882)   (748)   (2,482)   (4,261)
TOTAL   22,580    24,973    61,661    67,406 
                 
INCOME BEFORE INCOME TAXES   90,181    128,610    181,973    229,886 
                 
Income taxes   39,908     44,909     81,460     86,709  
                 
NET INCOME   50,273    83,701    100,513    143,177 
                 
Preferred dividend requirements and other   1,718    1,718    5,155    5,155 
                 
EARNINGS APPLICABLE TO                
COMMON STOCK   $48,555    $81,983    $95,358    $138,022 
                 
See Notes to Financial Statements.                
                 

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ENTERGY ARKANSAS, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
     
    2008   2007
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $100,513    $143,177 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Reserve for regulatory adjustments   (2,167)   (18,607)
  Other regulatory credits - net   (9,477)   (16,896)
  Depreciation, amortization, and decommissioning   202,111    194,512 
  Deferred income taxes, investment tax credits, and non-current taxes accrued   66,291     2,770 
  Changes in working capital:        
    Receivables   30,045    (20,717)
    Fuel inventory   (7,917)   3,555 
    Accounts payable   (231,263)   83,139 
    Taxes accrued   -     (37,161)
    Interest accrued   7,161    1,339 
    Deferred fuel costs   4,253    (68,021)
    Other working capital accounts   140,572    (135,837)
  Provision for estimated losses and reserves   534    (183)
  Changes in other regulatory assets   26,396    26,956 
  Other   (71,916)   104,208 
Net cash flow provided by operating activities   255,136    262,234 
         
INVESTING ACTIVITIES        
Construction expenditures   (251,917)   (212,835)
Allowance for equity funds used during construction   4,924    9,191 
Nuclear fuel purchases   (94,489)   (40,353)
Proceeds from sale/leaseback of nuclear fuel   94,489    42,220 
Payment for purchase of plant   (210,029)    - 
Proceeds from nuclear decommissioning trust fund sales   137,509    59,155 
Investment in nuclear decommissioning trust funds   (147,072)   (68,569)
Change in money pool receivable - net     14,298 
Net cash flow used in investing activities   (466,585)   (196,893)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt   298,001   
Change in credit borrowing - net     60,000 
Change in money pool payable - net   (72,135)   29,924 
Dividends paid:        
  Common stock   (6,900)   (181,600)
  Preferred stock   (5,155)   (5,155)
Net cash flow provided by (used in) financing activities   213,811    (96,831)
         
Net increase (decrease) in cash and cash equivalents   2,362    (31,490)
         
Cash and cash equivalents at beginning of period   212    34,815 
         
Cash and cash equivalents at end of period   $2,574    $3,325 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
  Interest - net of amount capitalized   $50,315    $60,050 
  Income taxes   $36,174    $25,795 
         
See Notes to Financial Statements.        
         

 

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ENTERGY ARKANSAS, INC.
BALANCE SHEETS
ASSETS
September 30, 2008 and December 31, 2007
(Unaudited)
   
  2008   2007
  (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents   $2,574    $212 
Accounts receivable:        
  Customer   137,378    85,414 
  Allowance for doubtful accounts   (16,152)   (16,649)
  Associated companies   48,606    75,756 
  Other   61,254    124,111 
  Accrued unbilled revenues   75,741    68,240 
     Total accounts receivable   306,827    336,872 
Deferred fuel costs   110,510    114,763 
Accumulated deferred income taxes   35,168   
Fuel inventory - at average cost   28,422    20,505 
Materials and supplies - at average cost   113,926    106,165 
Deferred nuclear refueling outage costs   21,296    17,623 
System agreement cost equalization   108,048    268,000 
Prepayments and other   34,998    16,511 
TOTAL   761,769    880,651 
         
OTHER PROPERTY AND INVESTMENTS        
Investment in affiliates - at equity   11,203    11,203 
Decommissioning trust funds   420,536    466,348 
Non-utility property - at cost (less accumulated depreciation)   1,440    1,442 
Other   5,391    5,391 
TOTAL   438,570    484,384 
         
UTILITY PLANT        
Electric   7,210,393    6,792,825 
Property under capital lease   1,444    2,436 
Construction work in progress   140,761    146,651 
Nuclear fuel under capital lease   127,815    124,585 
Nuclear fuel   13,763    19,548 
TOTAL UTILITY PLANT   7,494,176    7,086,045 
Less - accumulated depreciation and amortization   3,229,868    3,112,896 
UTILITY PLANT - NET   4,264,308    3,973,149 
         
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  SFAS 109 regulatory asset - net   91,333    93,557 
  Other regulatory assets   520,909    534,937 
Other   32,904     33,128  
TOTAL   645,146    661,622 
           
TOTAL ASSETS   $6,109,793    $5,999,806 
         
See Notes to Financial Statements.        
 
74
 
ENTERGY ARKANSAS, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2008 and December 31, 2007
(Unaudited)
   
  2008   2007
  (In Thousands)
 
CURRENT LIABILITIES        
Accounts payable:        
  Associated companies   $145,234   $486,201
  Other   138,719   100,246
Customer deposits   60,825   57,751
Accumulated deferred income taxes   -   26,964
Interest accrued   24,608   17,447
Obligations under capital leases   48,786   49,738
Other   18,357   10,890
TOTAL   436,529   749,237
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   1,453,111   1,330,324
Accumulated deferred investment tax credits   52,874   55,854
Obligations under capital leases   80,474   77,283
Other regulatory liabilities   62,134   117,510
Decommissioning   531,717   505,626
Accumulated provisions   14,948   14,414
Pension and other postretirement liabilities   224,694   260,381
Long-term debt   1,617,632   1,314,525
Other   46,392   73,739
TOTAL   4,083,976   3,749,656
         
Commitments and Contingencies        
         
SHAREHOLDERS' EQUITY        
Preferred stock without sinking fund   116,350   116,350
Common stock, $0.01 par value, authorized 325,000,000        
 shares; issued and outstanding 46,980,196 shares in 2008        
 and 2007   470   470
Paid-in capital   588,444   588,527
Retained earnings   884,024   795,566
TOTAL   1,589,288   1,500,913
         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $6,109,793   $5,999,806
         
See Notes to Financial Statements.        
         

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ENTERGY ARKANSAS, INC.
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 
 
    Three Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 249   $ 239   $ 10   
  Commercial   143   127   16    13 
  Industrial   140   122   18    15 
  Governmental   6   6    
     Total retail   538   494   44   
  Sales for resale                
    Associated companies   123   74   49    66 
    Non-associated companies   42   41    
  Other   9   16   (7)   (44)
     Total   $ 712   $ 625   $ 87    14 
                 
Billed Electric Energy                
 Sales (GWh):                 
  Residential   2,354   2,515   (161)   (6)
  Commercial   1,758   1,809   (51)   (3)
  Industrial   1,977   2,022   (45)   (2)
  Governmental   79   77    
     Total retail   6,168   6,423   (255)   (4)
  Sales for resale                
    Associated companies   2,290   1,686   604    36 
    Non-associated companies   516   503   13   
     Total   8,974   8,612   362   
                 
                 
    Nine Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 586   $ 545   $ 41   
  Commercial   346   309   37    12 
  Industrial   342   304   38    13 
  Governmental   15   15    
     Total retail   1,289   1,173   116    10 
  Sales for resale                
    Associated companies   334   222   112    50 
    Non-associated companies   119   110    
  Other   50   56   (6)   (11)
     Total   $ 1,792   $ 1,561   $ 231    15 
                 
Billed Electric Energy                
 Sales (GWh):                 
  Residential   6,049   6,070   (21)  
  Commercial   4,489   4,519   (30)   (1)
  Industrial   5,454   5,542   (88)   (2)
  Governmental   209   210   (1)  
     Total retail   16,201   16,341   (140)   (1)
  Sales for resale                
    Associated companies   6,207   5,257   950    18 
    Non-associated companies   1,647   1,758   (111)   (6)
     Total   24,055   23,356   699   
                 
                 
                 

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ENTERGY GULF STATES LOUISIANA, L.L.C.

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

Jurisdictional Separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas

See Part I, Item 1 in the Form 10-K and Entergy Gulf States Louisiana's Management's Financial Discussion and Analysis in the Form 10-K for a discussion of the jurisdictional separation of Entergy Gulf States, Inc. into two vertically integrated utility companies, one operating under the sole retail jurisdiction of the PUCT, Entergy Texas, and the other operating under the sole retail jurisdiction of the LPSC, Entergy Gulf States Louisiana.

Entergy Gulf States Louisiana is the successor for financial reporting purposes to Entergy Gulf States, Inc. Entergy Gulf States Louisiana's Income Statement for the three and nine months ended September 30, 2008 and Entergy Gulf States Louisiana's Cash Flow Statement for the nine months ended September 30, 2008, reflect the effects of the separation of the Texas business. Entergy Gulf States Louisiana's Income Statement for the three and nine months ended September 30, 2007 and Entergy Gulf States Louisiana's Cash Flow Statement for the nine months ended September 30, 2007, include the operations of Entergy Texas. Entergy Gulf States Louisiana's balance sheets as of September 30, 2008 and December 31, 2007 reflect the effects of the separation of the Texas business.

Pursuant to the LPSC order approving the jurisdictional separation plan, Entergy Gulf States Louisiana has made two compliance filings in 2008. On March 31, 2008, Entergy Gulf States Louisiana made its jurisdictional separation plan balance sheet compliance filing with the LPSC. On June 11, 2008, Entergy Gulf States Louisiana made its revenue and expense compliance filing.

Hurricane Gustav and Hurricane Ike

In September 2008, Hurricane Gustav and Hurricane Ike caused catastrophic damage to Entergy Gulf States Louisiana's service territory. The storms resulted in widespread power outages, significant damage to distribution, transmission, and generation 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 Gustav and Hurricane Ike are estimated to be in the range of $275 million to $325 million. Entergy Gulf States Louisiana is considering all reasonable avenues to recover storm-related costs from Hurricane Gustav and Hurricane Ike, including, but not limited to, accessing funded storm reserves; federal and local cost recovery mechanisms, including requests for Community Development Block Grant funding; securitization; and insurance, to the extent deductibles are met.

On October 9, 2008, Entergy Gulf States Louisiana drew $85 million from its funded storm reserve. On October 15, 2008, the LPSC approved Entergy Gulf States Louisiana's request to defer and accrue carrying cost on unrecovered storm expenditures during the period the company seeks regulatory recovery. The approval was without prejudice to the ultimate resolution of the total amount of prudently incurred storm cost or final carrying cost rate. Entergy Gulf States Louisiana expects to initiate its storm cost recovery proceeding in the first quarter 2009. The existing securitization legislation in Louisiana extends to Hurricane Gustav and Hurricane Ike. Entergy is currently evaluating the amount of the losses covered by insurance for Entergy and each of the affected Utility operating companies. Because most of the Hurricane Gustav damage was to distribution and transmission facilities that are generally not covered by property insurance, Entergy does not expect to meet its deductibles for that storm. Because Hurricane Ike caused more damage by flooding and also caused more damage to generation facilities as compared to Hurricane Gustav, it is more likely that Entergy will meet its deductibles for that storm.

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 $148 million and construction work in progress of approximately $120 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 territory, because management believes that recovery through some form of

77

 

 

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

Following are income statement variances for Entergy Gulf States Louisiana comparing the third quarter 2008 to the third quarter 2007 showing how much the line item increased or (decreased) in comparison to the prior period:

 




Third Quarter
2007

 

Variance caused directly by the jurisdictional separation

 



Variance caused by other factors




Third Quarter 2008

(In Thousands)

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

 



$394,770



($149,448)



($3,979)



$241,343

Other operation and maintenance expenses

 

128,154

(43,551)

(9,818)

74,785

Taxes other than income taxes

 

35,838

(12,941)

(276)

22,621

Depreciation and amortization

 

50,925

(16,644)

809 

35,090

Other expenses

5,490

(44)

6,290 

11,736

Other income

 

31,746

7,002 

(19,022)

19,726

Interest charges

 

41,701

(7,789)

(2,817)

31,095

Income taxes

 

65,026

(21,222)

(17,997)

25,807

Net Income (Loss)

 

$99,382

 

($40,255)

 

$808 

$59,935

Following are income statement variances for Entergy Gulf States Louisiana comparing the nine months ended September 30, 2008 to the nine months ended September 30, 2007 showing how much the line item increased or (decreased) in comparison to the prior period:

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Nine months
ended
September 30, 2007

 

Variance caused directly by the jurisdictional separation

 


Variance caused by other factors


Nine months
ended
September 30, 2008

(In Thousands)

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

 



$981,877



($315,669)



($22,453)



$643,755

Other operation and maintenance expenses

 

395,283

(132,741)

(16,793)

245,749

Taxes other than income taxes

 

101,980

(38,945)

(3,729)

59,306

Depreciation and amortization

 

156,400

(51,124)

(2,952)

102,324

Other expenses

18,707

(129)

11,080 

29,658

Other income

 

71,128

16,437

(24,683)

62,882

Interest charges

 

115,682

(15,356)

(6,225)

94,101

Income taxes

 

106,014

(24,240)

(20,223)

61,551

Net Income (Loss)

$158,939

($36,697) 

 

($8,294)

$113,948

Net Income

Third Quarter 2008 Compared to Third Quarter 2007

Net income decreased by $39.4 million primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007, and lower other income, partially offset by lower other operation and maintenance expenses and a lower effective income tax rate. For the three months ended September 30, 2007, Entergy Texas reported net income of $40.3 million.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net income decreased by $45.0 million primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007, lower net revenue other than the effect on net revenue directly caused by the jurisdictional separation, and lower other income, partially offset by lower other operation and maintenance expenses and a lower effective income tax rate. For the nine months ended September 30, 2007, Entergy Texas reported net income of $36.7 million.

Net Revenue

Third Quarter 2008 Compared to Third Quarter 2007

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 2008 to the third quarter 2007.

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Amount

 

 

(In Millions)

 

 

 

2007 net revenue

 

$394.8 

Jurisdictional separation

 

(149.4)

Volume/weather

 

(11.9)

Other

 

7.8 

2008 net revenue

 

$241.3 

Net revenue decreased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007.

The volume/weather variance is primarily due to the effects of Hurricane Gustav and Hurricane Ike.

The Other variance is primarily caused by various operational effects of the jurisdictional separation on revenues and fuel and purchased power expenses.

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

Gross operating revenues decreased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007, partially offset by an increase in fuel cost recovery revenues due to higher fuel rates.

Fuel and purchased power expense increased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007.

Other regulatory charges decreased primarily due to a decrease in capacity charges and due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

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, 2008 to the nine months ended September 30, 2007.

 

 

Amount

 

 

(In Millions)

 

 

 

2007 net revenue

 

$981.9 

Jurisdictional separation

 

(315.7)

Other

 

(22.4)

2008 net revenue

 

$643.8 

Net revenue decreased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007.

The Other variance is primarily caused by various operational effects of the jurisdictional separation on revenues and fuel and purchased power expenses.

 

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

Gross operating revenues decreased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007, partially offset by an increase in fuel cost recovery revenues due to higher fuel rates and increased usage.

Fuel and purchased power expense decreased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007.

Other regulatory charges decreased primarily due to a decrease in capacity charges and due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007.

Other Income Statement Variances

Third Quarter 2008 Compared to Third Quarter 2007

Other operation and maintenance decreased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007.

Taxes other than income taxes decreased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007.

Depreciation and amortization decreased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007.

Nuclear refueling outage expenses increased due to the amortization of higher expenses associated with the planned maintenance and refueling outage at River Bend in the first quarter 2008 as well as the delay of this outage from late 2007 to early 2008 resulting in a shorter amortization period for these costs.

Other income includes $15 million in interest and dividend income in 2008 related to the debt assumption agreement between Entergy Gulf States Louisiana and Entergy Texas and the $1.079 billion of debt assumed by Entergy Texas as of December 31, 2007. Entergy Gulf States Louisiana remains primarily liable on this debt. The increase in interest income is partially offset by $8 million of other income reported by Entergy Texas for the third quarter 2007. The income from the debt assumption agreement offsets the interest expense on the portion of long-term debt assumed by Entergy Texas. The remaining variance is primarily due to lower carrying charges on storm restoration costs and a decrease in interest earned on money pool investments.

Interest and other charges decreased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007 and due to a decrease in long-term debt outstanding.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Other operation and maintenance decreased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007.

Taxes other than income taxes decreased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007.

Depreciation and amortization decreased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007 .

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Nuclear refueling outage expenses increased due to the amortization of higher expenses associated with the planned maintenance and refueling outage at River Bend in the first quarter 2008 as well as the delay of this outage from late 2007 to early 2008 resulting in a shorter amortization period for these costs.

Other income includes $46 million in interest and dividend income in 2008 related to the debt assumption agreement between Entergy Gulf States Louisiana and Entergy Texas and the $1.079 billion of debt assumed by Entergy Texas as of December 31, 2007. Entergy Gulf States Louisiana remains primarily liable on this debt. The increase in interest income is partially offset by $29 million of other income reported by Entergy Texas for the nine months ended September 30, 2007. The income from the debt assumption agreement offsets the interest expense on the portion of long-term debt assumed by Entergy Texas . The remaining variance is primarily due to the absence of carrying charges on storm restoration costs and a decrease in interest earned on money pool investments.

Interest and other charges decreased primarily due to the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007 and due to a decrease in long-term debt outstanding.

Income Taxes

The effective income tax rate was 30.1% for the third quarter 2008 and 35.1% for the nine months ended September 30, 2008. The difference in the effective income tax rate for the third quarter 2008 versus the federal statutory rate of 35% is due to flow-through book and tax timing differences and book and tax differences related to storm cost financing and to utility plant items, partially offset by state income taxes.

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

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2008 and 2007 were as follows:

 

 

2008

 

2007

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$108,036 

 

$180,381 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

505,770 

 

380,945 

 

Investing activities

 

(554,329)

 

(361,600)

 

Financing activities

 

64,685 

 

239,609 

Net increase in cash and cash equivalents

 

16,126 

 

258,954 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$124,162 

 

$439,335 

Operating Activities

 

Net cash flow provided by operating activities increased $124.8 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to storm cost proceeds of $274.7 million received from the Louisiana Utilities Restoration

 

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Corporation (LURC) as a result of the Act 55 storm cost financings, partially offset by the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas, effective December 31, 2007. The storm cost financings are discussed in further detail below.

Investing Activities

Net cash flow used in investing activities increased $192.7 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to:

  • the investment of $189.4 million in affiliate securities and the investment of $85.3 million in the storm reserve escrow account as a result of the Act 55 storm cost financings. The storm cost financings are discussed in further detail below; and
  • the purchase of the Calcasieu power plant for $56.4 million. See "MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources " in the Form 10-K for a discussion of the Calcasieu purchase which was completed in March 2008.

The increase was partially offset by a change in money pool activity.

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 $15 million for the nine months ended September 30, 2008 compared to increasing by $120.3 million the nine months ended September 30, 2007. The money pool is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries' need for external short-term borrowings.

Financing Activities

Net cash flow provided by financing activities decreased $174.9 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to the issuance of $329.5 million of securitization bonds in June 2007 by a subsidiary of Entergy Texas, partially offset by borrowings in 2008 of $100 million on Entergy Gulf States Louisiana's credit facility and a decrease of $39.8 million in 2008 in common membership interest distributions paid.

Capital Structure

Entergy Gulf States Louisiana's capitalization is balanced between equity and debt, as shown in the following table. The calculation below does not reduce the debt by the long-term debt assumed by Entergy Texas ($930 million as of September 30, 2008 and $1.079 billion as of December 31, 2007) because Entergy Gulf States Louisiana remains primarily liable on the debt.

 

 

September 30,
2008

 

December 31,
2007

 

 

 

 

 

Net debt to net capital

 

62.6%

 

64.4%

Effect of subtracting cash from debt

 

1.2%

 

1.0%

Debt to capital

 

63.8%

 

65.4%

Net debt consists of debt less cash and cash equivalents. Debt consists of notes payable, capital lease obligations, and long-term debt, including the currently maturing portion. Capital consists of debt and members' equity. Net capital consists of capital less cash and cash equivalents. Entergy 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.

 

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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. Following are updates to the information provided in the Form 10-K.

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

September 30,
2008

 

December 31,
2007

 

September 30,
2007

 

December 31,
2006

(In Thousands)

 

 

 

 

 

 

 

$70,533

 

$55,509

 

$195,371

 

$75,048

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

As discussed in the Form 10-K, Entergy Gulf States Louisiana has a credit facility in the amount of $100 million scheduled to expire in August 2012. As of September 30, 2008, $100 million was outstanding on the credit facility.

In May 2008, Entergy Gulf States Louisiana issued $375 million of 6.00% Series First Mortgage Bonds due May 2018. The proceeds were used to pay at maturity the portion of the $325 million of 3.6% Series First Mortgage Bonds due June 2008 that had not been assumed by Entergy Texas and to redeem, prior to maturity, $189.7 million of the $350 million Floating Rate series of First Mortgage bonds due December 2008, and for other general corporate purposes.

The portion of the $325 million of 3.6% Series First Mortgage Bonds due June 2008 that had been assumed by Entergy Texas was paid at maturity by Entergy Texas in June 2008, and that bond series is no longer outstanding. The remainder of the $350 million Floating Rate series of First Mortgage bonds due December 2008 had been assumed by Entergy Texas, and management expects Entergy Texas to redeem those bonds by their maturity date.

Hurricane Rita and Hurricane Katrina

See the Form 10-K for a discussion of the effects of Hurricanes Katrina and Rita, which hit Entergy Gulf States Inc.'s jurisdictions in Louisiana and Texas in August and September 2005, which resulted in power outages, significant damage to electric distribution, transmission, and generation infrastructure, the temporary loss of sales and customers due to mandatory evacuations, and Entergy Gulf States, Inc.'s initiatives to recover storm restoration and business continuity costs and incremental losses.

Storm Cost Financings

In March 2008, Entergy Gulf States Louisiana, Entergy Louisiana, and the Louisiana Utilities Restoration Corporation (LURC), an instrumentality of the State of Louisiana, filed at the LPSC an application requesting that the LPSC grant financing orders authorizing the financing of Entergy Gulf States Louisiana and Entergy Louisiana storm costs, storm reserves, and issuance costs pursuant to Act 55 of the Louisiana Legislature (Act 55 financings). The Act 55 financings are expected to produce additional customer benefits as compared to Act 64 traditional securitization.  Entergy Gulf States Louisiana and Entergy Louisiana also filed an application requesting LPSC approval for ancillary issues including the mechanism to flow charges and savings to customers via a Storm Cost Offset rider.  On April 3, 2008, the Louisiana State Bond Commission granted preliminary approval for the Act 55 financings.  On April 8, 2008, the Louisiana Public Facilities Authority (LPFA), which is the issuer of the bonds pursuant to the Act 55 financings, approved requests for the Act 55 financings.  On April 10, 2008, Entergy Gulf States Louisiana and Entergy Louisiana and the LPSC Staff filed with the LPSC an uncontested stipulated settlement that includes Entergy Gulf States Louisiana and Entergy Louisiana's proposals under the Act 55 financings, which includes a commitment to pass on to customers a minimum of $10 million and $30 million of customer benefits, respectively, through prospective annual rate reductions of $2 million and $6

 

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million for five years. On April 16, 2008, the LPSC approved the settlement and issued two financing orders and one ratemaking order intended to facilitate implementation of the Act 55 financings.  In May 2008, the Louisiana State Bond Commission granted final approval of the Act 55 financings.

On August 26, 2008, the LPFA issued $278.4 million in bonds under the aforementioned Act 55. From the $274.7 million of bond proceeds loaned by the LPFA to the LURC, the LURC deposited $87 million in a restricted escrow account as a storm damage reserve for Entergy Gulf States Louisiana and transferred $187.7 million directly to Entergy Gulf States Louisiana. From the bond proceeds received by Entergy Gulf States Louisiana from the LURC, Entergy Gulf States Louisiana invested $189.4 million, including $1.7 million that was withdrawn from the restricted escrow account as approved by the April 16, 2008 LPSC orders, in exchange for 1,893,918.39 Class A preferred, non-voting, membership interest units of Entergy Holdings Company LLC, a company wholly-owned and consolidated by Entergy, that carry a 10% annual distribution rate. Distributions are payable quarterly commencing on September 15, 2008 and have a liquidation price of $100 per unit. The preferred membership interests are callable at the option of Entergy Holdings Company LLC after ten years. The terms of the membership interests include certain financial covenants to which Entergy Holdings Company LLC is subject, including the requirement to maintain a net worth of at least $1 billion.

Entergy Gulf States Louisiana will not report the bonds on its balance sheet because the bonds are the obligation of the LPFA, and there is no recourse against Entergy Gulf States Louisiana in the event of a bond default.

Little Gypsy Repowering Project

See Entergy Corporation's Management's Financial Discussion and Analysis in the Form 10-K for a discussion of the Little Gypsy repowering project. The preconstruction and operating air permits for the Little Gypsy repowering project were issued by the Louisiana Department of Environmental Quality (LDEQ) in November 2007 under then-effective federal and state air regulations, including the EPA's Clean Air Mercury Rule that had been issued in 2005 (CAMR 2005). As discussed in more detail in Part I, Item 1, "Environmental Regulation, Clean Air Act and Subsequent Amendments, Hazardous Air Pollutants" in the Form 10-K, in February 2008 the U.S. Court of Appeals for the D.C. Circuit struck down CAMR 2005. The D.C. Circuit decision requires utilities that have not yet begun construction of the facility in question to undergo before beginning construction a case-by-case Maximum Achievable Control Technology (MACT) analysis for construction or reconstruction of emission units pursuant to the Clean Air Act. The Little Gypsy project as currently configured is expected to meet MACT standards. Little Gypsy received its construction permit before a formal MACT analysis was required, however, and Entergy Louisiana has sought a MACT determination from the LDEQ. The filing was made in June 2008, and the LDEQ has certified that the filing is complete. A decision on the MACT determination is expected by first quarter 2009. Entergy Louisiana also is awaiting permit determinations from several additional agencies. These permits are unrelated to CAMR 2005 and always have been part of the construction process. Onsite construction of the project was scheduled to begin in July 2008, but obtaining the MACT determination will cause a delay in the start of construction, which Entergy Louisiana now expects to begin in mid-year 2009. This delays the expected commercial operation date of the project to mid-year 2013.

The LPSC Phase I order has been appealed to the state district court in Baton Rouge, Louisiana by a group led by the Sierra Club and represented by the Tulane Environmental Law Clinic. A status conference is set for December 3, 2008, at which time a procedural schedule should be established for the appeal.

The LPSC had approved the temporary suspension of Phase II of the Little Gypsy proceedings because Entergy Louisiana must update its estimated project cost and schedule in order to support the request to recover cash earnings on its construction work in progress (CWIP) costs. On October 16, 2008, Entergy Louisiana, together with Entergy Gulf States Louisiana, filed an application to resume Phase II of the proceeding. The Phase II filing seeks certification for Entergy Gulf States Louisiana to participate in a one-third ownership share in the repowering project. In addition, Entergy Louisiana and Entergy Gulf States Louisiana seek recovery of approximately 79% of their construction financing costs through the recovery of cash earnings on CWIP costs. The LPSC previously found that the recovery of CWIP for

 

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a large baseload project may be in the public interest as cash earnings may be needed to protect the utility's financial integrity, maintain an acceptable credit rating, prevent an undue increase in the utility's cost of capital, or to accomplish phasing in of the cost of a large capital project for the benefit of customers. In Phase II, the LPSC will rule on Entergy Gulf States Louisiana's certification request, determine the appropriate amount of CWIP costs, if any, to be recovered and will develop the allocation, accounting and rate recovery mechanisms for such recovery. The LPSC also will determine the appropriate procedure or mechanism for synchronizing base rate recovery of Little Gypsy's fixed or non-fuel costs with its commercial in-service date. A status conference is set for November 14, 2008, at which time a procedural schedule should be established for Phase II. Entergy Louisiana and Entergy Gulf States Louisiana have requested that the case be decided in time to permit the recovery of cash earnings on CWIP beginning in July 2009.

The delayed construction of the Little Gypsy repowering project is expected to increase the total project cost from approximately $1.55 billion to $1.76 billion, primarily due to price escalation on non-contracted equipment and material and increased carrying cost due to the extended construction period.

Significant Factors, Known Trends, and Uncertainties

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

State and Local Rate Regulation

Retail Rates - Electric

In August 2008, the LPSC issued an order approving an uncontested settlement between Entergy Gulf States Louisiana and the LPSC Staff authorizing Entergy Gulf States Louisiana's purchase of one-third of the capacity and energy from the 789 MW Ouachita plant, which Entergy Arkansas acquired on September 30, 2008. Entergy Gulf States Louisiana will purchase one-third of the plant's capacity and output from Entergy Arkansas under a life-of-unit agreement.

In May 2008, Entergy Gulf States Louisiana made its formula rate plan filing with the LPSC for the 2007 test year. The filing reflected a 9.26% return on common equity, which is below the allowed earnings bandwidth, and indicated a $5.4 million revenue deficiency, offset by a $4.1 million decrease in required additional capacity costs. Entergy Gulf States Louisiana implemented a $20.7 million formula rate plan decrease, subject to refund, effective the first billing cycle in September 2008. The decrease includes removal of interim storm cost recovery and a reduction in the storm damage accrual. Entergy Gulf States Louisiana then implemented a $16.0 million formula rate plan increase, subject to refund, effective the first billing cycle in October 2008 to collect previously deferred and ongoing costs associated with LPSC approved additional capacity, including the Ouachita power plant. Consideration of the formula rate plan filing is pending.

In May 2007, Entergy Gulf States Louisiana made its formula rate plan filing with the LPSC for the 2006 test year. The filing reflected a 10.0% return on common equity, which is within the allowed earnings bandwidth, and an anticipated formula rate plan decrease of $23 million annually attributable to adjustments outside of the formula rate plan sharing mechanism related to capacity costs and the anticipated securitization of storm costs related to Hurricane Katrina and Hurricane Rita and the securitization of a storm reserve. In September 2007, Entergy Gulf States Louisiana modified the formula rate plan filing to reflect a 10.07% return on common equity, which is still within the allowed bandwidth. The modified filing also reflected implementation of a $4.1 million rate increase, subject to refund, attributable to recovery of additional LPSC-approved incremental deferred and ongoing capacity costs. The rate decrease anticipated in the original filing did not occur because of the additional capacity costs approved by the LPSC, and because securitization of storm costs associated with Hurricane Katrina and Hurricane Rita and the establishment of a storm reserve had not yet occurred. In October 2007, Entergy Gulf States Louisiana implemented a $16.4

 

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million formula rate plan decrease that is due to the reclassification of certain franchise fees from base rates to collection via a line item on customer bills pursuant to an LPSC order. The LPSC staff issued its final report in December 2007, indicating a $1.6 million decrease in formula rate plan revenues for which interim rates were already in effect. In addition, the LPSC staff recommended that the LPSC give a one-year extension of Entergy Gulf States Louisiana's formula rate plan to synchronize with the final year of Entergy Louisiana's formula rate plan, or alternatively, to extend the formula rate plan for a longer period. Entergy Gulf States Louisiana indicated it is amenable to a one-year extension. An uncontested stipulated settlement was filed in February 2008 that will leave the current base rates in place and extend the formula rate plan for one year, and the LPSC approved the settlement in March 2008.

Retail Rates - Gas

In January 2008, Entergy Gulf States Louisiana filed with the LPSC its gas rate stabilization plan for the test year ending September 30, 2007.  The filing showed a revenue deficiency of $3.7 million based on a return on common equity mid-point of 10.5%. Entergy Gulf States Louisiana implemented a $3.4 million rate increase in April 2008 pursuant to an uncontested agreement with the LPSC staff.

Federal Regulation

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

Critical Accounting Estimates

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

New Accounting Pronouncements

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

 

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ENTERGY GULF STATES LOUISIANA, L.L.C.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 
  Three Months Ended   Nine Months Ended
    2008   2007   2008   2007
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Electric   $840,696    $946,222    $2,042,483    $2,606,045 
Natural gas   16,186    11,818    75,499    66,836 
TOTAL   856,882    958,040    2,117,982    2,672,881 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   180,362    210,890    262,478    643,081 
  Purchased power   441,998    341,278    1,214,183    1,024,478 
  Nuclear refueling outage expenses   8,571    2,529    20,354    10,000 
  Other operation and maintenance   74,785     128,154     245,749     395,283  
Decommissioning   3,165    2,961    9,304    8,707 
Taxes other than income taxes   22,621    35,838    59,306    101,980 
Depreciation and amortization   35,090    50,925    102,324    156,400 
Other regulatory charges (credits) - net   (6,821)   11,102    (2,434)   23,445 
TOTAL   759,771    783,677    1,911,264    2,363,374 
                 
OPERATING INCOME   97,111    174,363    206,718    309,507 
                 
OTHER INCOME                
Allowance for equity funds used during construction   1,476    2,512    4,391    8,943 
Interest and dividend income   19,900    29,020    62,169    61,314 
Miscellaneous - net   (1,650)   214    (3,678)   871 
TOTAL   19,726    31,746    62,882    71,128 
                 
INTEREST AND OTHER CHARGES  
Interest on long-term debt   30,439    39,878    93,691    109,567 
Other interest - net   1,553    3,433    3,117    11,899 
Allowance for borrowed funds used during construction   (897)   (1,610)   (2,707)   (5,784)
TOTAL   31,095    41,701    94,101    115,682 
                 
INCOME BEFORE INCOME TAXES   85,742    164,408    175,499    264,953 
                 
Income taxes   25,807     65,026     61,551     106,014  
                  
NET INCOME   59,935    99,382    113,948    158,939 
                 
Preferred distribution requirements and other   206    955    619    2,846 
                 
                 
EARNINGS APPLICABLE TO COMMON EQUITY   $59,729    $98,427    $113,329    $156,093 
                 
See Notes to Financial Statements.                
                 

 

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ENTERGY GULF STATES LOUISIANA, L.L.C.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
     
    2008   2007
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $113,948     $158,939 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Reserve for regulatory adjustments   -     270 
  Other regulatory charges (credits) - net   (2,434)   23,445 
  Depreciation, amortization, and decommissioning   111,628     165,107 
  Deferred income taxes, investment tax credits, and non-current taxes accrued   93,503     1,126 
  Changes in working capital:        
    Receivables   (50,114)   (178,606)
    Fuel inventory   (2,147)   (8,685)
    Accounts payable   1,545     38,139 
    Taxes accrued   -     22,199 
    Interest accrued   4,326     6,270 
    Deferred fuel costs   7,897     8,884 
    Other working capital accounts   (72,002)   59,625 
  Provision for estimated losses and reserves   86,733     (4,236)
  Changes in other regulatory assets   239,821     (48,544)
  Other   (26,934)   137,012 
Net cash flow provided by operating activities   505,770     380,945 
         
INVESTING ACTIVITIES        
Construction expenditures   (206,694)   (226,941)
Allowance for equity funds used during construction   4,391     8,943 
Insurance proceeds   -     6,580 
Nuclear fuel purchases   (21,807)   (35,376)
Proceeds from sale/leaseback of nuclear fuel   21,819     13,839 
Payment for purchase of plant   (56,409)  
Investment in affiliates   (189,400)  
Payment to storm reserve escrow account   (85,306)  
Proceeds from nuclear decommissioning trust fund sales   41,587     48,918 
Investment in nuclear decommissioning trust funds   (51,420)   (59,621)
Change in money pool receivable - net   (15,024)   (120,323)
Changes in other investments - net   3,934     2,381 
Net cash flow used in investing activities   (554,329)   (361,600)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt   369,821     323,486 
Retirement of long-term debt   (366,683)  
Redemption of preferred stock   -     (3,450)
Changes in credit borrowing - net   100,000    
Dividends/distributions paid:        
  Common equity   (37,800)   (77,600)
  Preferred membership interests   (653)   (2,827)
Net cash flow provided by financing activities   64,685     239,609 
         
Net increase in cash and cash equivalents   16,126    258,954 
         
Cash and cash equivalents at beginning of period   108,036     180,381 
         
Cash and cash equivalents at end of period   $124,162     $439,335 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
  Interest - net of amount capitalized   $89,947    $108,372 
  Income taxes   $2,324    $15,066 
         
Noncash financing activities:        
  Repayment by Entergy Texas of assumed long-term debt   $148,837    $- 
         
See Notes to Financial Statements.        

89

 

ENTERGY GULF STATES LOUISIANA, L.L.C.
BALANCE SHEETS
ASSETS
September 30, 2008 and December 31, 2007
(Unaudited)
       
  2008   2007
  (In Thousands)
       
CURRENT ASSETS          
Cash and cash equivalents:          
  Cash     $200    $233 
  Temporary cash investments - at cost,           
   which approximates market     123,962    107,803 
     Total cash and cash equivalents     124,162    108,036 
Accounts receivable:          
  Customer     114,476    62,408 
  Allowance for doubtful accounts     (1,504)   (979)
  Associated companies     219,784    218,891 
  Other     77,864    59,059 
  Accrued unbilled revenues     47,918    54,021 
     Total accounts receivable     458,538    393,400 
Deferred fuel costs       5,644 
Accumulated deferred income taxes       21,938 
Fuel inventory - at average cost     33,957    31,810 
Materials and supplies - at average cost     105,398    100,161 
Deferred nuclear refueling outage costs     22,457    5,155 
Debt assumption by Entergy Texas     160,286    309,123 
Prepayments and other     21,699    23,533 
TOTAL     926,497    998,800 
           
OTHER PROPERTY AND INVESTMENTS        
Investment in affiliates   189,400   
Decommissioning trust funds     329,892    366,062 
Non-utility property - at cost (less accumulated depreciation)     121,654    109,517 
Storm reserve escrow account     85,306   
Other     13,092    17,350 
TOTAL     739,344    492,929 
           
UTILITY PLANT        
Electric     6,352,342    6,132,362 
Natural gas     104,736    98,484 
Construction work in progress     206,838    141,528 
Nuclear fuel under capital lease     116,143    110,769 
Nuclear fuel     7,692    11,256 
TOTAL UTILITY PLANT     6,787,751    6,494,399 
Less - accumulated depreciation and amortization     3,545,630    3,433,131 
UTILITY PLANT - NET     3,242,121    3,061,268 
           
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:          
  SFAS 109 regulatory asset - net     320,843    299,023 
  Other regulatory assets     311,012    335,897 
  Deferred fuel costs     100,124    100,124 
Long-term receivables     1,316    1,872 
Debt assumption by Entergy Texas     769,971    769,971 
Other     16,238    12,807 
TOTAL     1,519,504    1,519,694 
           
TOTAL ASSETS     $6,427,466    $6,072,691 
           
See Notes to Financial Statements.          
 

90

 
 
ENTERGY GULF STATES LOUISIANA, L.L.C.
BALANCE SHEETS
LIABILITIES AND MEMBERS' EQUITY
September 30, 2008 and December 31, 2007
(Unaudited)
 
  2008   2007
  (In Thousands)
 
CURRENT LIABILITIES        
Currently maturing long-term debt   $160,286    $675,000 
Accounts payable:          
  Associated companies     214,401    201,217 
  Other     313,289    111,579 
Customer deposits     40,418    38,061 
Accumulated deferred income taxes     45,029   
Interest accrued     33,724    29,398 
Deferred fuel costs     2,253   
Obligations under capital leases     28,795    28,795 
Pension and other postretirement liabilities     7,255    7,064 
Gas hedge contracts     17,939   
System agreement cost equalization     53,146    124,775 
Other     8,863    9,052 
TOTAL     925,398    1,224,941 
           
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued     1,267,548    1,219,568 
Accumulated deferred investment tax credits     92,662    95,745 
Obligations under capital leases     87,348    81,974 
Other regulatory liabilities     33,635    69,890 
Decommissioning and asset retirement cost liabilities     218,252    204,828 
Accumulated provisions     98,620    11,887 
Pension and other postretirement liabilities     68,752    102,510 
Long-term debt     2,147,259    1,674,113 
Other     112,275    87,468 
TOTAL     4,126,351    3,547,983 
           
Commitments and Contingencies          
           
MEMBERS' EQUITY        
Preferred membership interests without sinking fund     10,000    10,000 
Members' equity     1,388,220    1,312,701 
Accumulated other comprehensive loss     (22,503)   (22,934)
TOTAL     1,375,717    1,299,767 
           
TOTAL LIABILITIES AND MEMBERS' EQUITY     $6,427,466    $6,072,691 
           
See Notes to Financial Statements.          
           

91

 

ENTERGY GULF STATES LOUISIANA, L.L.C.
STATEMENTS OF MEMBERS' EQUITY AND COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
                     
        Three Months Ended
        2008   2007
        (In Thousands)
MEMBERS' EQUITY                    
Members' Equity - Beginning of period       $1,328,501        $2,237,631     
                     
  Add: Net Income       59,935    $59,935    99,382    $99,382 
                     
  Deduct:                    
    Dividends/distributions declared on common equity             32,100     
    Preferred membership interests       206    206    955    955 
    Other                
        214        33,055     
                     
Members' Equity - End of period       $1,388,222        $2,303,958     
                     
ACCUMULATED OTHER COMPREHENSIVE                    
LOSS (Net of Taxes):                    
Balance at beginning of period:                    
  Pension and other postretirement liabilities       ($22,302)       ($19,245)    
                     
Pension and other postretirement liabilities (net of tax expense of $959 and $326)       (201)   (201)   335    335 
                     
Balance at end of period:                    
  Pension and other postretirement liabilities       ($22,503)       ($18,910)    
Comprehensive Income           $59,528        $98,762 
                     
                     
        Nine Months Ended
        2008   2007
        (In Thousands)
MEMBERS' EQUITY                    
Members' Equity - Beginning of period       $1,312,701        $2,225,465     
                     
  Add: Net Income       113,948    $113,948    158,939    $158,939 
                     
  Deduct:                    
    Dividends/distributions declared on common equity       37,800        77,600     
    Preferred membership interests       619    619    2,846    2,846 
    Other       10           
        38,429        80,446     
                     
Members' Equity - End of period       $1,388,220        $2,303,958     
                     
ACCUMULATED OTHER COMPREHENSIVE                    
LOSS (Net of Taxes):                    
Balance at beginning of period:                    
  Pension and other postretirement liabilities       ($22,934)       ($19,914)    
                     
Pension and other postretirement liabilities (net of tax expense of $1,839 and $978)       431    431    1,004    1,004 
                     
Balance at end of period:                    
  Pension and other postretirement liabilities       ($22,503)       ($18,910)    
Comprehensive Income           $113,760        $157,097 
                     
                     
See Notes to Financial Statements.                    

92

 

 

ENTERGY GULF STATES LOUISIANA, L.L.C.
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues (1):                
  Residential   $194   $320   ($126)   (39)
  Commercial   161   210   (49)   (23)
  Industrial   202   247   (45)   (18)
  Governmental   7   10   (3)   (30)
     Total retail   564   787   (223)   (28)
  Sales for resale                
    Associated companies   217   85   132    155 
    Non-associated companies   63   51   12    24 
  Other   (3)   23   (26)   (113)
     Total   $841   $946   ($105)   (11)
                 
Billed Electric Energy                
 Sales (GWh) (1):                
  Residential   1,608   3,359   (1,751)   (52)
  Commercial   1,439   2,577   (1,138)   (44)
  Industrial   2,256   3,815   (1,559)   (41)
  Governmental   55   114   (59)   (52)
     Total retail   5,358   9,865   (4,507)   (46)
  Sales for resale                
    Associated companies   1,747   728   1,019    140 
    Non-associated companies   685   704   (19)   (3)
     Total   7,790   11,297   (3,507)   (31)
                 
                 
    Nine Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues (1):                
  Residential   $440   $800   ($360)   (45)
  Commercial   403   612   (209)   (34)
  Industrial   534   785   (251)   (32)
  Governmental   18   34   (16)   (47)
     Total retail   1,395   2,231   (836)   (37)
  Sales for resale                
    Associated companies   465   151   314    208 
    Non-associated companies   157   153    
  Other   25   71   (46)   (65)
     Total   $2,042   $2,606   ($564)   (22)
                 
Billed Electric Energy                
 Sales (GWh) (1):                
  Residential   3,831   7,890   (4,059)   (51)
  Commercial   3,787   6,761   (2,974)   (44)
  Industrial   6,553   11,317   (4,764)   (42)
  Governmental   163   335   (172)   (51)
     Total retail   14,334   26,303   (11,969)   (46)
  Sales for resale                
    Associated companies   4,425   1,962   2,463    126 
    Non-associated companies   2,020   2,248   (228)   (10)
     Total   20,779   30,513   (9,734)   (32)
                 
                 
(1) Amounts for the three and nine months ended September 30, 2008 reflect the effects of the separation of the Texas business. Amounts for the three and nine months ended September 30, 2007 include the operations of Entergy Texas.
                 

93

 

ENTERGY LOUISIANA, LLC

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

Hurricane Gustav and Hurricane Ike

In September 2008, Hurricane Gustav (and, to a much lesser extent, Hurricane Ike) caused catastrophic damage to Entergy Louisiana's service territory. The storms resulted in widespread power outages, significant damage to distribution, transmission, and generation 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 Gustav and Hurricane Ike are estimated to be in the range of $240 million to $285 million. Entergy Louisiana is considering all reasonable avenues to recover storm-related costs, including, but not limited to, accessing funded storm reserves; federal and local cost recovery mechanisms, including requests for Community Development Block Grant funding; securitization; and insurance, to the extent deductibles are met.

On October 9, 2008, Entergy Louisiana drew $134 million from its funded storm reserves. On October 15, 2008, the LPSC approved Entergy Louisiana's request to defer and accrue carrying cost on unrecovered storm expenditures during the period the company seeks regulatory recovery. The approval was without prejudice to the ultimate resolution of the total amount of prudently incurred storm cost or final carrying cost rate. Entergy Louisiana expects to initiate its storm cost recovery proceeding in the first quarter 2009. The existing securitization in Louisiana extends to Hurricane Gustav and Hurricane Ike. Entergy is currently evaluating the amount of the losses covered by insurance for Entergy and each of the affected Utility operating companies. Because most of the Hurricane Gustav damage was to distribution and transmission facilities that are generally not covered by property insurance, Entergy does not expect to meet its deductibles for that storm.

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 $130 million and construction work in progress of approximately $113 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 territory, 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 2008 Compared to Third Quarter 2007

Net income decreased $13.1 million primarily due to lower net revenue and higher depreciation and amortization expenses, partially offset by lower other operation and maintenance expenses and higher other income.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net income decreased $11.5 million primarily due to lower net revenue and higher depreciation and amortization expenses, partially offset by higher other income.

94

Net Revenue

Third Quarter 2008 Compared to Third Quarter 2007

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 2008 to the third quarter 2007.

 

 

Amount

 

 

(In Millions)

 

 

 

2007 net revenue

 

$309.4 

Volume/weather

 

(27.0)

Retail electric price

 

(13.5)

Net wholesale revenue

 

(5.4)

Other

 

0.4 

2008 net revenue

 

$263.9 

The volume/weather variance is primarily due to decreased electricity usage, including the effects of Hurricane Gustav and Hurricane Ike, which contributed an estimated $18 million to the decrease, primarily during the unbilled sales period, and the effect of less favorable weather compared to the same period in 2007.

The retail electric price variance is primarily due to the cessation of the interim storm recovery through the formula rate plan upon the Act 55 financing of storm costs and a credit passed on to customers as a result of the Act 55 storm cost financing. Refer to " Hurricane Rita and Hurricane Katrina" below and Note 2 to the financial statements in the Form 10-K and herein for a discussion of the interim recovery of storm costs and the Act 55 storm cost financing.

The net wholesale revenue variance is primarily due to provisions recorded for potential rate refunds related to interruptible load revenues.

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

Gross operating revenues increased primarily due to an increase of $248.4 million in fuel cost recovery revenues due to higher fuel rates and usage, partially offset by a decrease in volume/weather, as discussed above.

Fuel and purchased power expenses increased primarily due to an increase in the recovery from customers of deferred fuel costs in addition to increases in the average market prices of natural gas and purchased power.

Other regulatory charges decreased primarily due to the amortization of interim storm recoveries in 2007 that ceased in July 2008 with the Act 55 financing of storm costs. See Note 2 to the financial statements for a discussion of the interim storm recoveries and the Act 55 financing.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

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, 2008 to the nine months ended September 30, 2007.

95

 

 

Amount

 

 

(In Millions)

 

 

 

2007 net revenue

 

$770.2 

Volume/weather

 

(13.8)

Purchased power capacity

 

(8.8)

Retail electric price

 

(6.9)

Net wholesale revenue

 

(6.0)

Other

 

6.7 

2008 net revenue

 

$741.4 

The volume/weather variance is primarily due to decreased electricity usage, including the effects of Hurricane Gustav and Hurricane Ike, during the unbilled sales period and the effect of less favorable weather compared to 2007, offset by other miscellaneous factors.

The purchased power capacity variance is due to the amortization of deferred capacity costs effective September 2007 as a result of the formula rate plan filing in May 2007. See Note 2 to the financial statements for a discussion of the formula rate plan filing.

The retail electric price variance is primarily due to the cessation of the interim storm recovery through the formula rate plan upon the Act 55 financing of storm costs and a credit passed on to customers as a result of the Act 55 storm cost financing, partially offset by increases in the formula rate plan effective October 2007. Refer to " Hurricane Rita and Hurricane Katrina" below and to Note 2 to the financial statements in the Form 10-K and herein for a discussion of the interim recovery of storm costs, the Act 55 storm cost financing, and the formula rate plan filing.

The net wholesale revenue variance is primarily due to provisions recorded for potential rate refunds related to interruptible load revenues.

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

Gross operating revenues increased primarily due to an increase of $275.8 million in fuel cost recovery revenues due to higher fuel rates and usage, partially offset by a decrease in volume/weather, as discussed above.

Fuel and purchased power expenses increased primarily due to increases in the average market prices of natural gas and purchased power and the shift from lower-priced nuclear generation due to the scheduled nuclear refueling outage in 2008, partially offset by a decrease in the recovery from customers of deferred fuel costs.

Other regulatory charges decreased primarily due to the amortization of interim storm recoveries in 2007 that ceased in July 2008 with the Act 55 financing of storm costs and the amortization in 2007 related to the voluntary severance program. See " Hurricane Rita and Hurricane Katrina" below and Note 2 to the financial statements for a discussion of the interim storm recoveries and the Act 55 financing.

96

Other Income Statement Variances

Third Quarter 2008 Compared to Third Quarter 2007

Other operation and maintenance expenses decreased primarily due to:

  • a decrease of $6.9 million in customer service costs primarily as the result of write-offs in 2007 of uncollectible customer accounts;
  • a decrease of $5.4 million in payroll-related costs; and
  • a decrease of $3.2 million in loss reserves for storm damage in 2008 upon the Act 55 storm cost financing.

Depreciation and amortization expenses increased due to a revision in the third quarter 2007 related to depreciation on storm cost-related assets. Recovery of the cost of those assets will now be through the Act 55 financing of storm costs as approved by the LPSC in the third quarter 2007. See " Hurricane Rita and Hurricane Katrina" below and Note 2 to the financial statements for a discussion of the Act 55 storm cost financing.

Other income increased primarily due to dividends earned on preferred stock purchased from Entergy Holdings Company with the proceeds received from the Act 55 storm cost financing. See " Hurricane Rita and Hurricane Katrina" below and Note 2 to the financial statements for a discussion of the storm cost financing.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Depreciation and amortization expenses increased due to a revision in the third quarter 2007 related to depreciation on storm cost-related assets. Recovery of the cost of those assets will now be through the Act 55 financing of storm costs as approved by the LPSC in the third quarter 2007. See " Hurricane Rita and Hurricane Katrina" below and Note 2 to the financial statements for a discussion of the Act 55 storm cost financing.

Other income increased primarily due to dividends earned on preferred stock purchased from Entergy Holdings Company with the proceeds received from the Act 55 Storm Cost Financings, interest earned on the deferred fuel balance, and carrying charges on storm restoration costs approved by the LPSC. See " Hurricane Rita and Hurricane Katrina" below and Note 2 to the financial statements for a discussion of the Act 55 storm cost financing.

Income Taxes

The effective income tax rate was 34.0% for the third quarter 2008 and 37.7% for the nine months ended September 30, 2008. The effective income tax rate was 34.8% for the third quarter 2007 and 36.2% for the nine months ended September 30, 2007. The difference in the effective income tax rates for the nine months ended September 30, 2008 and 2007 versus the federal statutory rate of 35.0% is primarily due to book and tax differences related to utility plant items and state income taxes, partially offset by book and tax differences related to the allowance for equity funds used during construction and the amortization of investment tax credits. Also contributing to the nine months ended September 30, 2008 income tax rate versus the federal statutory rate is book and tax differences related to the storm cost financing.

97

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2008 and 2007 were as follows:

 

 

2008

 

2007

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$300 

 

$2,743 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

 925,998 

 

193,117 

 

Investing activities

 

(1,168,734)

 

(199,231)

 

Financing activities

 

429,044 

 

3,898 

Net increase (decrease) in cash and cash equivalents

 

186,308 

 

(2,216)

 

 

 

 

 

Cash and cash equivalents at end of period

 

$186,608 

 

$527 

Operating Activities

Cash flow provided by operating activities increased $732.9 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to storm cost proceeds of $679 million received from the LURC as a result of the Act 55 storm cost financings and income tax refunds of $5.7 million in 2008 compared to income tax payments of $98.9 million in 2007. The increase was partially offset by decreased recovery of deferred fuel costs. See " Hurricane Rita and Hurricane Katrina" below and Note 2 to the financial statements for a discussion of the storm cost financings.

Investing Activities

Net cash flow used in investing activities increased $970 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to:

  • the investment of $545 million in affiliate securities and the investment of $134.4 million in the storm reserve escrow account as a result of the Act 55 storm cost financings. See " Hurricane Rita and Hurricane Katrina" below and Note 2 to the financial statements for a discussion of the storm cost financings;
  • increased construction expenditures in 2008 due to Hurricane Gustav and Hurricane Ike, the Little Gypsy Unit 3 repowering project, and various nuclear project; 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 $106.4 million for the nine months ended September 30, 2008. The money pool is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries need for external short-term borrowings.

98

 

 

Financing Activities

Net cash provided by financing activities increased $425.1 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to the issuance of $300 million of 6.50% Series First Mortgage Bonds in August 2008 and borrowings of $200 million on Entergy Louisiana's credit facility, partially offset by the repurchase, prior to maturity, of $60 million of Auction Rate governmental bonds, which are being held for remarketing at a later date, and money pool activity.

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 $2.8 million for the nine months ended September 30, 2008 compared to increasing by $9.1 million for the nine months ended September 30, 2007. The money pool is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries' need for external short-term borrowings.

Capital Structure

Entergy Louisiana's capitalization is balanced between equity and debt, as shown in the following table. The increase in the debt to capital ratio for Entergy Louisiana as of September 30, 2008 is primarily due to borrowings of $200 million on Entergy Louisiana's credit facility and the issuance of $300 million 6.50% Series First Mortgage Bonds in August 2008, partially offset by the repurchase, prior to maturity, of $60 million of Auction Rate governmental bonds.

 

 

September 30,
2008

December 31,
2007

 

 

Net debt to net capital

 

47.1%

43.4%

Effect of subtracting cash from debt

 

3.0%

-

Debt to capital

 

50.1%

43.4%

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

Uses and Sources of Capital

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

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

September 30,
2008

 

December 31,
2007

 

September 30,
2007

 

December 31,
2006

(In Thousands)

 

 

 

 

 

 

 

$106,427

 

($2,791)

 

($63,151)

 

($54,041)

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

As discussed in the Form 10-K, Entergy Louisiana has a credit facility in the amount of $200 million scheduled to expire in August 2012. As of September 30, 2008, $200 million was outstanding on the credit facility.

In April 2008, Entergy Louisiana repurchased, prior to maturity, $60 million of Auction Rate governmental bonds, which are being held for possible remarketing at a later date.

In August 2008, Entergy Louisiana issued $300 million of 6.50% Series First Mortgage Bonds due September 2018. The net proceeds of the issuance will be used for capital expenditures, working capital needs, and general corporate purposes. Prior to their application, the remaining net proceeds may be invested in temporary cash investments or the Entergy System money pool.

99

 

 

Hurricane Rita and Hurricane Katrina

See the Form 10-K for a discussion of the effects of Hurricane Katrina and Hurricane Rita and Entergy's initiatives to recover storm restoration and business continuity costs and incremental losses, which includes obtaining reimbursement of certain costs covered by insurance and pursuing recovery through existing or new rate mechanisms regulated by the FERC and local regulatory bodies, in combination with securitization. In August and September 2005, Hurricane Katrina and Hurricane Rita, along with extensive flooding that resulted from levee breaks in and around Entergy Louisiana's service territory, caused catastrophic damage.

Insurance Claims

Entergy has settled its lawsuit against one of its excess insurers on the Hurricane Katrina claim, and in July 2008 received $71.5 million in proceeds on the claim. The July 2008 proceeds were allocated as follows: $2.0 million to Entergy Arkansas, $3.0 million to Entergy Gulf States Louisiana, $12.4 million to Entergy Louisiana, $1.8 million to Entergy Mississippi, and $48.4 million to Entergy New Orleans, with the remainder allocated in smaller amounts to other Entergy subsidiaries.

Storm Cost Financings

In March 2008, Entergy Gulf States Louisiana, Entergy Louisiana, and the Louisiana Utilities Restoration Corporation (LURC), an instrumentality of the State of Louisiana, filed at the LPSC an application requesting that the LPSC grant financing orders authorizing the financing of Entergy Gulf States Louisiana and Entergy Louisiana storm costs, storm reserves, and issuance costs pursuant to Act 55 of the Louisiana Legislature (Act 55 financings). The Act 55 financings are expected to produce additional customer benefits as compared to Act 64 traditional securitization.  Entergy Gulf States Louisiana and Entergy Louisiana also filed an application requesting LPSC approval for ancillary issues including the mechanism to flow charges and savings to customers via a Storm Cost Offset rider.  On April 3, 2008, the Louisiana State Bond Commission granted preliminary approval for the Act 55 financings.  On April 8, 2008, the Louisiana Public Facilities Authority (LPFA), which is the issuer of the bonds pursuant to the Act 55 financings, approved requests for the Act 55 financings.  On April 10, 2008, Entergy Gulf States Louisiana and Entergy Louisiana and the LPSC Staff filed with the LPSC an uncontested stipulated settlement that includes Entergy Gulf States Louisiana and Entergy Louisiana's proposals under the Act 55 financings, which includes a commitment to pass on to customers a minimum of $10 million and $30 million of customer benefits, respectively, through prospective annual rate reductions of $2 million and $6 million for five years. On April 16, 2008, the LPSC approved the settlement and issued two financing orders and one ratemaking order intended to facilitate implementation of the Act 55 financings.  In May 2008, the Louisiana State Bond Commission granted final approval of the Act 55 financings.

On July 29, 2008, the LPFA issued $687.7 million in bonds under the aforementioned Act 55. From the $679 million of bond proceeds loaned by the LPFA to the LURC, the LURC deposited $152 million in a restricted escrow account as a storm damage reserve for Entergy Louisiana and transferred $527 million directly to Entergy Louisiana. From the bond proceeds received by Entergy Louisiana from the LURC, Entergy Louisiana invested $545 million, including $17.8 million that was withdrawn from the restricted escrow account as approved by the April 16, 2008 LPSC orders, in exchange for 5,449,861.85 Class A preferred, non-voting, membership interest units of Entergy Holdings Company LLC, a company wholly-owned and consolidated by Entergy, that carry a 10% annual distribution rate. Distributions are payable quarterly commencing on September 15, 2008 and have a liquidation price of $100 per unit. The preferred membership interests are callable at the option of Entergy Holdings Company LLC after ten years. The terms of the membership interests include certain financial covenants to which Entergy Holdings Company LLC is subject, including the requirement to maintain a net worth of at least $1 billion.

Entergy Louisiana will not report the bonds on its balance sheet because the bonds are the obligation of the LPFA, and there is no recourse against Entergy Louisiana in the event of a bond default.

100

Little Gypsy Repowering Project

See the Form 10-K for a discussion of the Little Gypsy repowering project. The preconstruction and operating air permits for the Little Gypsy repowering project were issued by the Louisiana Department of Environmental Quality (LDEQ) in November 2007 under then-effective federal and state air regulations, including the EPA's Clean Air Mercury Rule that had been issued in 2005 (CAMR 2005). As discussed in more detail in Part I, Item 1, "Environmental Regulation, Clean Air Act and Subsequent Amendments, Hazardous Air Pollutants" in the Form 10-K, in February 2008 the U.S. Court of Appeals for the D.C. Circuit struck down CAMR 2005. The D.C. Circuit decision requires utilities that have not yet begun construction of the facility in question to undergo before beginning construction a case-by-case Maximum Achievable Control Technology (MACT) analysis for construction or reconstruction of emission units pursuant to the Clean Air Act. The Little Gypsy project as currently configured is expected to meet MACT standards. Little Gypsy received its construction permit before a formal MACT analysis was required, however, and Entergy Louisiana has sought a MACT determination from the LDEQ. The filing was made in June 2008, and the LDEQ has certified that the filing is complete. A decision on the MACT determination is expected by first quarter 2009. Entergy Louisiana also is awaiting permit determinations from several additional agencies. These permits are unrelated to CAMR 2005 and always have been part of the construction process. Onsite construction of the project was scheduled to begin in July 2008, but obtaining the MACT determination will cause a delay in the start of construction, which Entergy Louisiana now expects to begin in mid-year 2009. This delays the expected commercial operation date of the project to mid-year 2013.

The LPSC Phase I order has been appealed to the state district court in Baton Rouge, Louisiana by a group led by the Sierra Club and represented by the Tulane Environmental Law Clinic. A status conference is set for December 3, 2008, at which time a procedural schedule should be established for the appeal.

The LPSC had approved the temporary suspension of Phase II of the Little Gypsy proceedings because Entergy Louisiana must update its estimated project cost and schedule in order to support the request to recover cash earnings on its construction work in progress (CWIP) costs. On October 16, 2008, Entergy Louisiana, together with Entergy Gulf States Louisiana, filed an application to resume Phase II of the proceeding. The Phase II filing seeks certification for Entergy Gulf States Louisiana to participate in a one-third ownership share in the repowering project. In addition, Entergy Louisiana and Entergy Gulf States Louisiana seek recovery of approximately 79% of their construction financing costs through the recovery of cash earnings on CWIP costs. The LPSC previously found that the recovery of CWIP for a large baseload project may be in the public interest as cash earnings may be needed to protect the utility's financial integrity, maintain an acceptable credit rating, prevent an undue increase in the utility's cost of capital, or to accomplish phasing in of the cost of a large capital project for the benefit of customers. In Phase II, the LPSC will rule on Entergy Gulf States Louisiana's certification request, determine the appropriate amount of CWIP costs, if any, to be recovered and will develop the allocation, accounting and rate recovery mechanisms for such recovery. The LPSC also will determine the appropriate procedure or mechanism for synchronizing base rate recovery of Little Gypsy's fixed or non-fuel costs with its commercial in-service date. A status conference is set for November 14, 2008, at which time a procedural schedule should be established for Phase II. Entergy Louisiana and Entergy Gulf States Louisiana have requested that the case be decided in time to permit the recovery of cash earnings on CWIP beginning in July 2009.

Entergy Louisiana expects a net reduction of committed capital expenditures for 2008-2010 of approximately $210 million from the estimates disclosed in the Form 10-K as a result of delayed construction of the Little Gypsy repowering project. The delay is expected to increase the total project cost, however, from approximately $1.55 billion to $1.76 billion, primarily due to price escalation on non-contracted equipment and material and increased carrying cost due to the extended construction period.

Waterford 3 Steam Generator Replacement Project

As discussed in more detail in the Form 10-K, Entergy Louisiana plans to replace the Waterford 3 steam generators, along with the reactor vessel closure head and control element drive mechanisms, in 2011.  In June 2008, Entergy Louisiana filed with the LPSC for approval of the project, including full cost recovery. Entergy Louisiana estimates in the filing that it will spend approximately $511 million on this project. The

 

101

 

petition seeks relief in two phases. Phase I seeks certification within 120 days that the public convenience and necessity would be served by undertaking this project. Among other relief requested, Entergy Louisiana is also seeking approval for a procedure to synchronize permanent base rate recovery when the project is placed in service, either by a formula rate plan or base rate filing. In Phase II, Entergy Louisiana will seek cash earnings on construction work in progress. The settlement also provides that Phase II of the proceeding will be consolidated with Phase II of the Little Gypsy proceeding described above. An ALJ will consider the settlement at a hearing scheduled for November 7, 2008.

Significant Factors, Known Trends, and Uncertainties

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

Retail Rates

In May 2008, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2007 test year, seeking an $18.4 million rate increase, comprised of $12.6 million of recovery of incremental and deferred capacity costs and $5.8 million based on a cost of service revenue deficiency related to continued lost contribution to fixed costs associated with the loss of customers due to Hurricane Katrina. The filing includes two alternative versions of the calculated revenue requirement, one that reflects Entergy Louisiana's full request for recovery of the loss of fixed cost contribution and the other that reflects the anticipated rate implementation in September 2008, subject to refund, of only a portion of the full request, with the remainder deferred, until the lost fixed cost contribution issue is resolved. Under the first alternative, Entergy Louisiana's earned return on common equity was 9.44%, whereas under the other alternative, its earned return on common equity was 9.04%. The LPSC staff and intervenors issued their reports on Entergy Louisiana's filing on July 31, 2008 and, with minor exceptions, primarily raised proposed disallowance issues that were previously raised with regard to Entergy Louisiana's May 2007 filing and remain at issue in that proceeding. Entergy Louisiana disagrees with the majority of the proposed adjustments. In August 2008, Entergy Louisiana implemented a $43.9 million formula rate plan decrease to remove interim storm cost recovery and to reduce the storm damage accrual. Entergy Louisiana then implemented a $16.9 million formula rate plan increase, subject to refund, effective the first billing cycle in September 2008, comprised of $12.6 million of recovery of incremental and deferred capacity costs and $4.3 million based on a cost of service deficiency. A procedural schedule has not been established yet for further consideration of the issues raised regarding the formula rate plan filing.

In May 2007, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2006 test year, indicating a 7.6% earned return on common equity. That filing included Entergy Louisiana's request to recover $39.8 million in unrecovered fixed costs associated with the loss of customers that resulted from Hurricane Katrina, a request that was recently reduced to $31.7 million. In September 2007, Entergy Louisiana modified its formula rate plan filing to reflect its implementation of certain adjustments proposed by the LPSC Staff in its review of Entergy Louisiana's original filing with which Entergy Louisiana agreed, and to reflect its implementation of an $18.4 million annual formula rate plan increase comprised of (1) a $23.8 million increase representing 60% of Entergy Louisiana's revenue deficiency, and (2) a $5.4 million decrease for reduced incremental and deferred capacity costs. The LPSC authorized Entergy Louisiana to defer for accounting purposes the difference between its $39.8 million claim, now at $31.7 million, for unrecovered fixed cost and 60% of the revenue deficiency to preserve Entergy Louisiana's right to pursue that claim in full during the formula rate plan proceeding. In October 2007, Entergy Louisiana implemented a $7.1 million formula rate plan decrease that was due primarily to the reclassification of certain franchise fees from base rates to collection via a line item on customer bills pursuant to an LPSC Order. The LPSC staff and intervenors have recommended disallowance of certain costs included in Entergy Louisiana's filing. Entergy Louisiana disagrees with the majority of the proposed disallowances and a hearing on the disputed issues was held in late-September/early-October 2008. Post-hearing briefing is scheduled to conclude in mid-December 2008.

102

In May 2006, Entergy Louisiana made its formula rate plan filing with the LPSC for the 2005 test year. Entergy Louisiana modified the filing in August 2006 to reflect a 9.45% return on equity which is within the allowed bandwidth. The modified filing includes an increase of $24.2 million for interim recovery of storm costs from Hurricanes Katrina and Rita and a $119.2 million rate increase to recover LPSC-approved incremental deferred and ongoing capacity costs. The filing requested recovery of approximately $50 million for the amortization of capacity deferrals over a three-year period, including carrying charges, and approximately $70 million for ongoing capacity costs. The increase was implemented, subject to refund, with the first billing cycle of September 2006. Entergy Louisiana subsequently updated its formula rate plan rider to reflect adjustments proposed by the LPSC Staff with which it agrees. The adjusted return on equity of 9.56% remains within the allowed bandwidth. Ongoing and deferred incremental capacity costs were reduced to $118.7 million. The updated formula rate plan rider was implemented, subject to refund, with the first billing cycle of October 2006. An uncontested stipulated settlement was filed in February 2008 that will leave the current base rates in place, and the LPSC approved the settlement in March 2008. In the settlement Entergy Louisiana agreed to credit customers $7.2 million, plus $0.7 million of interest, for customer contributions to the Central States Compact in Nebraska that was never completed and agreed to a one-time $2.6 million deduction from the deferred capacity cost balance. The credit, for which Entergy Louisiana had previously recorded a provision, was made in May 2008.

Federal Regulation

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

Critical Accounting Estimates

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

New Accounting Pronouncements

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

 

103

 

ENTERGY LOUISIANA, LLC
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 
  Three Months Ended   Nine Months Ended
    2008   2007   2008   2007
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Electric   $1,021,588    $801,890    $2,340,109    $2,075,668 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   476,050    266,674    731,324    633,392 
  Purchased power   276,996    214,769    841,845    638,697 
  Nuclear refueling outage expenses   5,196    4,494    13,921    13,109 
  Other operation and maintenance   89,936    108,055    302,345    304,216 
Decommissioning   5,021    4,673    14,796    13,772 
Taxes other than income taxes   17,801    15,296    49,049    44,072 
Depreciation and amortization   48,354    36,097    143,324    134,289 
Other regulatory charges - net   4,634    11,071    25,561    33,363 
TOTAL   923,988    661,129    2,122,165    1,814,910 
                 
OPERATING INCOME   97,600    140,761    217,944    260,758 
                 
OTHER INCOME                
Allowance for equity funds used during construction   4,530    2,737    11,552    8,994 
Interest and dividend income   19,520    (526)   28,225    4,929 
Miscellaneous - net   (947)   (876)   (2,886)   (2,565)
TOTAL   23,103    1,335    36,891    11,358 
                 
INTEREST AND OTHER CHARGES  
Interest on long-term debt   21,046    20,084    59,378    60,667 
Other interest - net   5,065    5,271    9,251    10,989 
Allowance for borrowed funds used during construction   (2,772)   (1,842)   (7,077)   (6,142)
TOTAL   23,339    23,513    61,552    65,514 
                 
INCOME BEFORE INCOME TAXES   97,364    118,583    193,283    206,602 
                   
Income taxes   33,139    41,272    72,919    74,725 
                 
NET INCOME   64,225    77,311    120,364    131,877 
                 
Preferred dividend requirements and other   1,738    1,738    5,213    5,213 
                 
EARNINGS APPLICABLE TO                
COMMON EQUITY   $62,487    $75,573    $115,151    $126,664 
                 
See Notes to Financial Statements.                

 

104

 

ENTERGY LOUISIANA, LLC
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
     
    2008   2007
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $120,364    $131,877 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Other regulatory charges - net   25,561    33,363 
  Depreciation, amortization, and decommissioning   158,120    148,061 
  Deferred income taxes, investment tax credits, and non-current taxes accrued   28,473    (38,843)
  Changes in working capital:        
    Receivables   (79,325)   (125,163)
    Accounts payable   30,663    (96,906)
    Taxes accrued   96,964    71,381 
    Interest accrued   (230)   4,253 
    Deferred fuel costs   (101,082)   44,518 
    Other working capital accounts   (42,171)   29,030 
  Provision for estimated losses and reserves   135,054    (5,425)
  Changes in other regulatory assets   599,709    (96,758)
  Other   (46,102)   93,729 
Net cash flow provided by operating activities   925,998    193,117 
         
INVESTING ACTIVITIES        
Construction expenditures   (400,146)   (223,734)
Allowance for equity funds used during construction   11,552    8,994 
Insurance proceeds   11,317    10,065 
Nuclear fuel purchases   (71,253)   (3,131)
Proceeds from the sale/leaseback of nuclear fuel   70,818    14,279 
Payment to storm reserve escrow account   (134,423)  
Investment in affiliates   (544,994)  
Proceeds from nuclear decommissioning trust fund sales   15,163    17,768 
Investment in nuclear decommissioning trust funds   (20,341)   (23,472)
Change in money pool receivable - net   (106,427)  
Net cash flow used in investing activities   (1,168,734)   (199,231)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt   297,048     - 
Additional equity from parent     1,119 
Retirement of long-term debt   (60,000)  
Change in money pool payable - net   (2,791)   9,110 
Changes in credit borrowing, net   200,000   
Distributions paid:        
  Preferred membership interests   (5,213)   (6,331)
Net cash flow provided by financing activities   429,044    3,898 
         
Net increase (decrease) in cash and cash equivalents   186,308    (2,216)
         
Cash and cash equivalents at beginning of period   300    2,743 
         
Cash and cash equivalents at end of period   $186,608    $527 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid/(received) during the period for:        
  Interest - net of amount capitalized   $66,352    $64,457 
  Income taxes   ($5,661)   $98,904 
         
See Notes to Financial Statements.        

105

 

ENTERGY LOUISIANA, LLC
BALANCE SHEETS
ASSETS
September 30, 2008 and December 31, 2007
(Unaudited)
         
  2008   2007
  (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents:        
  Cash   $513    $300 
  Temporary cash investments - at cost,        
   which approximates market   186,095   
     Total cash and cash equivalents   186,608    300 
Accounts receivable:        
  Customer   207,227    96,679 
  Allowance for doubtful accounts   (1,864)   (1,988)
  Associated companies   183,614    91,873 
  Other   10,103    14,186 
  Accrued unbilled revenues   63,282    75,860 
     Total accounts receivable   462,362    276,610 
Deferred fuel costs   52,298   
Accumulated deferred income taxes     15,229 
Materials and supplies - at average cost   129,074    108,959 
Deferred nuclear refueling outage costs   25,807    7,080 
Prepayments and other   14,644    7,820 
TOTAL   870,793    415,998 
         
OTHER PROPERTY AND INVESTMENTS        
Investment in affiliates   544,994   
Decommissioning trust funds   199,758    221,971 
Non-utility property - at cost (less accumulated depreciation)   1,351    1,488 
Note receivable - Entergy New Orleans   9,353    9,353 
Storm reserve escrow account   134,423   
Other   504   
TOTAL   890,383    232,816 
         
UTILITY PLANT        
Electric   6,708,636    6,550,597 
Property under capital lease   253,387    253,387 
Construction work in progress   463,179    276,974 
Nuclear fuel under capital lease   87,456    44,532 
TOTAL UTILITY PLANT   7,512,658    7,125,490 
Less - accumulated depreciation and amortization   3,208,728    3,095,473 
UTILITY PLANT - NET   4,303,930    4,030,017 
         
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  SFAS 109 regulatory asset - net   85,781    117,322 
  Other regulatory assets   408,547    832,449 
  Deferred fuel costs   67,998    67,998 
Long-term receivables   1,772    2,982 
Other   22,429    23,539 
TOTAL   586,527    1,044,290 
         
TOTAL ASSETS   $6,651,633    $5,723,121 
         
See Notes to Financial Statements.        
 

106

 
 
ENTERGY LOUISIANA, LLC
BALANCE SHEETS
LIABILITIES AND MEMBERS' EQUITY
September 30, 2008 and December 31, 2007
(Unaudited)
         
  2008   2007
  (In Thousands)
 
CURRENT LIABILITIES        
Accounts payable:        
  Associated companies   $67,796    $65,930 
  Other   330,973    148,651 
Customer deposits   79,075    79,013 
Taxes accrued   104,720    7,756 
Accumulated deferred income taxes   7,056   
Interest accrued   29,509    29,739 
Deferred fuel costs     48,784 
Obligations under capital leases   42,714    42,714 
Pension and other postretirement liabilities   8,936    8,772 
System agreement cost equalization   15,524    46,000 
Gas hedge contracts   24,662    2,741 
Other   28,044    16,220 
TOTAL   739,009    496,320 
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   1,797,779    1,803,430 
Accumulated deferred investment tax credits   83,647    86,045 
Obligations under capital leases   44,742    1,818 
Other regulatory liabilities   62,033    127,836 
Decommissioning   271,862    257,066 
Accumulated provisions   153,459    18,405 
Pension and other postretirement liabilities   151,626    145,786 
Long-term debt   1,587,465    1,147,660 
Other   89,923    85,214 
TOTAL   4,242,536    3,673,260 
         
Commitments and Contingencies        
         
MEMBERS' EQUITY        
Preferred membership interests without sinking fund   100,000    100,000 
Members' equity   1,596,610    1,481,509 
Accumulated other comprehensive loss   (26,522)   (27,968)
TOTAL   1,670,088    1,553,541 
         
TOTAL LIABILITIES AND MEMBERS' EQUITY   $6,651,633    $5,723,121 
         
See Notes to Financial Statements.        

107

 

ENTERGY LOUISIANA, LLC
STATEMENTS OF MEMBERS' EQUITY AND COMPREHENSIVE INCOME
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
                 
    Three Months Ended
    2008   2007
    (In Thousands)
MEMBERS' EQUITY                
Members' Equity - Beginning of period   $1,534,173        $1,396,213     
                 
  Add:                
    Net income   64,225    $64,225    77,311    $77,311 
                 
  Deduct:                
    Distributions declared:                
      Preferred membership interests   1,738    1,738    1,738    1,738 
    Other   50           
    1,788        1,738     
                 
Members' Equity - End of period   $1,596,610        $1,471,786     
                 
                 
                 
                 
ACCUMULATED OTHER COMPREHENSIVE                
LOSS (Net of Taxes):                
Balance at beginning of period:                
  Pension and other postretirement liabilities   ($27,004)       ($24,673)    
                 
Pension and other postretirement liabilities (net of tax expense of $409 and $465)   482    482    512    512 
                 
Balance at end of period:                
  Pension and other postretirement liabilities   ($26,522)       ($24,161)    
Comprehensive Income       $62,969        $76,085 
                 
                 
                 
    Nine Months Ended
    2008   2007
    (In Thousands)
MEMBERS' EQUITY                
Members' Equity - Beginning of period   $1,481,509        $1,344,003     
                 
  Add:                
    Net income   120,364    $120,364    131,877    $131,877 
    Additional equity from parent         1,119     
    120,364        132,996     
                 
  Deduct:                
    Distributions declared:                
      Preferred membership interests   5,213    5,213    5,213    5,213 
    Other   50           
    5,263        5,213     
                 
Members' Equity - End of period   $1,596,610        $1,471,786     
                 
                 
                 
                 
ACCUMULATED OTHER COMPREHENSIVE                
LOSS (Net of Taxes):                
Balance at beginning of period:                
 Pension and other postretirement liabilities   ($27,968)       ($25,695)    
                 
Pension and other postretirement liabilities (net of tax expense of $1,227 and $1,397)   1,446    1,446    1,534    1,534 
                 
Balance at end of period:                
 Pension and other postretirement liabilities   ($26,522)       ($24,161)    
Comprehensive Income       $116,597        $128,198 
                 
                 
                 
                 
See Notes to Financial Statements.                

108

 

ENTERGY LOUISIANA, LLC
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $365    $285   $80    28 
  Commercial   218    164   54    33 
  Industrial   333    215   118    55 
  Governmental   16    11     45 
     Total retail   932    675   257    38 
  Sales for resale                
    Associated companies   104    101    
    Non-associated companies     3   (1)   (33)
  Other   (16)   23   (39)   (170)
     Total   $1,022    $802   $220    27 
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   2,756    2,914   (158)   (5)
  Commercial   1,688    1,740   (52)   (3)
  Industrial   3,444    3,403   41   
  Governmental   118    112    
     Total retail   8,006    8,169   (163)   (2)
  Sales for resale                 
    Associated companies   613    752   (139)   (18)
    Non-associated companies   49    34   15    44 
     Total   8,668    8,955   (287)   (3)
                 
                 
    Nine Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $762    $665   $97    15 
  Commercial   500    437   63    14 
  Industrial   797    658   139    21 
  Governmental   38    32     19 
     Total retail   2,097    1,792   305    17 
  Sales for resale                 
    Associated companies   201    208   (7)   (3)
    Non-associated companies     9   (2)   (22)
  Other   35    67   (32)   (48)
     Total   $2,340     $2,076   $264    13 
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   6,703    6,721   (18)  
  Commercial   4,431    4,415   16   
  Industrial   10,111    9,898   213   
  Governmental   348    336   12   
     Total retail   21,593    21,370   223   
  Sales for resale                 
    Associated companies   1,723    1,704   19   
    Non-associated companies   102    92   10    11 
     Total   23,418    23,166   252   
                 

109

 

 

ENTERGY MISSISSIPPI, INC.

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

Results of Operations

Net Income

Third Quarter 2008 Compared to Third Quarter 2007

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

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net income decreased by $7.1 million primarily due to higher other operation and maintenance expenses, lower other income, and a higher effective income tax rate in 2008, partially offset by higher net revenue.

Net Revenue

Third Quarter 2008 Compared to Third Quarter 2007

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 2008 to the third quarter 2007.

   

Amount

   

(In Millions)

     

2007 net revenue

 

$151.0 

Volume/weather

 

(7.1)

Reserve equalization

 

(3.0)

Rider revenue

 

2.4 

Attala costs

 

4.3 

Other

 

(3.2)

2008 net revenue

 

$144.4 

The volume/weather variance is primarily due to the effect of less favorable weather on billed and unbilled electric sales compared to the same period in 2007. Billed electricity usage decreased a total of 185 GWh in the residential and commercial sectors.

The reserve equalization variance is primarily due to a revision in 2008 of reserve equalization payments among Entergy companies due to a FERC ruling regarding the inclusion of interruptible loads in reserve equalization calculations and lower reserve equalization revenue related to changes in the Entergy System generation mix compared to the same period in 2007.

The rider revenue variance is the result of a storm damage rider that became effective in October 2007. The establishment of this rider results in an increase in rider revenue and a corresponding increase in other operation and maintenance expense for the storm reserve with no impact on net income.

 

110

 

The Attala costs variance is primarily due to an increase in the Attala power plant costs that are recovered through the power management rider. The net income effect of this recovery is limited to a portion representing an allowed return on equity with the remainder offset by Attala power plant costs in other operation and maintenance expenses, depreciation expenses, and taxes other than income taxes. The recovery of Attala power plant costs is discussed in " MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources - Use of Capital " in the Form 10-K.

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

Gross operating revenues increased primarily due to an increase of $90.7 million in fuel cost recoveries due to higher fuel rates. The increase was partially offset by a decrease of $35 million in gross wholesale revenues due to a decrease in net generation and purchases in excess of decreased net area demand resulting in less energy available for resale sales coupled with a decrease in System Agreement remedy receipts.

Fuel and purchased power expenses increased primarily due to an increase in the average market prices of natural gas and purchased power, partially offset by decreased demand.

Other regulatory charges increased primarily due to increased recovery of costs associated with the power management recovery rider. There is no material effect on net income due to quarterly adjustments to the power management recovery rider.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

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, 2008 to the nine months ended September 30, 2007.

   

Amount

   

(In Millions)

     

2007 net revenue

 

$371.0

Attala costs

 

9.9 

Rider revenue

 

6.1 

Base revenue

 

5.2 

Volume/weather

 

(2.9)

Reserve equalization

 

(3.6)

Other

 

(0.5)

2008 net revenue

 

$385.2 

The Attala costs variance is primarily due to an increase in the Attala power plant costs that are recovered through the power management rider. The net income effect of this recovery is limited to a portion representing an allowed return on equity with the remainder offset by Attala power plant costs in other operation and maintenance expenses, depreciation expenses, and taxes other than income taxes. The recovery of Attala power plant costs is discussed in " MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Liquidity and Capital Resources - Use of Capital " in the Form 10-K.

The rider revenue variance is the result of a storm damage rider that became effective in October 2007. The establishment of this rider results in an increase in rider revenue and a corresponding increase in other operation and maintenance expense for the storm reserve with no impact on net income.

The base revenue variance is primarily due to a formula rate plan increase effective July 2007. The formula rate plan is discussed in Note 2 to the financial statements in the Form 10-K.

111

The volume/weather variance is primarily due to the effect of less favorable weather on billed and unbilled electric sales compared to the same period in 2007. Billed electricity usage decreased a total of 87 GWh in the residential and commercial sectors.

The reserve equalization variance is primarily due to changes in the Entergy System generation mix compared to the same period in 2007 and a revision of reserve equalization payments among Entergy companies due to a FERC ruling regarding the inclusion of interruptible loads in reserve equalization calculations.

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

Gross operating revenues increased primarily due to an increase of $107.3 million in fuel cost recoveries due to higher fuel rates, partially offset by a decrease of $30.5 million in gross wholesale revenues due to a decrease in net generation and purchases in excess of decreased net area demand resulting in less energy available for resale sales coupled with a decrease in System Agreement remedy receipts.

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

Other regulatory charges increased primarily due to increased recovery through the Grand Gulf Rider of Grand Gulf capacity costs due to higher rates and increased recovery of costs associated with the power management recovery rider. There is no material effect on net income due to quarterly adjustments to the power management recovery rider.

Other Income Statement Variances

Third Quarter 2008 Compared to Third Quarter 2007

Other operation and maintenance expenses increased primarily due to an increase of $2.9 million in loss reserves for storm damages and an increase of $1.6 million due to higher fossil plant maintenance costs. The increase was partially offset by a decrease of $2.3 million in payroll-related costs.

Taxes other than income taxes increased due to an increase in local franchise taxes as a result of higher revenues primarily in the commercial sector as compared to 2007.

Interest and other charges decreased primarily due to interest expense of $1.7 million recorded in the third quarter 2007 on advances from independent power producers per a FERC order.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Other operation and maintenance expenses increased primarily due to:

  • an increase of $8 million in loss reserves for storm damages;
  • an increase of $5.3 million in fossil expenses due to higher plant maintenance costs, higher Attala equipment service agreement expenses, and increased outage costs; and
  • an increase of $2.2 million in distribution expenses due primarily to a higher non-incremental storm adjustment, the timing of contract work, and lower reimbursements.

The increase was partially offset by a decrease of $3 million in payroll-related costs.

Other income decreased primarily due to the gain recorded in 2007 on the sale of non-utility property.

112

Income Taxes

The effective income tax rate was 37.3% for the third quarter 2008 and 36.7% for the nine months ended September 30, 2008. The difference in the effective income tax rate for the third quarter 2008 versus the federal statutory rate of 35% is primarily due to state income taxes.

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

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2008 and 2007 were as follows:

 

 

2008

 

2007

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$40,582 

 

$73,417 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

33,744 

 

106,474  

 

Investing activities

 

(87,621)

 

(17,379) 

 

Financing activities

 

15,028 

 

(125,721)

Net decrease in cash and cash equivalents

 

(38,849)

 

(36,626)

 

 

 

 

 

Cash and cash equivalents at end of period

 

$1,733 

 

$36,791 

Operating Activities

Cash flow provided by operating activities decreased $72.7 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to the decreased recovery of deferred fuel costs and securitization proceeds of $48 million received in 2007, partially offset by the timing of payments to vendors and the collection of receivables from customers. Fuel prices have been increasing and, due to the time lag before the fuel recovery rate increases in response, Entergy Mississippi has under-recovered fuel costs thus far in 2008.

Investing Activities

Cash flow used in investing activities increased $70.2 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to the receipt of proceeds in 2007 from funds held in trust in 2006 that were used for the redemption in January 2007, prior to maturity, of its $100 million, 4.35% Series First Mortgage Bonds, partially offset by the transfer in 2007 of $30.4 million to a storm damage reserve escrow account and money pool activity.

Decreases in Entergy Mississippi's receivable from the money pool are a source of cash flow, and Entergy Mississippi's receivable from the money pool decreased by $21 million for the nine months ended September 30, 2008 compared to decreasing by $16.5 million for the nine months ended September 30, 2007. The money pool is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries' need for external short-term borrowings.

113

Financing Activities

Entergy Mississippi's financing activities provided $15 million in cash flow for the nine months ended September 30, 2008 compared to using $125.7 million in cash flow for the nine months ended September 30, 2007 primarily due to the redemption, prior to maturity, of $100 million of 4.35% Series First Mortgage Bonds in January 2007, money pool activity, and a decrease of $13 million in common stock dividends paid.

Increases in Entergy Mississippi's payable to the money pool are a source of cash flow, and Entergy Mississippi's payable to the money pool increased by $28.3 million for the nine months ended September 30, 2008. The money pool is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries' need for external short-term borrowings.

Capital Structure

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

 

 

September 30,
2008

 

December 31,
2007

 

 

 

 

 

Net debt to net capital

 

48.4%

 

48.4%

Effect of subtracting cash from debt

 

0.0%

 

1.5%

Debt to capital

 

48.4%

 

49.9%

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

Uses and Sources of Capital

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

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

September 30,
2008

 

December 31,
2007

 

September 30,
2007

 

December 31,
2006

(In Thousands)

 

 

 

 

 

 

 

($28,250)

 

$20,997

 

$16,498

 

$39,573

In May 2007, $6.6 million of Entergy Mississippi's receivable from the money pool was replaced by a note receivable from Entergy New Orleans. See Note 4 to the financial statements in the Form 10-K for a description of the money pool.

As discussed in the Form 10-K, Entergy Mississippi has two separate credit facilities in the aggregate amount of $50 million and renewed both facilities through May 2009. Borrowings under the credit facilities may be secured by a security interest in Entergy Mississippi's accounts receivable. No borrowings were outstanding under either credit facility as of September 30, 2008.

114

In April 2008, Entergy Mississippi repurchased its $30 million series of Independence County Pollution Control Revenue Bonds due July 2022. In June 2008, Entergy Mississippi remarketed the series and fixed the interest rate to maturity at 4.90%. Entergy Mississippi used the proceeds from the remarketing to repay short-term borrowings that were drawn on its credit facilities to repurchase the bonds in April 2008.

Significant Factors, Known Trends, and Uncertainties

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

State and Local Rate Regulation

Fuel and purchased power cost recovery

In May 2008, Entergy Mississippi filed its quarterly fuel adjustment factor for the third quarter 2008, effective beginning with July 2008 bills. The third quarter 2008 factor is $0.038861/kWh, which is an increase from the $0.010878/kWh factor for the second quarter 2008. The increase is due to a significant increase in fuel prices, and Entergy Mississippi has gone from an over-recovery to an under-recovery position during 2008. After a decline in fuel prices, Entergy Mississippi filed on August 13, 2008 a mid-quarter revision to its fuel adjustment factor. The revised factor is $0.024058/kWh, effective for September 2008 bills. On August 15, 2008, Entergy Mississippi filed its quarterly fuel adjustment factor for the fourth quarter 2008, effective beginning with October 2008 bills. Under an agreement with the Mississippi Public Utilities staff, approved by the MPSC, the fourth quarter 2008 rate will be set at the September 2008 rate of $0.024058/kWh.

In July 2008, the MPSC began a proceeding to investigate the fuel procurement practices and fuel adjustment schedules of the Mississippi utility companies, including Entergy Mississippi. A two-day public hearing was held in July 2008, and after a recess during which the MPSC reviewed information, the hearing resumed on August 5, 2008 for additional testimony by an expert witness retained by the MPSC. The expert witness presented testimony regarding a review of the utilities' fuel adjustment clauses.  The MPSC stated that the goal of the proceeding is fact-finding so that the MPSC may decide whether to amend the current fuel cost recovery process.

The Mississippi attorney general has also issued a civil investigative demand directed at Entergy Corporation, Entergy Mississippi, and Entergy Services regarding information related to Entergy Mississippi's fuel adjustment clause. The Mississippi attorney general states that he is investigating whether Entergy has violated Mississippi's consumer protection laws. Entergy opposes the civil investigative demand of the Mississippi attorney general on several grounds, including that the proper jurisdiction for the Mississippi attorney general's request for information is through the MPSC and the FERC. On October 29, 2008, the MPSC issued a subpoena to Entergy Mississippi and Entergy Services requesting documents associated with fuel adjustment clause litigation in Louisiana involving Entergy Louisiana and Entergy New Orleans.

Formula rate plan filing

In March 2008, Entergy Mississippi made its annual scheduled formula rate plan filing for the 2007 test year with the MPSC.  The filing showed that a $10.1 million increase in annual electric revenues is warranted. In June 2008, Entergy Mississippi reached a settlement with the Mississippi Public Utilities Staff that results in a $3.8 million rate increase. An MPSC decision on the settlement is pending.

Federal Regulation

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

115

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, and see Entergy Corporation and Subsidiaries " MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates " in this Form 10-Q for an update to the discussion regarding qualified pension and other postretirement benefits.

New Accounting Pronouncements

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

 

 

116

 

ENTERGY MISSISSIPPI, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
     
    Three Months Ended   Nine Months Ended
    2008   2007   2008   2007
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Electric   $491,113    $447,244    $1,137,945    $1,063,685 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   164,632    186,302    313,824    358,377 
  Purchased power   149,603    102,964    365,971    308,085 
  Other operation and maintenance   49,748    47,673    160,094    145,381 
Taxes other than income taxes   18,412    15,147    48,386    47,037 
Depreciation and amortization   21,082    20,218    62,356    60,429 
Other regulatory charges - net   32,509    7,005    72,908    26,289 
TOTAL   435,986    379,309    1,023,539    945,598 
                 
OPERATING INCOME   55,127    67,935    114,406    118,087 
                 
OTHER INCOME                
Allowance for equity funds used during construction   782    756    2,396    3,149 
Interest and dividend income   649    1,458    1,423    4,099 
Miscellaneous - net   (460)   (541)   483    1,652 
TOTAL   971    1,673    4,302    8,900 
                 
INTEREST AND OTHER CHARGES      
Interest on long-term debt   10,404    10,682    31,149    31,501 
Other interest - net   1,723    3,447    4,168    5,929 
Allowance for borrowed funds used during construction   (541)   (485)   (1,444)   (2,065)
TOTAL   11,586    13,644    33,873    35,365 
                 
INCOME BEFORE INCOME TAXES   44,512    55,964    84,835    91,622 
                 
Income taxes   16,588    19,839    31,102    30,757 
                 
NET INCOME   27,924    36,125    53,733    60,865 
                 
Preferred dividend requirements and other   707    707    2,121    2,121 
                 
EARNINGS APPLICABLE TO                
COMMON STOCK   $27,217    $35,418    $51,612    $58,744 
                 
See Notes to Financial Statements.                
                 

117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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118

 

 

 

ENTERGY MISSISSIPPI, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
     
    2008   2007
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $53,733    $60,865 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Other regulatory charges - net   72,908    26,289 
  Depreciation and amortization   62,356    60,429 
  Deferred income taxes, investment tax credits, and non-current taxes accrued   1,441    (39,128)
  Changes in working capital:        
    Receivables   (67,954)   (82,111)
    Fuel inventory   1,468    (236)
    Accounts payable   40,189    24,156 
    Taxes accrued   21,283    36,677 
    Interest accrued   2,924    2,775 
    Deferred fuel costs   (134,470)   (63,150)
    Other working capital accounts   26,665    14,449 
  Provision for estimated losses and reserves   (10,079)   39,907 
  Changes in other regulatory assets   4,955    31,292 
  Other   (41,675)   (5,740)
Net cash flow provided by operating activities   33,744    106,474 
         
INVESTING ACTIVITIES        
Construction expenditures   (110,277)   (109,264)
Allowance for equity funds used during construction   2,396    3,149 
Changes in other temporary investments - net     100,000 
Proceeds from sale of assets     2,616 
Change in money pool receivable - net   20,997    16,474 
Payment to storm reserve escrow account   (737)   (30,354)
Net cash flow used in investing activities   (87,621)   (17,379)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt   29,499   
Retirement of long-term debt   (30,000)   (100,000)
Change in money pool payable - net   28,250   
Dividends paid:        
  Common stock   (10,600)   (23,600)
  Preferred stock   (2,121)   (2,121)
Net cash flow provided by (used in) financing activities   15,028    (125,721)
         
Net decrease in cash and cash equivalents   (38,849)   (36,626)
         
Cash and cash equivalents at beginning of period   40,582    73,417 
         
Cash and cash equivalents at end of period   $1,733    $36,791 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
  Interest - net of amount capitalized   $30,869    $32,768 
  Income taxes   $4,209    $8,290 
         
         
See Notes to Financial Statements.        

 

119

 

ENTERGY MISSISSIPPI, INC.
BALANCE SHEETS
ASSETS
September 30, 2008 and December 31, 2007
(Unaudited)
 
  2008   2007
  (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents:        
  Cash   $1,733    $117 
  Temporary cash investments - at cost,        
   which approximates market     40,465 
     Total cash and cash equivalents   1,733    40,582 
Accounts receivable:        
  Customer   112,226    62,052 
  Allowance for doubtful accounts   (1,201)   (615)
  Associated companies   16,720    23,534 
  Other   7,881    8,234 
  Accrued unbilled revenues   38,071    33,535 
     Total accounts receivable   173,697    126,740 
Deferred fuel costs   57,888   
Accumulated deferred income taxes     7,686 
Fuel inventory - at average cost   8,898    10,366 
Materials and supplies - at average cost   31,321    30,167 
Prepayments and other   6,399    13,701 
TOTAL   279,936    229,242 
         
OTHER PROPERTY AND INVESTMENTS         
Investment in affiliates - at equity   5,535    5,531 
Non-utility property - at cost (less accumulated depreciation)   5,036    5,140 
Storm reserve escrow account   31,485    30,748 
Note receivable - Entergy New Orleans   7,610    7,610 
TOTAL   49,666    49,029 
         
UTILITY PLANT        
Electric   2,919,691    2,829,065 
Property under capital lease   8,140    9,116 
Construction work in progress   79,891    72,753 
TOTAL UTILITY PLANT   3,007,722    2,910,934 
Less - accumulated depreciation and amortization   1,046,863    995,902 
UTILITY PLANT - NET   1,960,859    1,915,032 
         
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  SFAS 109 regulatory asset - net   35,293    29,868 
  Other regulatory assets   143,107    141,717 
Other   22,087    21,381 
TOTAL   200,487    192,966 
         
TOTAL ASSETS   $2,490,948    $2,386,269 
         
See Notes to Financial Statements.        
 

120

 
 
ENTERGY MISSISSIPPI, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2008 and December 31, 2007
(Unaudited)
 
  2008   2007
  (In Thousands)
 
CURRENT LIABILITIES        
Accounts payable:        
  Associated companies   $80,909    $46,424 
  Other   79,457    36,104 
Customer deposits   57,498    55,719 
Taxes accrued   57,321    36,038 
Accumulated deferred income taxes   7,303   
Interest accrued   18,118    15,194 
Deferred fuel costs     76,582 
System agreement cost equalization   8,664   
Gas hedge contracts   12,262    2,273 
Other   6,717    6,632 
TOTAL   328,249    274,966 
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   524,498    535,469 
Accumulated deferred investment tax credits   8,891    9,748 
Obligations under capital lease   6,773    7,806 
Other regulatory liabilities   50,351   
Asset retirement cost liabilities   4,714    4,505 
Accumulated provisions   40,185    50,264 
Pension and other postretirement liabilities   45,361    56,946 
Long-term debt   695,314    695,266 
Other   38,544    44,243 
TOTAL   1,414,631    1,404,247 
         
Commitments and Contingencies        
         
SHAREHOLDERS' EQUITY        
Preferred stock without sinking fund   50,381    50,381 
Common stock, no par value, authorized 15,000,000        
 shares; issued and outstanding 8,666,357 shares in 2008 and 2007   199,326    199,326 
Capital stock expense and other   (690)   (690)
Retained earnings   499,051    458,039 
TOTAL   748,068    707,056 
         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $2,490,948    $2,386,269 
         
See Notes to Financial Statements.        

121

 

ENTERGY MISSISSIPPI, INC.
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 213   $ 179   $ 34    19 
  Commercial   161   129   32    25 
  Industrial   64   49   15    31 
  Governmental   14   11     27 
     Total retail   452   368   84    23 
  Sales for resale                
    Associated companies   19   56   (37)   (66)
    Non-associated companies   14   11     27 
  Other   6   12   (6)   (50)
     Total   $ 491   $ 447   $ 44    10 
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   1,757   1,898   (141)   (7)
  Commercial   1,426   1,470   (44)   (3)
  Industrial   710   724   (14)   (2)
  Governmental   116   122   (6)   (5)
     Total retail   4,009   4,214   (205)   (5)
  Sales for resale                
    Associated companies   80   444   (364)   (82)
    Non-associated companies   152   167   (15)   (9)
     Total   4,241   4,825   (584)   (12)
                 
                 
    Nine Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 441   $ 393   $ 48    12 
  Commercial   369   323   46    14 
  Industrial   150   139   11   
  Governmental   33   30     10 
     Total retail   993   885   108    12 
  Sales for resale                
    Associated companies   75   108   (33)   (31)
    Non-associated companies   28   26    
  Other   42   45   (3)   (7)
     Total   $ 1,138   $ 1,064   $ 74   
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   4,203   4,291   (88)   (2)
  Commercial   3,685   3,684    
  Industrial   1,953   2,072   (119)   (6)
  Governmental   311   317   (6)   (2)
     Total retail   10,152   10,364   (212)   (2)
  Sales for resale                
    Associated companies   478   893   (415)   (46)
    Non-associated companies   302   370   (68)   (18)
     Total   10,932   11,627   (695)   (6)
                 
                 

122

 

ENTERGY NEW ORLEANS, INC.

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

Hurricane Katrina

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

Bankruptcy Proceedings

See the Form 10-K for a discussion of the significant terms in Entergy New Orleans' plan of reorganization that became effective in May 2007.

Insurance Claim

In April 2008, Entergy received from its primary insurer $53.6 million of additional insurance proceeds on its Hurricane Katrina claim, and almost all of the April 2008 proceeds were allocated to Entergy New Orleans. In the third quarter 2008, Entergy received from its primary insurer $17.5 million of additional insurance proceeds on its Hurricane Katrina and Hurricane Rita claims, which were allocated as follows: $1.8 million to Entergy Gulf States Louisiana, $2.2 million to Entergy Louisiana, $9.7 million to Entergy New Orleans, and $3.3 million to Entergy Texas, with the remainder allocated in smaller amounts to other Entergy subsidiaries.

Entergy has settled its lawsuit against one of its excess insurers on the Hurricane Katrina claim, and in July 2008 received $71.5 million in proceeds on the claim. The July 2008 proceeds were allocated as follows: $2.0 million to Entergy Arkansas, $3.0 million to Entergy Gulf States Louisiana, $12.4 million to Entergy Louisiana, $1.8 million to Entergy Mississippi, and $48.4 million to Entergy New Orleans, with the remainder allocated in smaller amounts to other Entergy subsidiaries.

Hurricane Gustav

In September 2008, Hurricane Gustav caused severe damage to Entergy New Orleans' service territory. The storm resulted in widespread power outages, significant damage to distribution and transmission infrastructure, and the loss of sales during the power outages. Total restoration costs for the repair and/or replacement of Entergy New Orleans' electric facilities damaged by Hurricane Gustav are estimated to be approximately $50 million. Entergy New Orleans is considering all reasonable avenues to recover storm-related costs, including, but not limited to, accessing funded storm reserves; federal and local cost recovery mechanisms, including requests for Community Development Block Grant funding; securitization; and insurance, to the extent deductibles are met. On October 9, 2008, ENOI drew $10 million of its funded storm reserve. Entergy is currently evaluating the amount of the losses covered by insurance for Entergy and each of the affected Utility operating companies. Because most of the Hurricane Gustav damage was to distribution and transmission facilities that are generally not covered by property insurance, Entergy does not expect to meet its deductibles for that storm.

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 $26 million and construction work in progress of approximately $23 million. Entergy recorded the regulatory assets in accordance with its accounting policies and based on the historic treatment of such costs in its service territory, 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.

 

123

 

Results of Operations

Net Income

Third Quarter 2008 Compared to Third Quarter 2007

Net income increased $2.4 million primarily due to lower other operation and maintenance expenses.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net income increased $6.8 million primarily due to higher net revenue, lower other operation and maintenance expenses, and lower interest and other charges, partially offset by higher taxes other than income taxes and lower other income.

Net Revenue

Third Quarter 2008 Compared to Third Quarter 2007

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 2008 to the third quarter 2007.

   

Amount

   

(In Millions)

     

2007 net revenue

 

$71.5 

Volume/weather

 

(4.6)

Other

 

0.6 

2008 net revenue

 

$67.5 

The volume/weather variance is primarily due to decreased electricity usage during the unbilled sales period and the effects of the power outages caused by Hurricane Gustav, which contributed an estimated $2 million to the decrease.

Gross operating revenues and fuel and purchased power expenses

Gross operating revenues increased primarily due to:

  • an increase of $16.9 million in electric fuel cost recovery revenues due to higher fuel rates and increased electricity usage; and
  • an increase of $7.5 million in gross gas revenue primarily due to higher fuel recovery revenues.

Fuel and purchased power expenses increased primarily due to an increase in the average market price of natural gas.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

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, 2008 to the nine months ended September 30, 2007.

124

   

Amount

   

(In Millions)

     

2007 net revenue

 

$183.6 

Net gas revenue

 

5.5 

Volume/weather

 

5.0 

Storm reserve rider

 

3.7 

Other

 

(1.3)

2008 net revenue

 

$196.5 

The net gas revenue variance is primarily due to an increase in base rates in March and November 2007 and increased gas usage. Refer to Note 2 to the financial statements in the Form 10-K for a discussion of the base rate increase.

The volume/weather variance is due to an increase in electricity usage. Billed retail electricity usage increased a total of 227 GWh, an increase of 7%.

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

Gross operating revenues and fuel and purchased power expenses

Gross operating revenues increased primarily due to:

  • an increase of $48.7 million in gross wholesale revenue due to increased sales to affiliated customers and an increase in the average price of energy available for resale sales;
  • an increase of $36.7 million in electric fuel cost recovery revenues due to higher fuel rates and increased electricity usage; and
  • an increase of $18.7 million in gross gas revenues primarily due to higher fuel recovery revenues and increases in gas base rates in March 2007 and November 2007.

Fuel and purchased power increased primarily due to increases in the average market prices of natural gas and purchased power in addition to an increase in demand.

Other Income Statement Variances

Third Quarter 2008 Compared to Third Quarter 2007

Other operation and maintenance expenses decreased primarily due to a provision for storm-related bad debts of $11 million recorded in 2007.

Other income decreased primarily due to a reduction in the allowance for equity funds used during construction related to a decrease in storm-related construction, lower carrying costs related to the Hurricane Katrina storm costs regulatory asset, and lower interest income earned on temporary cash investments.

125

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Other operation and maintenance expenses decreased primarily due to:

  • a provision for storm-related bad debts of $11 million recorded in 2007; and
  • a decrease of $2.2 million in gas operations spending due to higher labor and material costs for reliability work in 2007.

The decrease was partially offset by:

  • an increase of $2.4 million due to expenses associated with the Energy Efficiency and Economic Development Funds effective in the first quarter 2008;
  • an increase of $2.0 million due to the implementation of the storm reserve rider in March 2007;
  • an increase of $1.4 million in fossil expenses primarily due to higher costs for plant maintenance outages as a result of differing outage schedules for 2008 compared to 2007; and
  • an increase of $1.0 million in transmission spending primarily due to higher transmission equalization expenses.

Taxes other than income taxes increased primarily due to increased local franchise taxes as a result of higher electric and gas retail revenues partially offset by the reduction of sales and use tax reserves.

Other income decreased primarily due to a reduction in the allowance for equity funds used during construction related to a decrease in storm-related construction, lower carrying costs related to the Hurricane Katrina storm costs regulatory asset, and lower interest income earned on temporary cash investments.

Interest and other charges decreased as a result of interest accrued on pre-petition liabilities in 2007 in addition to a lower interest rate on the 3-year note issued to satisfy its affiliate pre-petition accounts payable in its plan of reorganization. Refer to Note 18 to the financial statements in the Form 10-K for Entergy New Orleans bankruptcy proceedings.

Income Taxes

The effective income tax rate was 40.5% for the third quarter 2008 and 41.1% for the nine months ended September 30, 2008. The difference in the effective income tax rate for the third quarter and nine months ended September 30, 2008 versus the federal statutory rate of 35% is primarily due to state income taxes and book and tax differences related to utility plant items.

The effective income tax rate was 33.4% for the third quarter 2007 and 37.8% for the nine months ended September 30, 2007. The difference in the effective income tax rate for the third quarter 2007 versus the federal statutory rate of 35% is primarily due to an adjustment of prior year's federal tax reserve partially offset by state income taxes and book and tax differences related to utility plant items. The difference in the effective income tax rate for the nine months ended September 30, 2007 versus the federal statutory rate of 35% is primarily due to state income taxes and book and tax differences related to utility plant items, partially offset by the amortization of deferred income taxes, book and tax differences related to the allowance for equity funds used during construction, and an adjustment of prior year's federal tax reserve.

126

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2008 and 2007 were as follows:

 

 

2008

 

2007

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$92,010 

 

$17,093 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

63,204 

 

163,563 

 

Investing activities

 

(3,043)

 

8,910 

 

Financing activities

 

(31,498)

 

(53,586)

Net increase in cash and cash equivalents

 

28,663 

 

118,887 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$120,673 

 

$135,980 

Operating Activities

Net cash provided by operating activities decreased $100.4 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to the receipt of CDBG funds of $180.8 million in 2007 and the timing of collections of receivables from customers, partially offset by the timing of payments to vendors and a decrease of $43.6 million in pension contributions.

Investing Activities

Investing activities used $3.0 million of cash for the nine months ended September 30, 2008 compared to providing $8.9 million of cash for the nine months ended September 30, 2007 primarily due to:

  • additional work performed on the gas distribution rebuild project;
  • money pool activity; and
  • proceeds of $10 million received in 2007 related to the sale in the first quarter 2007 of a power plant that had been out of service since 1984.

The decrease was substantially offset by an increase of $46.9 million in insurance proceeds related to Hurricane Katrina.

Increases in Entergy New Orleans' receivable from the money pool are a use of cash flow, and Entergy New Orleans' receivable from the money pool increased by $21.3 million for the nine months ended September 30, 2008. The money pool is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries' need for external short-term borrowings.

Financing Activities

Net cash used in financing activities decreased $22.1 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to the repayment of Entergy New Orleans' borrowings under the debtor-in-possession credit facility in 2007, partially offset by the redemption, at maturity, of $30 million 3.875% Series first mortgage bonds in August 2008.

127

Capital Structure

Entergy New Orleans' capitalization is shown in the following table. The decrease in the debt to capital ratio is primarily due to a decrease in debt outstanding and an increase in shareholders' equity resulting from net income in 2008.

 

 

September 30,
2008

 

December 31,
2007

 

 

 

 

 

Net debt to net capital

 

39.9%

 

51.8%

Effect of subtracting cash from debt

14.4%

8.8%

Debt to capital

 

54.3%

 

60.6%

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

Uses and Sources of Capital

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

Entergy New Orleans' receivables from or (payables to) the money pool was as follows:

September 30,
2008

 

December 31,
2007

 

September 30,
2007

 

December 31,
2006

(In Thousands)

 

 

 

 

 

 

 

$69,013

 

$47,705

 

$-

 

($37,166)

See Note 4 to the financial statements in the Form 10-K for a description of the money pool. As discussed in the Form 10-K, in May 2007, Entergy New Orleans issued notes in satisfaction of its affiliate prepetition accounts payable, including its indebtedness to the Entergy System money pool.

On August 1, 2008, Entergy New Orleans paid, at maturity, its $30 million 3.875% Series first mortgage bonds.

Significant Factors, Known Trends, and Uncertainties

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

State and Local Rate Regulation

Retail Rates

In January 2008, Entergy New Orleans voluntarily implemented a 6.15% base rate credit (the recovery credit) for electric customers, which Entergy New Orleans estimates will return approximately $10.6 million to electric customers in 2008. Entergy New Orleans was able to implement this credit because during 2007 the recovery of New Orleans after Hurricane Katrina was occurring faster than expected in 2006 projections. In addition, Entergy New Orleans committed to set aside $2.5 million for an energy efficiency program focused on community education and outreach and weatherization of homes.

 

128

 

On July 31, 2008, Entergy New Orleans filed an electric and gas base rate case with the City Council. The filing requests an 11.75% return on common equity. The filing calls for a $23.0 million decrease in electric base rates, which includes keeping the recovery credit in effect, as well as realigning approximately $12.3 million of capacity costs from recovery through the fuel adjustment clause to electric base rates. The filing also calls for a $9.1 million increase in gas base rates to fund ongoing operations. This request is unrelated to the ongoing rebuild of Entergy New Orleans' natural gas system. The procedural schedule calls for a hearing on the filing to commence on March 2, 2009, with certification of the evidentiary record by a hearing officer no later than March 16, 2009, and a decision by the City Council on or before April 30, 2009.

Fuel Adjustment Clause Litigation

See the Form 10-K for a discussion of the complaint filed in April 1999 by a group of ratepayers against Entergy New Orleans, Entergy Corporation, Entergy Services, and Entergy Power in state court in Orleans Parish purportedly on behalf of all Entergy New Orleans ratepayers and a corresponding complaint filed with the City Council. In February 2004, the City Council approved a resolution that resulted in a refund to customers of $11.3 million, including interest, during the months of June through September 2004. In May 2005 the Civil District Court for the Parish of Orleans affirmed the City Council resolution, finding no support for the plaintiffs' claim that the refund amount should be higher. In June 2005, the plaintiffs appealed the Civil District Court decision to the Louisiana Fourth Circuit Court of Appeal. On February 25, 2008, the Fourth Circuit Court of Appeal issued a decision affirming in part, and reversing in part, the Civil District Court's decision.  Although the Fourth Circuit Court of Appeal did not reverse any of the substantive findings and conclusions of the City Council or the Civil District Court, the Fourth Circuit found that the amount of the refund was arbitrary and capricious and increased the amount of the refund to $34.3 million.  Entergy New Orleans believes that the increase in the refund ordered by the Fourth Circuit is not justified. Entergy New Orleans, the City Council, and the plaintiffs requested rehearing, and in April 2008, the Fourth Circuit granted the plaintiffs' request for rehearing. In addition to changing the basis for the court's decision in the manner requested by the plaintiffs, the court also granted the plaintiffs' request that it provide for interest on the refund amount. The court denied the motions for rehearing filed by the City Council and Entergy New Orleans. In May 2008, Entergy New Orleans and the City Council filed with the Louisiana Supreme Court applications for a writ of certiorari seeking, among other things, reversal of the Fourth Circuit decision. The Louisiana Supreme Court granted these writ applications in October 2008 and will review the Fourth Circuit's decision.

Federal Regulation

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

Critical Accounting Estimates

See " MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates " in the Form 10-K for a discussion of the estimates and judgments necessary in Entergy New Orleans' accounting for unbilled revenue and qualified pension and other postretirement benefits, and see Entergy Corporation and Subsidiaries " MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates " in this Form 10-Q for an update to the discussion regarding qualified pension and other postretirement benefits.

New Accounting Pronouncements

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

129

ENTERGY NEW ORLEANS, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
                 
  Three Months Ended   Nine Months Ended
    2008   2007   2008   2007
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Electric   $189,808    $172,528    $524,603    $431,815 
Natural gas   25,795    18,335    109,863    91,178 
TOTAL   215,603    190,863    634,466    522,993 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   82,409    58,134    263,366    189,727 
  Purchased power   64,679    60,188    171,485    146,543 
  Other operation and maintenance   26,094    35,326    78,327    82,121 
Taxes other than income taxes   11,158    10,537    31,391    29,339 
Depreciation and amortization   8,250    8,117    24,553    24,227 
Other regulatory charges - net   1,028    1,031    3,087    3,096 
TOTAL   193,618    173,333    572,209    475,053 
                 
OPERATING INCOME   21,985    17,530    62,257    47,940 
                 
OTHER INCOME                
Allowance for equity funds used during construction   109    133    244    1,592 
Interest and dividend income   2,743    2,877    7,589    8,902 
Miscellaneous - net   (157)   (202)   (1,173)   (569)
TOTAL   2,695    2,808    6,660    9,925 
                 
INTEREST AND OTHER CHARGES                
Interest on long-term debt   3,072    3,246    9,552    9,736 
Other interest - net   1,340    2,663    5,748    9,398 
Allowance for borrowed funds used during construction   (71)   (98)   (158)   (1,195)
TOTAL   4,341    5,811    15,142    17,939 
                 
INCOME BEFORE INCOME TAXES   20,339    14,527    53,775    39,926 
                   
Income taxes   8,235    4,848    22,092    15,079 
                 
NET INCOME   12,104    9,679    31,683    24,847 
                 
Preferred dividend requirements and other   241    402    724    884 
                 
EARNINGS APPLICABLE TO                
COMMON STOCK   $11,863    $9,277    $30,959    $23,963 
                 
See Notes to Financial Statements.                
                 

 

130

 

ENTERGY NEW ORLEANS, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
     
    2008   2007
    (In Thousands)
OPERATING ACTIVITIES        
Net income   $31,683    $24,847 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Other regulatory charges - net   3,087    3,096 
  Depreciation and amortization   24,553    24,227 
  Deferred income taxes, investment tax credits, and non-current taxes accrued   16,021    18,591 
  Changes in working capital:        
    Receivables   (17,154)   (673)
    Fuel inventory   998    674 
    Accounts payable   2,820    (15,016)
    Taxes accrued   6,028    (2,086)
    Interest accrued   (2,798)   (14,583)
    Deferred fuel costs   (20,295)   (11,789)
    Other working capital accounts   3,615    (4,763)
  Provision for estimated losses and reserves   5,229    3,811 
  Changes in pension liability   (4,594)   (45,759)
  Changes in other regulatory assets   15,216    186,324 
  Other   (1,205)   (3,338)
Net cash flow provided by operating activities   63,204    163,563 
         
INVESTING ACTIVITIES        
Construction expenditures   (79,223)   (55,526)
Allowance for equity funds used during construction   244    1,592 
Insurance proceeds   102,914    55,973 
Proceeds from the sale of assets     10,046 
Change in money pool receivable - net   (21,308)  
Change in other investments - net   (5,670)   (3,175)
Net cash flow provided by (used in) investing activities   (3,043)   8,910 
         
FINANCING ACTIVITIES        
Retirement of long-term debt   (30,774)  
Repayment of DIP credit facility     (51,934)
Dividends paid:        
  Preferred stock   (724)   (1,652)
Net cash flow used in financing activities   (31,498)   (53,586)
         
Net increase in cash and cash equivalents   28,663    118,887 
         
Cash and cash equivalents at beginning of period   92,010    17,093 
         
Cash and cash equivalents at end of period   $120,673    $135,980 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
  Interest - net of amount capitalized   $17,545    $15,153 
  Income taxes   $1,270    $381 
         
See Notes to Financial Statements.        

 

131

 

ENTERGY NEW ORLEANS, INC.
BALANCE SHEETS
ASSETS
September 30, 2008 and December 31, 2007
(Unaudited)
 
         
  2008   2007
  (In Thousands)
         
CURRENT ASSETS        
Cash and cash equivalents        
  Cash   $ -    $119  
  Temporary cash investments - at cost        
   which approximates market   120,673     91,891  
     Total cash and cash equivalents   120,673     92,010  
Accounts receivable:        
  Customer   67,674     45,478  
  Allowance for doubtful accounts   (1,116)   (4,639)
  Associated companies   74,646     58,952  
  Other   2,935     9,928  
  Accrued unbilled revenues   28,884     24,842  
     Total accounts receivable   173,023     134,561  
Deferred fuel costs   37,576     17,281  
Fuel inventory - at average cost   3,502     4,500  
Materials and supplies - at average cost   9,763     9,007  
Prepayments and other   6,375     2,539  
TOTAL   350,912     259,898  
         
OTHER PROPERTY AND INVESTMENTS        
Investment in affiliates - at equity   3,259     3,259  
Non-utility property at cost (less accumulated depreciation)   1,016     1,016  
Other property and investments   10,942     5,272  
TOTAL   15,217     9,547  
         
UTILITY PLANT        
Electric   766,392     745,426  
Natural gas   196,387     201,870  
Construction work in progress   26,101     14,144  
TOTAL UTILITY PLANT   988,880     961,440  
Less - accumulated depreciation and amortization   529,992     507,537  
UTILITY PLANT - NET   458,888     453,903  
         
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:        
  Other regulatory assets   175,519     143,726  
Long term receivables   -     126  
Other   8,474     8,995  
TOTAL   183,993     152,847  
         
TOTAL ASSETS   $1,009,010    $876,195 
         
See Notes to Financial Statements.        
 

132

 
 
ENTERGY NEW ORLEANS, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, 2008 and December 31, 2007
(Unaudited)
 
         
  2008   2007
  (In Thousands)
 
CURRENT LIABILITIES        
Currently maturing long-term debt   $ -   $30,000
Accounts payable:        
  Associated companies   24,072   27,138
  Other   69,309   23,366
Customer deposits   19,065   17,803
Taxes accrued   11,009   4,981
Accumulated deferred income taxes   11,944   1,754
Interest accrued   2,419   5,217
Other   16,889   9,944
TOTAL CURRENT LIABILITIES   154,707   120,203
         
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued   117,198   114,729
Accumulated deferred investment tax credits   2,552   2,809
SFAS 109 regulatory liability - net   74,918   73,613
Other regulatory liabilities   9,522   9,522
Retirement cost liability   2,916   2,772
Accumulated provisions   19,558   14,329
Pension and other postretirement liabilities   10,890   15,484
Long-term debt   273,149   273,912
Gas system rebuild insurance proceeds   100,270   36,958
Other   15,147   14,640
TOTAL NON-CURRENT LIABILITIES   626,120   558,768
         
         
Commitments and Contingencies        
         
SHAREHOLDERS' EQUITY        
Preferred stock without sinking fund   19,780   19,780
Common stock, $4 par value, authorized 10,000,000        
 shares; issued and outstanding 8,435,900 shares in 2008        
 and 2007   33,744   33,744
Paid-in capital   36,294   36,294
Retained earnings   138,365   107,406
TOTAL   228,183   197,224
         
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $1,009,010   $876,195
         
See Notes to Financial Statements.        

133

 

ENTERGY NEW ORLEANS, INC.
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 61   $ 53   $ 8    15 
  Commercial   59   54    
  Industrial   15   14    
  Governmental   24   21     14 
     Total retail   159   142   17    12 
  Sales for resale                
    Associated companies   28   25     12 
    Non-associated companies   1   -    
  Other   2   6   (4)   (67)
     Total   $ 190   $ 173   $ 17    10 
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   469   442   27   
  Commercial   506   515   (9)   (2)
  Industrial   148   156   (8)   (5)
  Governmental   216   211    
     Total retail   1,339   1,324   15   
  Sales for resale                
    Associated companies   233   224    
    Non-associated companies   6   5     20 
     Total   1,578   1,553   25   
                 
                 
    Nine Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $ 132   $ 108   $ 24    22 
  Commercial   147   134   13    10 
  Industrial   36   34    
  Governmental   59   53     11 
     Total retail   374   329   45    14 
  Sales for resale                
    Associated companies   133   84   49    58 
    Non-associated companies   1   1    
  Other   17   18   (1)   (6)
     Total   $ 525   $ 432   93    22 
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   1,098   933   165    18 
  Commercial   1,366   1,330   36   
  Industrial   418   426   (8)   (2)
  Governmental   585   551   34   
     Total retail   3,467   3,240   227   
  Sales for resale                
    Associated companies   1,037   799   238    30 
    Non-associated companies   16   12     33 
     Total   4,520   4,051   469    12 
                 
                 
                 
                 

134

ENTERGY TEXAS, INC.

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

Jurisdictional Separation of Entergy Gulf States, Inc. into Entergy Gulf States Louisiana and Entergy Texas

See the Entergy Texas Form 10 for a discussion of the jurisdictional separation of Entergy Gulf States, Inc. into two vertically integrated utility companies, one operating under the sole retail jurisdiction of the PUCT, Entergy Texas, and the other operating under the sole retail jurisdiction of the LPSC, Entergy Gulf States Louisiana.

Because the jurisdictional separation was a transaction involving entities under common control, Entergy Texas recognized the assets and liabilities allocated to it at their carrying amounts in the accounts of Entergy Gulf States, Inc. at the time of the jurisdictional separation. Entergy Texas' financial statements contained herein report results of operations for 2007 as though the jurisdictional separation had occurred at the beginning of 2007.

Hurricane Ike

In September 2008, Hurricane Ike caused catastrophic damage to Entergy Texas' service territory. The storm resulted in widespread power outages, significant damage to distribution, transmission, and generation infrastructure, and the loss of sales during the power outages. Total restoration costs for the repair and/or replacement of Entergy Texas' electric facilities damaged by Hurricane Ike are estimated to be in the range of $435 million to $510 million. Entergy Texas is considering all reasonable avenues to recover storm-related costs, including, but not limited to, federal and local cost recovery mechanisms, including requests for Community Development Block Grant funding; securitization; and insurance, to the extent deductibles are met. Entergy Texas expects to initiate its storm cost recovery proceeding in the spring of 2009, because new securitization legislation is required for it to securitize its Hurricane Ike restoration costs. The Texas legislative session begins in January 2009. Entergy is currently evaluating the amount of the losses covered by insurance for Entergy and each of the affected Utility operating companies. Because most of its Hurricane Gustav damage was to distribution and transmission facilities that are generally not covered by property insurance, Entergy does not expect to meet its deductibles for that storm. Because Hurricane Ike caused more damage by flooding and also caused more damage to generation facilities as compared to Hurricane Gustav, it is more likely that Entergy will meet its deductibles for that storm.

Entergy Texas has recorded accounts payable for the estimated costs incurred that were necessary to return customers to service.  Entergy Texas recorded corresponding regulatory assets of approximately $240 million and construction work in progress of approximately $154 million. Entergy Texas recorded the regulatory assets in accordance with its accounting policies and based on the historic treatment of such costs in its service territory, because management believes that recovery through some form of regulatory mechanism is probable. Because Entergy Texas has not gone through the regulatory process regarding these storm costs, however, there is an element of risk, and Entergy Texas 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 2008 Compared to Third Quarter 2007

Net income decreased by $17.3 million primarily due to lower net revenue and higher depreciation and amortization expenses, partially offset by lower other operation and maintenance expenses and lower interest and other charges.

135

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net income increased by $15.3 million primarily due to higher net revenue and lower other operation and maintenance expenses, partially offset by higher depreciation and amortization expenses and lower other income.

Net Revenue

Third Quarter 2008 Compared to Third Quarter 2007

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 of 2008 to the third quarter of 2007.

 

 

Amount

 

 

(In Millions)

 

 

 

2007 net revenue

 

$149.4 

Volume/weather

 

(12.8)

Other

 

(20.2)

2008 net revenue

 

$116.4 

The volume/weather variance is primarily due to decreased electricity usage, including the effects of Hurricane Ike, which contributed an estimated $11.7 million to the decrease, and less favorable weather compared to the same period in 2007 during the unbilled sales period.

The Other variance is primarily caused by various operational effects of the jurisdictional separation on revenues and fuel and purchased power expenses.

Gross operating revenues and fuel and purchased power expenses

Gross operating revenues increased $175.2 million primarily due to:

  • an increase of $164 million in fuel cost recovery revenues due to higher fuel rates and increased usage; and
  • an increase of $23.5 million in affiliated wholesale revenue primarily due to increases in the cost of energy.

The increase was partially offset by a decrease of $12.8 million related to volume/weather as discussed above.

Fuel and purchased power expenses increased primarily due to an increase in power purchases as a result of the purchased power agreements between Entergy Gulf States Louisiana and Entergy Texas, an increase in the average market prices of natural gas and purchased power, and an increase in deferred fuel expense as the result of increased recovery from customers of fuel costs.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

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, 2008 to the nine months ended September 30, 2007.

 

136

 

 

 

Amount

 

 

(In Millions)

 

 

 

2007 net revenue

 

$315.7 

Fuel recovery

 

10.8 

Securitization transition charge

 

9.4 

Other

 

(1.6)

2008 net revenue

 

$334.3 

The fuel recovery variance is primarily due to a reserve for potential rate refunds made in the first quarter 2007 as a result of a PUCT ruling related to the application of past PUCT rulings addressing transition to competition in Texas.

The securitization transition charge variance is primarily due to the issuance of securitization bonds. In June 2007, Entergy Gulf States Reconstruction Funding I, LLC, a company wholly-owned and consolidated by Entergy Texas, issued securitization bonds and with the proceeds purchased from Entergy Texas the transition property, which is the right to recover from customers through a transition charge amounts sufficient to service the securitization bonds. There is a corresponding increase in interest and other charges with no impact on net income. See Note 5 to the financial statements in the Entergy Texas Form 10 for additional information regarding the securitization bonds.

The Other variance is primarily caused by various operational effects of the jurisdictional separation on revenues and fuel and purchased power expenses.

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

Gross operating revenues increased $267.3 million primarily due to the following reasons:

  • an increase of $144.7 million in fuel cost recovery revenues due to higher fuel rates and increased usage, partially offset by interim fuel refunds to customers for fuel cost recovery over-collections through November 2007. The refund was distributed over a two-month period beginning February 2008. The interim refund and the PUCT approval is discussed in Note 2 to the financial statements in the Entergy Texas Form 10;
  • an increase of $91.7 million in affiliated wholesale revenue primarily due to increases in the cost of energy;
  • an increase of $17.4 million in transition charge amounts collected from customers to service the securitization bonds. See Note 5 to the financial statements in the Entergy Texas Form 10 for additional information regarding the securitization bonds; and
  • implementation of an interim surcharge to collect $10.3 million in under-recovered incremental purchased capacity costs incurred through July 2007. The surcharge was collected over a two-month period beginning February 2008. The incremental capacity recovery rider and PUCT approval is discussed in Note 2 to the financial statements in the Entergy Texas Form 10.

Fuel and purchased power expenses increased primarily due to an increase in power purchases as a result of the purchased power agreements between Entergy Gulf States Louisiana and Entergy Texas and an increase in the average market prices of natural gas and purchased power, substantially offset by a decrease in deferred fuel expense as the result of decreased recovery from customers of fuel costs.

Other regulatory charges increased primarily due to an increase of $8 million in the recovery of bond expenses related to the securitization bonds. The recovery became effective July 2007. See Note 5 to the financial statements in the Entergy Texas Form 10 for additional information regarding the securitization bonds.

 

137

 

Other Income Statement Variances

Third Quarter 2008 Compared to Third Quarter 2007

Other operation and maintenance expenses decreased primarily due to:

  • a decrease of $2.3 million in transmission spending due to lower transmission equalization expenses;
  • a decrease of $2.1 million in property insurance expenses;
  • a decrease of $1.4 million in regulatory commission expenses; and
  • a decrease of $1.1 million in payroll and payroll-related costs.

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

Other income decreased primarily due to a decrease in interest earned on money pool investments, substantially offset by an increase in taxes collected on advances for transmission projects.

Interest and other charges decreased primarily due to a decrease in first mortgage bonds outstanding.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Other operation and maintenance expenses decreased primarily due to:

  • a decrease of $4.7 million in transmission spending due to lower transmission equalization expenses;
  • a decrease of $3.6 million in customer service support costs, including a decrease in customer write-offs; and
  • a decrease of $2.5 million in regulatory commission expenses.

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

Other income decreased primarily due to the absence of carrying charges on storm restoration costs that were approved by the PUCT in the fourth quarter 2006 and a decrease in interest earned on money pool investments. In June 2007, Entergy Gulf States Reconstruction Funding I, LLC issued securitization bonds and the carrying charges ended. The PUCT approval of carrying charges, the securitization filing and the approval for the recovery of reconstruction costs are discussed in Note 2 to the financial statements in the Entergy Texas Form 10. The decrease was partially offset by an increase in taxes collected on advances for transmission projects.

Interest and other charges decreased primarily due to the absence of interest recorded on advances from independent power producers per a FERC order during the first quarter 2007. This decrease was partially offset by an increase in long-term debt outstanding as a result of the issuance of securitization bonds during the second quarter 2007, partially offset by a decrease in first mortgage bonds outstanding. See Note 5 to the financial statements in the Entergy Texas Form 10 for additional information regarding the securitization bonds.

Income Taxes

The effective income tax rate was 37.5% for the third quarter 2008 and 37.4% for the nine months ended September 30, 2008. The difference in the effective income tax rate for the third quarter 2008 versus the federal statutory rate of 35% is primarily due to state income taxes. The difference in the effective income tax rate for the nine months ended September 30, 2008 versus the federal statutory rate of 35% is primarily due to state income taxes, partially offset by the amortization of investment tax credits.

The effective income tax rate was 34.5% for the third quarter 2007 and 39.8% for the nine months ended September 30, 2007. The difference in the effective income tax rate for the nine months ended September 30, 2007 versus the federal statutory rate of 35% were primarily due to state income taxes and book and tax differences related to utility plant items, partially offset by the amortization of investment tax credits.

 

138

 

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2008 and 2007 were as follows:

 

 

2008

 

2007

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$297,082 

 

$77,115 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

26,515 

 

106,073 

 

Investing activities

 

(50,648)

 

(156,611)

 

Financing activities

 

(221,232)

 

290,001 

Net increase (decrease) in cash and cash equivalents

 

(245,365)

 

239,463 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$51,717 

 

$316,578 

Operating Activities

Net cash flow provided by operating activities decreased $79.6 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to decreased recovery of deferred fuel costs, partially offset by the timing of collections of receivables from customers and payments to vendors. The decreased fuel recovery was primarily caused by the $71 million fuel cost over-recovery refund that is discussed in Note 2 to the financial statements, in addition to the over-recovery of fuel costs for the nine months ended September 30, 2007 compared to under-recovering for the nine months ended September 30, 2008. Fuel prices have been increasing and due to the time lag before the fuel recovery rate increases in response, Entergy Texas has under-recovered fuel costs thus far in 2008.

Investing Activities

Net cash flow used in investing activities decreased $106 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to money pool activity, partially offset by an increase in distribution construction expenditures due to various tropical storms. Decreases in Entergy Texas' receivable from the money pool are a source of cash flow, and Entergy Texas' receivable from the money pool decreased by $124.8 million for the nine months ended September 30, 2008 compared to increasing by $43.4 million for the nine months ended September 30, 2007. The money pool is an inter-company borrowing arrangement designed to reduce Entergy's subsidiaries' need for external short-term borrowings.

Financing Activities

Financing activities used cash of $221.2 million for the nine months ended September 30, 2008 compared to providing cash of $290 million for the nine months ended September 30, 2007 primarily due to the issuance of $329.5 million of securitization bonds in June 2007, the retirement of $159.2 million of long-term debt in June 2008, and $150 million of capital returned to Entergy Corporation in February 2008, partially offset by borrowings of $100 million on Entergy Texas' credit facility. After the effects of Hurricane Katrina and Hurricane Rita, Entergy Corporation made a $300 million capital contribution to Entergy Gulf States, Inc. in 2005, which was part of Entergy's financing plan that provided liquidity and capital resources to Entergy and its subsidiaries while storm restoration cost recovery was pursued. See Note 5 in the Entergy Texas Form 10 for additional information regarding the securitization bonds.

139

 

Capital Structure

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

 

 

September 30,
2008

 

December 31,
2007

 

 

 

 

 

Net debt to net capital

 

59.3%

 

52.6%

Effect of subtracting cash from debt

 

0.9%

 

5.9%

Debt to capital

 

60.2%

 

58.5%

Net debt consists of debt less cash and cash equivalents. Debt consists of notes payable and long-term debt, including the currently maturing portion and also including the debt assumption liability. 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 in analyzing its financial condition and believes it provides useful information to its investors and creditors in evaluating Entergy Texas' financial condition.

On June 2, 2008, under the terms of the debt assumption agreement between Entergy Texas and Entergy Gulf States Louisiana that is discussed in Note 5 to the financial statements in the Entergy Texas Form 10, Entergy Texas paid at maturity $148.8 million of Entergy Gulf States Louisiana first mortgage bonds, which results in a corresponding decrease in Entergy Texas' debt assumption liability.

Uses and Sources of Capital

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

Entergy Texas' receivables from the money pool were as follows:

September 30,
2008

 

December 31,
2007

 

September 30,
2007

 

December 31,
2006

(In Thousands)

 

 

 

 

 

 

 

$29,416

 

$154,176

 

$140,651

 

$97,277

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

As discussed in the Entergy Texas Form 10, Entergy Texas has a credit facility in the amount of $100 million that will expire in August 2012. The facility became available to Entergy Texas on May 30, 2008, after the fulfillment of certain closing conditions. As of September 30, 2008, $100 million was outstanding on the credit facility.

Hurricane Ike and Other Short-term Liquidity Sources and Uses

As discussed above, Entergy Texas is currently evaluating various avenues of recovering its Hurricane Ike storm restoration costs. Entergy Texas believes its total liquidity is sufficient to meet its current obligations, including the effects associated with Hurricane Ike. At the end of the third quarter 2008, Entergy Texas had $51.7 million of cash and cash equivalents on hand, and believes that it has sufficient financing authority, subject to debt covenants, to meet its anticipated obligations. Entergy Texas has $200 million of available FERC-authorized short-term borrowing authority, which is discussed in more detail in Note 4 to the financial statements, and also has FERC-authorized long-term borrowing authority.

In addition to its Hurricane Ike storm restoration cost obligations, Entergy Texas has a long-term debt maturity of $160 million in the fourth quarter 2008. Entergy Texas plans to refinance this debt maturity, and also plans to issue additional long-term debt to assist in meeting its

140

 

obligations. In the event that Entergy Texas is unable to access the credit markets on reasonable commercial terms by the end of 2008, it has intercompany sources of funds available to it. Entergy Texas' FERC-authorized short-term borrowing authority includes the ability to access the Entergy system money pool or other forms of intercompany debt. Entergy Texas' FERC-authorized long-term borrowing authority includes the ability to access intercompany debt and also includes authority to issue various forms of equity, including on an intercompany basis.

Significant Factors, Known Trends, and Uncertainties

See " MANAGEMENT ' S FINANCIAL DISCUSSION AND ANALYSIS - Significant Factors and Known Trends " in the Entergy Texas Form 10 for a discussion of transition to retail competition in Texas; state and local rate regulation; federal regulation; the Energy Policy Act of 2005; industrial and commercial customers; market and credit risk sensitive instruments; and environmental risks. Following are updates to the information disclosed in the Entergy Texas Form 10.

State and Local Rate Regulation

Filings with the PUCT

Entergy Texas made a rate filing in September 2007 with the PUCT requesting an annual rate increase totaling $107.5 million, including a base rate increase of $64.3 million and riders totaling $43.2 million. The base rate increase request includes a $12.2 million annual increase for the storm damage reserve. Entergy Texas requested an 11% return on common equity. In December 2007 the PUCT issued an order setting September 26, 2008 (which it subsequently moved to November 27, 2008) as the effective date for the rate change proposed in this matter. In May 2008, Entergy Texas and certain parties in the rate case filed a non-unanimous settlement that provides for a $42.5 million base rate increase beginning in October 2008 and an additional $17 million base rate increase beginning in October 2009. The non-unanimous settlement also provides that $25 million of System Agreement rough production cost equalization payments will offset the effect on customers of the rate increase. The non-unanimous settlement further provides that an additional $17 million on an annual basis of System Agreement rough production cost equalization payments will be retained by Entergy Texas from January 2009 through September 2009. The non-unanimous settlement also resolves the fuel reconciliation portion of the proceeding with a $4.5 million disallowance. The PUCT staff, the Texas Industrial Energy Consumers (TIEC), and the state of Texas did not join in the settlement and filed a separate agreement among them that provides for a rate decrease, later revised to a slight increase, and a $4.7 million fuel cost disallowance. In May 2008 the ALJs issued an order stating that the proceeding will continue with Entergy Texas having the burden of proof to show that the non-unanimous settlement results in reasonable rates. The hearing on the merits of the non-unanimous settlement was held from June 23 through July 2, 2008, and in September 2008 the ALJs issued a proposal for decision recommending approval of the non-unanimous settlement. On November 5, 2008, the PUCT rejected the non-unanimous settlement and remanded the case for further hearings on the merits of Entergy Texas' original rate request.  The hearings on remand are expected to begin by early December 2008.  Entergy Texas agreed to extend until March 2, 2009 the PUCT's jurisdictional deadline to render a decision. In accordance with applicable law, after the requisite number of hearing days occurs, Entergy Texas will have the right to implement rates, up to the level of the requested rates, under bond and subject to refund.

In January 2008, Entergy Texas made a compliance filing with the PUCT describing how its 2007 Rough Production Cost Equalization receipts under the System Agreement were allocated between Entergy Gulf States, Inc.'s Texas and Louisiana jurisdictions. Several parties have intervened in the proceeding. A hearing was held at the end of July 2008, and in October 2008 the ALJ issued a proposal for decision recommending an additional $18.6 million allocation to Texas retail customers. Entergy Texas will file exceptions to the ALJ's proposal for decision. Because the PUCT allocation to Texas retail customers is inconsistent with the LPSC allocation to Louisiana retail customers, adoption of the proposal for decision by the PUCT would result in trapped costs between the Texas and Louisiana jurisdictions. Entergy will seek relief from the FERC or other appropriate relief if that occurs. The PUCT will consider final action on the proposal for decision and exceptions thereto at a future meeting.

 

141

 

In October 2007, Entergy Texas filed a request with the PUCT to refund $45.6 million, including interest, of fuel cost recovery over-collections through September 2007. In January 2008, Entergy Texas filed with the PUCT a stipulation and settlement agreement among the parties that updated the over-collection balance through November 2007 and establishes a refund amount, including interest, of $71 million. The PUCT approved the agreement in February 2008. The refund was made over a two-month period beginning February 2008, but was reduced by $10.3 million of under-recovered incremental purchased capacity costs. Amounts refunded through the interim fuel refund are subject to final reconciliation in a future fuel reconciliation proceeding.

Federal Regulation

See " System Agreement Proceedings " and " Independent Coordinator of Transmission " in the " Significant Factors and Known Trends " section of Entergy Corporation and Subsidiaries Management's Financial Discussion and Analysis herein for updates to the discussion in the Entergy Texas Form 10.

Critical Accounting Estimates

See " MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates " in the Entergy Texas Form 10 for a discussion of the estimates and judgments necessary in Entergy Texas' accounting for the application of SFAS 71, unbilled revenue, and qualified pension and other postretirement benefits, and see Entergy Corporation and Subsidiaries " MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates " in this Form 10-Q for an update to the discussion regarding qualified pension and other postretirement benefits.

New Accounting Pronouncements

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

142

 

ENTERGY TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 
  Three Months Ended   Nine Months Ended
    2008   2007   2008   2007
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Electric   $621,321    $446,130    $1,583,698    $1,316,423 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   207,949    83,962    435,131    394,446 
  Purchased power   289,157    204,664    794,750    595,071 
  Other operation and maintenance   34,517     43,551     119,192     132,741  
Decommissioning   46    44    137    128 
Taxes other than income taxes   14,006    12,941    40,550    38,945 
Depreciation and amortization   19,057    16,644    56,294    51,124 
Other regulatory charges - net   7,826    8,056    19,523    11,239 
TOTAL   572,558    369,862    1,465,577    1,223,694 
                 
OPERATING INCOME   48,763    76,268    118,121    92,729 
                 
OTHER INCOME                
Allowance for equity funds used during construction   563    692    1,541    2,462 
Interest and dividend income   2,127    7,466    7,680    27,255 
Miscellaneous - net   3,968    (115)   15,068    (465)
TOTAL   6,658    8,043    24,289    29,252 
                 
INTEREST AND OTHER CHARGES  
Interest on long-term debt   17,280    21,002    55,787    53,248 
Other interest - net   1,771    2,275    4,346    9,389 
Allowance for borrowed funds used during construction   (318)   (443)   (875)   (1,593)
TOTAL   18,733    22,834    59,258    61,044 
                 
INCOME BEFORE INCOME TAXES   36,688    61,477    83,152    60,937 
                 
Income taxes   13,772     21,222     31,108     24,240  
                 
NET INCOME   $22,916    $40,255    $52,044    $36,697 
                 
See Notes to Financial Statements.                

 

143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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144

 

 

ENTERGY TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
     
    2008   2007
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $52,044    $36,697 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Reserve for regulatory adjustments   285    270 
  Other regulatory charges - net   19,523    11,239 
  Depreciation, amortization, and decommissioning   56,431    51,252 
  Deferred income taxes and investment tax credits, and non-current taxes accrued   42,073    113,424 
  Changes in working capital:        
    Receivables   35,134    (92,947)
    Fuel inventory   (227)   (3,657)
    Accounts payable   85,084    34,335 
    Taxes accrued   (15,657)   14,213 
    Interest accrued   (1,246)   5,982 
    Deferred fuel costs   (151,922)   2,251 
    Other working capital accounts   (26,404)   42,502 
  Provision for estimated losses and reserves   2,072    (774)
  Changes in other regulatory assets   76,315    (107,291)
  Other   (146,990)   (1,423)
Net cash flow provided by operating activities   26,515     106,073  
         
INVESTING ACTIVITIES        
Construction expenditures   (176,218)   (112,623)
Allowance for equity funds used during construction   1,541    2,462 
Insurance proceeds   1,420    5,558 
Change in money pool receivable - net   124,760    (43,374)
Collections remitted to transition charge account   (2,151)   (8,634)
Net cash flow used in investing activities   (50,648)   (156,611)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt     323,647 
Return of capital to parent   (150,000)  
Retirement of long-term debt   (159,232)  
Changes in credit borrowings - net   100,000   
Dividends paid:        
  Common stock   (12,000)   (33,646)
Net cash flow provided by (used in) financing activities   (221,232)   290,001  
         
Net increase (decrease) in cash and cash equivalents   (245,365)   239,463 
         
Cash and cash equivalents at beginning of period   297,082    77,115 
         
Cash and cash equivalents at end of period   $51,717    $316,578 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
  Interest - net of amount capitalized   $58,645    $53,257 
  Income taxes   $7,293    $5,104 
         
See Notes to Financial Statements.        

145

 

ENTERGY TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 2008 and December 31, 2007
(Unaudited)
       
  2008   2007
  (In Thousands)
       
CURRENT ASSETS          
Cash and cash equivalents:          
  Cash     $232    $10 
  Temporary cash investments - at cost,          
   which approximates market     51,485    297,072 
     Total cash and cash equivalents     51,717    297,082 
Securitization recovery trust account     21,424    19,273 
Accounts receivable:          
  Customer     114,475    61,108 
  Allowance for doubtful accounts     (1,188)   (918)
  Associated companies     192,355    377,478 
  Other     17,662    35,048 
  Accrued unbilled revenues     20,492    30,974 
     Total accounts receivable     343,796    503,690 
Deferred fuel costs     84,652   
Accumulated deferred income taxes       24,507 
Fuel inventory - at average cost     56,005    55,778 
Materials and supplies - at average cost     33,856    31,454 
Prepayments and other     16,493    14,756 
TOTAL     607,943    946,540 
           
OTHER PROPERTY AND INVESTMENTS        
Investments in affiliates - at equity     870    863 
Non-utility property - at cost (less accumulated depreciation)     1,810    2,030 
Other     17,279    16,514 
TOTAL     19,959    19,407 
           
UTILITY PLANT        
Electric     2,892,272    2,817,681 
Construction work in progress     182,507    71,519 
TOTAL UTILITY PLANT     3,074,779    2,889,200 
Less - accumulated depreciation and amortization     1,081,561    1,043,183 
UTILITY PLANT - NET     1,993,218    1,846,017 
           
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:          
  SFAS 109 regulatory asset - net     85,219    87,531 
  Other regulatory assets     888,426    645,941 
Long-term receivables     789    1,284 
Other     126,828    60,032 
TOTAL     1,101,262    794,788 
           
TOTAL ASSETS     $3,722,382    $3,606,752 
           
See Notes to Financial Statements.          
 

146

 
 
ENTERGY TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
September 30, 2008 and December 31, 2007
(Unaudited)
 
  2008   2007
  (In Thousands)
 
CURRENT LIABILITIES        
Currently maturing portion of debt assumption liability   $160,286   $309,123
Accounts payable:          
  Associated companies     122,640   40,120
  Other     424,601   80,917
Customer deposits     40,459   37,962
Taxes accrued     96   15,753
Accumulated deferred income taxes     1,877   -
Interest accrued     26,803   28,049
Deferred fuel costs     -   67,270
Pension and other postretirement liabilities     1,236   1,236
System agreement cost equalization     65,597   92,225
Other     7,182   5,316
TOTAL     850,777   677,971
           
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued     708,442   697,693
Accumulated deferred investment tax credits     24,527   25,724
Other regulatory liabilities     -   4,881
Asset retirement cost liabilities     3,203   3,066
Accumulated provisions     10,935   8,863
Pension and other postretirement liabilities     -   14,418
Long-term debt - assumption liability     769,971   769,971
Other long-term debt     422,877   333,892
Other     37,352   66,019
TOTAL     1,977,307   1,924,527
           
Commitments and Contingencies          
           
SHAREHOLDER'S EQUITY        
Common stock, no par value, authorized 200,000,000 shares;          
 issued and outstanding 46,525,000 shares in 2008 and 2007     49,452   49,452
Paid-in capital     481,994   631,994
Retained earnings     362,852   322,808
TOTAL     894,298   1,004,254
           
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY     $3,722,382   $3,606,752
           
See Notes to Financial Statements.          

147

 

ENTERGY TEXAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS AND PAID-IN CAPITAL
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
             
      Three Months Ended  
      2008   2007  
      (In Thousands)
RETAINED EARNINGS            
Retained Earnings - Beginning of period     $339,936    $283,352   
             
  Add:            
    Net Income     22,916    40,255   
    Other additions       418   
      22,916    40,673   
             
  Deduct:            
    Dividends declared on common stock       13,918   
             
Retained Earnings - End of period     $362,852    $310,107   
             
PAID-IN CAPITAL            
Paid-in Capital - Beginning of period     $481,994    $632,222   
             
  Deduct:            
    Return of capital to parent        
             
Paid-in Capital - End of period     $481,994    $632,222   
             
             
      Nine Months Ended  
      2008   2007  
      (In Thousands)
RETAINED EARNINGS            
Retained Earnings - Beginning of period     $322,808    $306,266   
             
  Add:            
    Net Income     52,044    36,697   
    Other additions       790   
      52,044    37,487   
             
  Deduct:            
    Dividends declared on common stock     12,000    33,646   
             
Retained Earnings - End of period     $362,852    $310,107   
             
PAID-IN CAPITAL            
Paid-in Capital - Beginning of period     $631,994    $632,222   
             
  Deduct:            
    Return of capital to parent     (150,000)    
             
Paid-in Capital - End of period     $481,994    $632,222   
             
             
See Notes to Financial Statements.            
             
             

148

 

ENTERGY TEXAS, INC. AND SUBSIDIARIES
SELECTED OPERATING RESULTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 
                 
    Three Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $212     $152   $60     39  
  Commercial   125     80     45     56  
  Industrial   145     84   61     73  
  Governmental   7     5   2     40  
     Total retail   489     321   168     52  
  Sales for resale                    
    Associated companies   139     115   24     21  
    Non-associated companies   2     2   -     -  
  Other   (9)   8   (17)   (213)
     Total   $621     $446   $175     39  
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   1,727     1,704   23     1  
  Commercial   1,180     1,172   8     1  
  Industrial   1,575     1,526   49     3  
  Governmental   66     63   3     5  
     Total retail   4,548     4,465   83     2  
  Sales for resale                
    Associated companies   1,130     1,211   (81)   (7)
    Non-associated companies   23     28   (5)   (17)
     Total   5,701     5,704   (3)   -  
                 
                 
    Nine Months Ended   Increase/    
Description   2008   2007   (Decrease)   %
    (Dollars In Millions)    
Electric Operating Revenues:                
  Residential   $472   $410   $62     15  
  Commercial   313   266   47     18  
  Industrial   383   305   78     26  
  Governmental   20   17   3     18  
     Total retail   1,188   998   190     19  
  Sales for resale                
    Associated companies   377   287   90     31  
    Non-associated companies   7   5   2     40  
  Other   12   26   (14)   (54)
     Total   $1,584   $1,316   $268     20  
                 
Billed Electric Energy                
 Sales (GWh):                
  Residential   4,171   4,071   100     2  
  Commercial   3,165   3,069   96     3  
  Industrial   4,726   4,393   333     8  
  Governmental   189   183   6     3  
     Total retail   12,251   11,716   535     5  
  Sales for resale                
    Associated companies   3,105   3,206   (101)   (3)
    Non-associated companies   73   75   (2)   (3)
     Total   15,429   14,997   432     3  
                 

149

 

 

SYSTEM ENERGY RESOURCES, INC.

MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS

 

Results of Operations

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

Net income decreased by $5.0 million for the third quarter 2008 compared to the third quarter 2007 primarily due to a decrease in rate base in the third quarter 2008 resulting in lower operating income combined with lower interest income. The lower interest income resulted from interest income of $2.5 million recorded on an IRS audit settlement in the third quarter 2007 and lower interest earned on decommissioning trust funds and money pool investments.

Net income decreased by $15.6 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to a decrease in rate base in 2008 resulting in lower operating income combined with lower interest income. The lower interest income resulted from lower interest income earned on money pool investments and interest income of $2.5 million recorded on an IRS audit settlement in the third quarter of 2007.

Liquidity and Capital Resources

Cash Flow

Cash flows for the nine months ended September 30, 2008 and 2007 were as follows:

 

 

2008

 

2007

 

 

(In Thousands)

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

$105,005 

 

$135,012 

 

 

 

 

 

Cash flow provided by (used in):

 

 

 

 

 

Operating activities

 

182,138 

 

174,409 

 

Investing activities

 

(79,376)

 

(97,414)

 

Financing activities

 

(71,901)

 

(29,155)

Net increase in cash and cash equivalents

 

30,861 

 

47,840 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$135,866 

 

$182,852 

Operating Activities

The increase of $7.7 million in net cash provided by operating activities for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 is primarily due to a decrease of $19.8 million in income tax payments, partially offset by lower net income.

 

150

 

Investing Activities

The decrease of $18.0 million in net cash used in investing activities for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 is primarily due to higher spending in 2007 on the initial development of potential new nuclear development at the Grand Gulf and River Bend sites.

Financing Activities

The increase of $42.7 million in net cash used in financing activities for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 is primarily due to the issuance of $70 million of First Mortgage Bonds in September 2007, partially offset by an increase of $30.1 million in common stock dividends paid.

Capital Structure

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

 

 

September 30,
2008

 

December 31,
2007

 

 

 

 

 

Net debt to net capital

 

46.2%

 

47.4%

Effect of subtracting cash from debt

 

4.1%

 

3.2%

Debt to capital

 

50.3%

 

50.6%

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

Uses and Sources of Capital

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

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

September 30,
2008

 

December 31,
2007

 

September 30,
2007

 

December 31,
2006

(In Thousands)

 

 

 

 

 

 

 

$73,614

 

$53,620

 

$83,418

 

$88,231

In May 2007, $22.5 million of System Energy's receivable from the money pool was replaced by a note receivable from Entergy New Orleans. See Note 4 to the financial statements in the Form 10-K for a description of the money pool.

Significant Factors, Known Trends, and Uncertainties

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

 

151

 

System Energy Rate Proceeding

In March 2008, the LPSC filed a complaint at the FERC under Federal Power Act section 206 against System Energy and Entergy Services. The complaint requests that the FERC set System Energy's rate of return on common equity at no more than 9.75%. The LPSC's complaint further requests that System Energy base its decommissioning and depreciation expenses on a 60-year useful life for Grand Gulf as opposed to the 40-year life specified in the existing NRC operating license. The APSC, the City of New Orleans, the MPSC, and other parties have intervened in the proceeding. System Energy filed its answer to the complaint in April 2008, in which it denies the allegations of the LPSC and requests that the FERC dismiss the complaint without a hearing. On July 1, 2008, the FERC issued an order denying the relief requested by the LPSC.

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, and see Entergy Corporation and Subsidiaries " MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - Critical Accounting Estimates " in this Form 10-Q for an update to the discussion regarding qualified pension and other postretirement benefits.

New Accounting Pronouncements

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

152

SYSTEM ENERGY RESOURCES, INC.
INCOME STATEMENTS
For the Three and Nine Months Ended September 30, 2008 and 2007
(Unaudited)
 
  Three Months Ended   Nine Months Ended
    2008   2007   2008   2007
    (In Thousands)   (In Thousands)
                 
OPERATING REVENUES                
Electric   $142,045    $144,383    $384,783    $400,011 
                 
OPERATING EXPENSES                
Operation and Maintenance:                
  Fuel, fuel-related expenses, and                
   gas purchased for resale   11,315    10,560    34,619    29,281 
  Nuclear refueling outage expenses   4,256    4,177    12,669    12,403 
  Other operation and maintenance   30,712     30,831     87,709     83,372  
Decommissioning   6,972    6,486    20,543    19,110 
Taxes other than income taxes   6,068    6,520    10,097    19,525 
Depreciation and amortization   36,427    35,244    87,504    85,232 
Other regulatory credits - net   (4,641)   (2,500)   (9,198)   (7,110)
TOTAL   91,109    91,318    243,943    241,813 
                 
OPERATING INCOME   50,936    53,065    140,840    158,198 
                 
OTHER INCOME                
Allowance for equity funds used during construction   1,367    1,437    3,733    2,217 
Interest and dividend income   2,134    7,869    8,346    18,454 
Miscellaneous - net   (116)   (87)   (404)   491 
TOTAL   3,385    9,219    11,675    21,162 
                 
INTEREST AND OTHER CHARGES          
Interest on long-term debt   16,065    16,444    39,348    40,133 
Other interest - net   157    51    237    103 
Allowance for borrowed funds used during construction   (458)   (475)   (1,251)   (730)
TOTAL   15,764    16,020    38,334    39,506 
                 
INCOME BEFORE INCOME TAXES   38,557    46,264    114,181    139,854 
                 
Income taxes   16,173     18,832     48,105     58,161  
                 
NET INCOME   $22,384    $27,432    $66,076    $81,693 
                 
See Notes to Financial Statements.                
                 

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154

 

SYSTEM ENERGY RESOURCES, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2008 and 2007
(Unaudited)
     
    2008   2007
    (In Thousands)
         
OPERATING ACTIVITIES        
Net income   $66,076    $81,693 
Adjustments to reconcile net income to net cash flow provided by operating activities:        
  Other regulatory credits - net   (9,198)   (7,110)
  Depreciation, amortization, and decommissioning   108,047    104,342 
  Deferred income taxes, investment tax credits, and non-current taxes accrued   35,202    68,879 
  Changes in working capital:        
    Receivables   10,937    437 
    Accounts payable   2,846    3,134 
    Taxes accrued     (29,265)
    Interest accrued   (16,330)   (15,762)
    Other working capital accounts   (21,352)   (19,861)
  Provision for estimated losses and reserves   (389)   81 
  Changes in other regulatory assets   4,390    17,868 
  Other   1,909    (30,027)
Net cash flow provided by operating activities   182,138    174,409  
         
INVESTING ACTIVITIES        
Construction expenditures   (43,099)   (61,562)
Allowance for equity funds used during construction   3,733    2,217 
Nuclear fuel purchases   (63,319)   (56,260)
Proceeds from sale/leaseback of nuclear fuel   63,322    56,580 
Proceeds from nuclear decommissioning trust fund sales   344,772     53,810  
Investment in nuclear decommissioning trust funds   (364,791)   (74,484)
Changes in money pool receivable - net   (19,994)   (17,715)
Net cash flow used in investing activities   (79,376)   (97,414)
         
FINANCING ACTIVITIES        
Proceeds from the issuance of long-term debt     69,480 
Retirement of long-term debt   (26,701)   (23,335)
Dividends paid:        
  Common stock   (45,200)   (75,300)
Net cash flow used in financing activities   (71,901)   (29,155)
         
Net increase in cash and cash equivalents   30,861    47,840  
         
Cash and cash equivalents at beginning of period   105,005    135,012  
         
Cash and cash equivalents at end of period   $135,866    $182,852  
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid during the period for:        
  Interest - net of amount capitalized   $52,060    $51,861 
  Income taxes   $16,072    $35,897 
         
See Notes to Financial Statements.        
         

155

 

SYSTEM ENERGY RESOURCES, INC.
BALANCE SHEETS
ASSETS
September 30, 2008 and December 31, 2007
(Unaudited)
             
    2008   2007
  (In Thousands)
             
CURRENT ASSETS            
Cash and cash equivalents:            
  Cash       $103   $406
  Temporary cash investments - at cost,            
   which approximates market       135,763   104,599
     Total cash and cash equivalents       135,866   105,005
Accounts receivable:            
  Associated companies       121,174   112,598
  Other       4,402   3,921
     Total accounts receivable       125,576   116,519
Materials and supplies - at average cost       73,692   68,613
Deferred nuclear refueling outage costs       13,606   13,640
Prepayments and other       25,732   9,225
TOTAL       374,472   313,002
             
OTHER PROPERTY AND INVESTMENTS        
Decommissioning trust funds       292,074   315,654
Note receivable - Entergy New Orleans       25,560   25,560
TOTAL       317,634   341,214
             
UTILITY PLANT        
Electric       3,292,812   3,273,390
Property under capital lease       475,157   475,157
Construction work in progress       110,846   88,296
Nuclear fuel under capital lease       119,547   81,616
Nuclear fuel       8,302   7,656
TOTAL UTILITY PLANT       4,006,664   3,926,115
Less - accumulated depreciation and amortization       2,183,721   2,101,484
UTILITY PLANT - NET       1,822,943   1,824,631
             
DEFERRED DEBITS AND OTHER ASSETS        
Regulatory assets:            
  SFAS 109 regulatory asset - net       88,295   93,083
  Other regulatory assets       272,296   274,202
Other       11,506   12,628
TOTAL       372,097   379,913
             
TOTAL ASSETS       $2,887,146   $2,858,760
             
See Notes to Financial Statements.            
 

156

 
 
SYSTEM ENERGY RESOURCES, INC.
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
September 30, 2008 and December 31, 2007
(Unaudited)
             
    2008   2007
  (In Thousands)
 
CURRENT LIABILITIES        
Currently maturing long-term debt       $28,440   $26,701
Accounts payable:            
  Associated companies       1,327   8,902
  Other       39,603   29,182
Accumulated deferred income taxes       4,376   4,494
Interest accrued       31,073   47,403
Obligations under capital leases       30,058   30,058
Other       200   -
TOTAL       135,077   146,740
             
NON-CURRENT LIABILITIES        
Accumulated deferred income taxes and taxes accrued       340,562   314,991
Accumulated deferred investment tax credits       62,577   65,184
Obligations under capital leases       89,488   51,558
Other regulatory liabilities       214,380   243,450
Decommissioning       389,102   368,559
Accumulated provisions       2,080   2,469
Pension and other postretirement liabilities       25,756   30,031
Long-term debt       744,881   773,266
Other       -   145
TOTAL       1,868,826   1,849,653
             
Commitments and Contingencies            
             
SHAREHOLDER'S EQUITY        
Common stock, no par value, authorized 1,000,000 shares;            
 issued and outstanding 789,350 shares in 2008 and 2007       789,350   789,350
Retained earnings       93,893   73,017
TOTAL       883,243   862,367
             
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY       $2,887,146   $2,858,760
             
See Notes to Financial Statements.            
             

157

 

 

ENTERGY CORPORATION AND SUBSIDIARIES

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See " PART I, Item 1, Litigation " in the Form 10-K and "Item 8, Legal Proceedings" in the Entergy Texas Form 10 for a discussion of legal, administrative, and other regulatory proceedings affecting Entergy.

Item 1A. Risk Factors

See the risk factors discussed in " PART I, Item 1A, Risk Factors " in the Form 10-K and in the Entergy Texas Form 10. Following is an update to the risk factors discussed in the Form 10-K and the Entergy Texas Form 10.

Utility

(Entergy Corporation, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy New Orleans and Entergy Texas)

A delay or failure in recovering amounts for storm restoration costs incurred, or revenue lost, as a result of Hurricane Gustav and Hurricane Ike could have material, adverse effects on Entergy and those Utility operating companies affected by these storms.

As a result of Hurricane Gustav and Hurricane Ike, Entergy Arkansas, Entergy Gulf States Louisiana, Entergy Louisiana, Entergy Mississippi, Entergy New Orleans and Entergy Texas expect to incur a total of approximately $1.025 to $1.225 billion in storm restoration costs for the repair or replacement of their electric facilities damaged by the hurricanes. These costs do not include other incremental losses, such as the inability to recover fixed costs scheduled for recovery through base rates due to reduced sales volumes resulting from the storms. Entergy and the Utility operating companies are pursuing a broad range of initiatives to recover storm restoration costs, including obtaining reimbursement of certain costs covered by insurance and pursuing recovery through existing or new rate mechanisms regulated by FERC, state and local regulatory bodies, in combination with the possible issuance of bonds securitized by the storm recovery rates.

The non-capital portion of the restoration costs are being accumulated as regulatory assets (except for Entergy Arkansas) and not charged against current income based upon expectation of cost recovery. Because the Utility operating companies have not completed the regulatory process for recovery of these storm costs, however, there is an element of risk regarding recovery. For further information regarding the effects of Hurricane Gustav and Hurricane Ike, see "Management's Financial Discussion and Analysis - Hurricane Gustav and Hurricane Ike" for Entergy and each of the Utility operating companies (other than Entergy Mississippi). For further information with respect to storm cost recovery regulatory filings, see Note 2 to the financial statements.

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)

 

 

 

 

 

 

 

 

 

7/01/2008-7/31/2008

 

-

 

$ -

 

-

 

$707,627,695

8/01/2008-8/31/2008

 

705,000

 

$102.19

 

705,000

 

$666,779,561

9/01/2008-9/30/2008

 

290,000

 

$ 91.12

 

290,000

 

$640,595,073

Total

 

995,000

 

$ 98.96

 

995,000

 

 

158

(1)

In accordance with Entergy's stock-based compensation plans, Entergy periodically grants stock options to key employees that may be exercised to obtain shares of Entergy's common stock. According to the plans, these shares can be newly issued shares, treasury stock, or shares purchased on the open market. Entergy's management has been authorized by the Board to repurchase on the open market shares up to an amount sufficient to fund the exercise of grants under the plans. In addition to this authority, in January 2007 the Board approved a repurchase program under which Entergy is authorized to repurchase up to $1.5 billion of its common stock. The program does not have an expiration date, but Entergy expects to complete it in 2008. In January 2008, the Board authorized an incremental $500 million share repurchase program to enable Entergy to consider opportunistic purchases in response to equity market conditions. See Note 12 to the financial statements in the Form 10-K for additional discussion of the stock-based compensation plans.

(2)

Maximum amount of shares that may yet be repurchased relates only to the $1.5 billion and $500 million plans and does not include an estimate of the amount of shares that may be purchased to fund the exercise of grants under the stock-based compensation plans.

The amount of share repurchases may vary as a result of material changes in business results or capital spending or new investment opportunities.

Item 5. Other Information

Affiliate Purchased Power Agreements

See Part I, Item 1 of the Form 10-K for a discussion of the FERC proceeding involving the purchased power agreements entered by Entergy Louisiana and Entergy New Orleans to procure electric power from affiliates, the FERC's decision in the proceeding, and the LPSC's appeal of that decision. On April 10, 2008, the LPSC filed its initial brief with the D.C. Circuit. In its initial brief, the LPSC argues the FERC erred: (1) in concluding that Entergy Arkansas' short term sale of capacity and energy to third parties did not trigger the obligation to offer a right of first refusal with respect to this capacity to the other Utility operating companies pursuant to the provisions of the System Agreement; and (2) by approving an allocation of baseload generating resources that unduly preferred Entergy New Orleans and unduly discriminated against Entergy Gulf States Louisiana. Oral argument is scheduled for November 7, 2008.

Franchises and Certificates

As discussed in the Entergy Texas Form 10, on December 28, 2007, the Texas Industrial Energy Consumers (TIEC) filed a petition asking the PUCT to declare that Entergy Gulf States, Inc. was required to obtain prior PUCT approval in connection with Entergy Texas' acquisition of its certificate of convenience and necessity as part of the jurisdictional separation of Entergy Gulf States, Inc. into Entergy Texas and Entergy Gulf States Louisiana.  The TIEC further requested that the PUCT declare Entergy Texas' acquisition of the certificate of convenience and necessity null and void if it occurred without prior PUCT approval.

To resolve expeditiously any outstanding related issues, on March 31, 2008, Entergy Texas filed a request with the PUCT for approval of the allocation to Entergy Texas of the certificate of convenience and necessity to the extent the PUCT finds such an approval is necessary. On May 8, 2008, the ALJ issued an order consolidating the TIEC proceeding discussed above with this proceeding because the filings share threshold issues. On May 16, 2008, the ALJ certified two issues for the PUCT to consider that relate to whether Entergy Gulf States, Inc. needed to obtain PUCT approval with regard to allocating its certificate of convenience and necessity to Entergy Texas. In June 2008 the PUCT determined that the legislation authorizing the completion of the jurisdictional separation of Entergy Gulf States, Inc. into two separate companies contemplated Entergy Texas' succession to Entergy Gulf States, Inc.'s rights under the certificate of convenience and necessity without further regulatory approval. The PUCT issued in August 2008 its order dismissing this proceeding.

159

Environmental Regulation

Ozone Non-attainment

Entergy Texas and Entergy Gulf States Louisiana each operate fossil-fueled generating units in geographic areas that are not in attainment of the currently-enforced national ambient air quality standards for ozone. Texas non-attainment areas that affect Entergy are the Houston-Galveston and the Beaumont-Port Arthur areas. In Louisiana, Entergy is affected by the non-attainment status of the Baton Rouge area. Areas in non-attainment are classified as "marginal", "moderate," "serious," or "severe." When an area fails to meet the ambient air standard, the EPA requires state regulatory authorities to prepare state implementation plans meant to cause progress toward bringing the area into attainment with applicable standards.

In April 2004, the EPA issued a final rule, effective June 2005, revoking the 1-hour ozone standard, including designations and classifications. In a separate action over the same period, the EPA enacted 8-hour ozone non-attainment classifications and stated that areas designated as non-attainment under a new 8-hour ozone standard shall have one year to adjust to the new requirements with submittal of a new attainment plan. For Louisiana, the Baton Rouge area is currently classified as a ''marginal" (rather than "severe") non-attainment area under the new standard with an attainment date of June 15, 2007. On March 21, 2008 the EPA published a notice that the Baton Rouge area had failed to meet the standard by the attainment date and was proceeding with a "bump-up" of the area to the next higher non-attainment level. The Baton Rouge area is now classified as "moderate" non-attainment under the new standard with an attainment date of June 15, 2010.

For Texas, the Beaumont-Port Arthur area was originally classified as a "marginal" (rather than "serious") non-attainment area under the new standard with an attainment date of June 15, 2007. On March 18, 2008 the EPA published a notice that the Beaumont-Port Arthur area had failed to meet the standard by the attainment date based on the area's 2004-2006 monitoring data and was proceeding with a "bump-up" of the area to the next higher non-attainment level. However, 2005-2007 monitoring data showed the area to be in attainment, and on July 9, 2008 the Texas environmental commission proposed a Redesignation Request and Maintenance Plan for EPA redesignation of the area from non-attainment to attainment under the 8-hour ozone standard.

The Houston-Galveston-Brazoria area was originally classified as "moderate" non-attainment under the new standard with an attainment date of June 15, 2010. On June 15, 2007, the Texas governor petitioned the EPA to reclassify Houston-Galveston-Brazoria from "moderate" to "severe." On December 31, 2007 the EPA proposed to reclassify the Houston-Galveston-Brazoria area to a severe nonattainment area for the 1997 8-hour ozone standard. On October 1, 2008 the EPA granted the request by the Governor of the State of Texas to voluntarily reclassify the Houston-Galveston-Brazoria ozone nonattainment area from a moderate 8-hour ozone nonattainment area to a severe 8-hour ozone nonattainment area. The EPA also set April 15, 2010, as the date for the State of Texas to submit a revised State Implementation Plan addressing the severe ozone nonattainment area requirements of the Clean Air Act. The reclassification is effective on October 31, 2008. The area's new attainment date for the 1997 eight-hour ozone standard is as expeditiously as practicable, but no later than June 15, 2019.

In December 2006, the EPA's revocation of the 1-hour ozone standard was rejected by the courts. As a result, numerous requirements can return for areas that fail to meet 1-hour ozone levels by dates set by the law. These requirements include the potential to increase fees significantly for plants operating in these areas. In addition, it is possible that new emission controls may be required. Specific costs of compliance cannot be estimated at this time, but Entergy is monitoring development of the respective state implementation plans and will develop specific compliance strategies as the plans move through the adoption process.

On March 12, 2008 the EPA reduced the National Ambient Air Quality Standard for ozone, which will in turn place additional counties and parishes in which Entergy operates in nonattainment status. States will develop state implementation plans that outline control requirements to enable these counties and parishes to reach attainment status. Entergy facilities in these areas will be subject to installation of NOx controls, but the degree of control will not be known until the state implementation plans are developed. Entergy will monitor and be involved in the state implementation plans development process in states where Entergy has facilities.

160

Interstate Air Transport

In March 2005, the EPA finalized the Clean Air Interstate Rule, which would have reduced SO 2 and NOx emissions from electric generation plants in order to address transport issues and improve air quality in 29 eastern states. The Clean Air Interstate Rule was vacated by the  U.S. Court of Appeals for the D.C. Circuit  on July 11, 2008. The court found that the EPA failed to address basic obligations under the Clean Air Act's "good neighbor" provision regarding "upwind" states' contribution to air quality impairment in "downwind" states. Entergy is currently evaluating the impact of the D.C. Circuit's decision on both state plans to assure compliance with National Ambient Air Quality Standards and on the regional haze program, discussed below, because the regional haze program regulations rely in part on reductions expected to be gained through the Clean Air Interstate Rule program.

Regional Haze

In June 2005, the EPA issued final Best Available Retrofit Control Technology (BART) regulations, which could potentially result in a requirement to install SO 2 pollution control technology on certain of Entergy's coal and oil generation units. The rule leaves certain BART determinations to the states. The Arkansas Department of Environmental Quality (ADEQ) has completed its State Implementation Plan (SIP) for Arkansas facilities to implement its obligations under the Clean Air Visibility Rule. The ADEQ has determined that Entergy Arkansas' White Bluff power plant affects Class I Area visibility and will be subject to the EPA's presumptive BART requirements to install scrubbers and low NOx burners by 2013 . Under current regulations, the scrubbers must be operational by September 2013. On October 2, 2008, Entergy Arkansas, along with the co-owners of the White Bluff, filed a Third Party Rulemaking Petition before the Arkansas Pollution Control and Ecology Commission (APCE) to modify Arkansas environmental Regulation 19 to coincide with the federal date for implementation, which is within 5 years after the EPA approves the Arkansas SIP. This action was considered necessary to ensure that Entergy Arkansas consumers do not assume any risk from early investment in control equipment that the EPA could consider inadequate subsequent to the close of capital purchase agreements. The APCE has initiated the rulemaking procedure (an action which does not indicate agreement or disagreement with Entergy Arkansas' position), and the proposed rule change will now be published for public notice and comment, followed by legislative committee review and a possible APCE decision on adoption or rejection. Currently, the project remains in the planning stages and has not been fully designed, but the latest conceptual cost estimate has gone up significantly from previous estimates due to increases in equipment, commodity, and labor costs. These estimates indicate that Entergy Arkansas' share of the project could cost approximately $630 million compared to the $375 million reported in the Form 10-K. Entergy continues to review potential environmental spending needs and financing alternatives for any such spending, and future spending estimates could change based on the results of this continuing analysis.

316(b) Cooling Water Intake Structures

Entergy's Non-Utility Nuclear business is currently in various stages of the data evaluation and discharge permitting process for its generation facilities.  Indian Point 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 3 discharge permits.  In November 2003, the NYSDEC issued a draft permit indicating that closed cycle cooling would be considered the "best technology available" for minimizing perceived adverse environmental impacts attributable to the intake and discharge of cooling water at Indian Point 2 and 3.  The draft permit would require Entergy to take certain steps to assess the feasibility of retrofitting the site to install cooling towers because Entergy has announced its intent to apply for NRC license renewal at Indian Point 2 and 3.  The draft permit could also require, upon its becoming effective, the facilities to take an annual 42 unit-day outage (coordinated with the existing refueling outage schedule) and provide a payment into a NYSDEC account until the start of cooling tower construction.  Entergy is participating in the administrative process in order to have the draft permit modified prior to final issuance and opposes any requirement to install cooling towers or to begin annual outages at Indian Point 2 and 3.  Entergy notified the NYSDEC that the cost of retrofitting Indian Point 2 and 3 with cooling towers likely would cost, in 2003 dollars, at least $740 million in capital costs and an additional $630 million in lost generation during construction.  Due to fluctuations in power pricing and because a retrofitting of this size and complexity has never been undertaken, significant uncertainties exist in these estimates.  An August 13, 2008 ruling by the NYSDEC's Assistant Commissioner has restructured the permitting process.  The NYSDEC is now likely to direct Entergy to develop detailed feasibility information regarding the construction and operation of cooling towers prior to the issuance of a new draft permit.  A comment period and further contested proceedings likely would follow.

 

161

 

 

In March 2008, the NYSDEC issued a draft water quality certification and a draft discharge permit for FitzPatrick, opening a 30-day public comment period on these documents. The certification, or a waiver or exemption of the same, is required by section 401 of the federal Clean Water Act as a supporting document to the NRC's license renewal decision. The discharge permit action is not related to the license renewal decision. The NYSDEC received comments on the draft documents from Entergy and from the public. In response, the NYSDEC issued a draft denial without prejudice of the certification and held hearings on both draft documents in July 2008. FitzPatrick, having filed a timely and complete application for permit renewal, has continued to operate under its administratively continued discharge permit. On July 16, 2008, negotiations with the state concerning issuance of these authorizations resulted in an agreement, memorialized in a stipulation executed by the state and Entergy on July 17, 2008. The agreement includes a voluntary commitment by Entergy to install ristroph screens and an initial fish return system during the next five-year permit cycle. Additionally, Entergy has agreed to conduct further studies regarding the feasibility and effectiveness of relocating the facility's offshore intake structure and of additional fish return technologies. The permit to be issued under the agreement requires that the NYSDEC initiate a permit modification (triggering Entergy's right to challenge) if the state decides to require the installation and operation of additional fish return technology. The NYSDEC issued the water permit as described above and issued the water quality certification. Additionally, the New York Department of State has issued the Coastal Zone Management consistency determination, also required for the NRC to complete the licensing process.

At the request of EPA Region 1, Entergy submitted extensive data to the agency in July 2008 concerning cooling water intake impacts at the Pilgrim facility.  Analysis of what technologies may be appropriate for Pilgrim continues, but it appears at this point that cooling towers are not feasible due to restrictions in the plant's condenser design and capacity.  Other technologies, such as variable speed pumps and the relocation of the cooling water intake, are under consideration if monitoring indicates that any action needs to be taken at the station.

Vermont Yankee Thermal Discharge Permit

Opposition groups appealed a final permit issued to Vermont Yankee pursuant to the National Pollutant Discharge Elimination System in which the Vermont Agency of Natural Resources (VANR) allowed a small increase in the amount of heat the facility can discharge to the Connecticut River from June 16 to October 14 each year. The VANR permit amendment increases operational flexibility for the required usage rate of the existing cooling towers and for the generation rate of the facility that is especially helpful in conditions of high ambient temperatures or low river flow conditions. The trial of this matter took place in the Vermont Environmental Court during the summer of 2007. On May 22, 2008, the Vermont Environmental Court entered its judgment and order granting the increased thermal discharge provided in the amendment for the period from July 8 through October 14 each year but imposing additional management and measurement requirements with respect to the period from June 16 through July 7. Entergy generally accepts these additional requirements but it and VANR have requested clarification of certain aspects of the Court's order. The period for opposition groups to appeal the Court's judgment and order does not run while those requests for clarification are pending. A reversal on appeal would require that Vermont Yankee return to its previous thermal discharge permit limits with the loss of additional operational flexibility.

Indian Point 2 Hazardous Waste Remediation

As part of the effort to terminate the current Indian Point 2 mixed waste storage permit, Entergy was required to perform groundwater and soil sampling for metals, PCBs and other non-radiological contaminants on plant property, regardless of whether these contaminants stem from onsite activities or were related to the waste stored on-site pursuant to the permit. Entergy believes this permit is no longer necessary for the facility due to an exemption for mixed wastes (hazardous waste that is also radioactive) recently promulgated as part of the EPA's hazardous waste regulations. This exemption allows mixed waste to be regulated through the NRC license instead of through a separate EPA or state hazardous waste permit. In February 2008, Entergy submitted its report on this sampling effort to the NYSDEC. The report indicated the presence of various metals in soils at levels above the NYSDEC cleanup objectives. It does not appear that these metals are connected to operation of the nuclear facility. At the request of the NYSDEC, Entergy submitted a plan on August 8, 2008 for a study which will identify the

 

162

 

sources of the metals. The NYSDEC recently approved this workplan with some conditions related to the need to study whether the soil impact observed may have originated from plant construction materials. This issue is being studied by Entergy to determine if any changes to the workplan are necessary. The NYSDEC may require additional work to define the vertical and lateral extent of the contamination on-site, and evaluate any potential for migration off-site. The NYSDEC plans to use the results of this investigation to determine whether the permit can be terminated and the metals left in place until plant decommissioning or if further investigation and/or remediation are required. Entergy is unable to determine what the extent or cost of required remediation, if any, will be at this time.

Groundwater Contamination at Certain Nuclear Sites

The NRC requires nuclear power plants to regularly monitor and report the presence of radioactive material in the environment. Entergy joined other nuclear utilities and the Nuclear Energy Institute in 2006 to develop a voluntary groundwater monitoring and protection program. This initiative began after detection of very low levels of radioactive material, primarily tritium, in groundwater at several plants in the United States, including the Indian Point Energy Center. In addition to tritium, other radionuclides have been found in on site ground water at Indian Point.

As part of the groundwater monitoring and protection program, Entergy has: (1) performed reviews of plant groundwater characteristics (hydrology) and historical records of past events on site which may have potentially impacted groundwater; (2) implemented fleet procedures on how to handle events that could impact groundwater; and (3) installed groundwater monitoring wells and began periodic sampling. The program also includes protocols for notifying local officials if contamination is found.

Entergy identified two sources of the contamination at Indian Point. The first sourse is a historical leak from the Unit 2 spent fuel pool, which has been remediated. The other source was leakage from the Unit 1 spent fuel pool. Since the Unit 1 spent fuel pool has now been drained, Entergy expects no further migration of radionuclides into the groundwater. In October 2007, the EPA announced that it was consulting with the NRC and the NYSDEC regarding Indian Point. The EPA stated that after reviewing data it confirmed with New York State that there have been no violations of federal drinking water standards for radionuclides in drinking water supplies.

Indian Point has implemented an extensive groundwater monitoring and protection program, including installing approximately 35 monitoring wells, with five to six sampling points per well. Entergy has been working cooperatively with the NRC and NYSDEC in a split sample program to independently analyze test samples. Minor levels of tritium have also been found at the Pilgrim and Palisades plants, and those sites are addressing these findings.

In April 2006, an environmental advocacy organization served a notice of intent to bring an environmental citizen's suit pursuant to the federal Resource Conservation and Recovery Act (RCRA) against Entergy.  Notice of suit is required by RCRA sixty days before actual filing.  The suit, if filed, will allege that Entergy violated an EPA regulation by failing formally to report the discovered release of radioactive material into the environment at Indian Point.  It is expected that the environmental advocacy organization will ask the court to require Entergy formally to notify the EPA of the site condition, will seek to have the EPA formally involved in the ongoing site investigation and any required remediation, will seek attorney's fees under the statute, and may seek to have the judge impose statutory penalties. In response, the EPA stated that they had reviewed Entergy's investigation program and were satisfied that the program was protective of human health and the environment. To date, the advocacy group has not filed a complaint in the matter.

Hurricane Gustav and Hurricane Ike

Recent damage sustained by Entergy Louisiana's and Entergy Texas' electrical transmission infrastructure due to the effects of Hurricane Gustav and Hurricane Ike necessitated that significant amounts of restoration work occur in areas classified as jurisdictional wetlands and coastal marsh. While measures were taken to minimize the impact in these environmentally-sensitive areas, some level of damage to the

 

163

 

wetland and marsh areas likely has occurred. Mitigation requirements for these possible impacts have yet to be assessed or required by regulatory authorities. Following Hurricane Katrina and Hurricane Rita, the regulatory authorities deferred assessing mitigation requirements for such impacts pending an evaluation of spontaneous recovery of the marsh and wetlands damaged during line repairs.

Nuclear Retention Plan

Effective January 1, 2009, Entergy Corporation elected to renew the participation in its Nuclear Retention Plan of one of its Named Executive Officers, Mr. Gary J. Taylor, the current Group President, Utility Operations, who previously served as Entergy's Executive Vice President and Chief Nuclear Officer. The Nuclear Retention Plan (the "Plan") is a special retention plan for officers and other leaders with special expertise in the nuclear industry. Entergy established the plan to attract and retain management talent in the nuclear power field, a field that requires unique technical and other expertise that is in great demand in the utility industry. Mr. Taylor's continued participation in the plan will cover a three-year period beginning January 1, 2009. In January 2010, 2011 and 2012, Mr. Taylor will receive a cash bonus equal to 30 percent of his base salary as of January 1, 2009. If Mr. Taylor's participation in the Plan had not been renewed, his current participation would have ceased on December 2008 with Mr. Taylor receiving a final payout in January 2009 equal to 25% of his 2005 salary (his salary at the time of his enrollment in the plan). For more information about the Plan, see Exhibit 10(a)107 to the Form 10-K.

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,

 

2003

 

2004

 

2005

 

2006

 

2007

 

2008

                       

Entergy Arkansas

3.17

 

3.37

 

3.75

 

3.37

 

3.19

 

2.85

Entergy Gulf States Louisiana

1.51

 

3.04

 

3.34

 

3.01

 

2.84

 

2.58

Entergy Louisiana

3.93

 

3.60

 

3.50

 

3.23

 

3.44

 

3.41

Entergy Mississippi

3.06

 

3.41

 

3.16

 

2.54

 

3.22

 

3.18

Entergy New Orleans

1.73

 

3.60

 

1.22

 

1.52

 

2.74

 

4.03

Entergy Texas

1.21

 

2.07

 

2.06

 

2.12

 

2.07

 

2.38

System Energy

3.66

 

3.95

 

3.85

 

4.05

 

3.95

 

3.57

 

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

 

Twelve Months Ended

 

December 31,

 

September 30,

 

2003

 

2004

 

2005

 

2006

 

2007

 

2008

                       

Entergy Arkansas

2.79

 

2.98

 

3.34

 

3.06

 

2.88

 

2.52

Entergy Gulf States Louisiana

1.45

 

2.90

 

3.18

 

2.90

 

2.73

 

2.53

Entergy Louisiana

-

 

-

 

-

 

2.90

 

3.08

 

3.03

Entergy Mississippi

2.77

 

3.07

 

2.83

 

2.34

 

2.97

 

2.91

Entergy New Orleans

1.59

 

3.31

 

1.12

 

1.35

 

2.54

 

3.71

164

Item 6. Exhibits *

 

4 (a) -

Sixty-fifth Supplemental Indenture, dated as of August 1, 2008, to the Entergy Louisiana, LLC Mortgage and Deed of Trust, dated as of April 1, 1944.

     
 

10(a) -

Amended and Restated Limited Liability Company Agreement of Entergy Holdings Company LLC dated as of July 29, 2008.

     
 

12(a) -

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

     
 

12(b) -

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

     
 

12(f) -

Entergy Texas' 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.

     
165
     
     
 

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.

___________________________

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

*

Reference is made to a duplicate list of exhibits being filed as a part of this report on Form 10-Q for the quarter ended September 30, 2008, which list, prepared in accordance with Item 102 of Regulation S-T of the SEC, immediately precedes the exhibits being filed with this report on Form 10-Q for the quarter ended September 30, 2008.

**

Incorporated herein by reference as indicated.

166

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

 

Date: November 7, 2008

167

 

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