Entergy 2003 Annual Report Download - page 69

67
ENTERGY CORPORATION AND SUBSIDIARIES 2003
included in the fuel adjustment filings. Testimony was filed
on behalf of the plaintiffs in this proceeding asserting,
among other things, that Entergy New Orleans and other
defendants have engaged in fuel procurement and power
purchasing practices and included costs in Entergy New
Orleans’ fuel adjustment that could have resulted in
New Orleans customers being overcharged by more than
$100 million over a period of years. Hearings were held in
February and March 2002. In February 2004, the City
Council approved a resolution that results in a refund to
customers of $11.3 million, including interest, during the
months of June through September 2004. Entergy New
Orleans has accrued for this liability as of December 31,
2003. The resolution concludes, among other things, that
the record does not support an allegation that Entergy New
Orleans’ actions or inactions, either alone or in concert with
Entergy or any of its affiliates, constituted a misrepresentation
or a suppression of the truth made in order to obtain an
unjust advantage of Entergy New Orleans, or to cause loss,
inconvenience, or harm to its ratepayers. The plaintiffs
have appealed the City Council resolution to the state court
in Orleans Parish.
SYSTEM ENERGY’S1995 RATE PROCEEDING
System Energy applied to FERC in May 1995 for a rate
increase, and implemented the increase in December 1995.
The request sought changes to System Energy’s rate schedule,
including increases in the revenue requirement associated
with decommissioning costs, the depreciation rate, and the
rate of return on common equity. The request proposed a
13% return on common equity. In July 2000, FERC
approved a rate of return of 10.58% for the period December
1995 to the date of FERC’s decision, and prospectively
adjusted the rate of return to 10.94% from the date of FERC’s
decision. FERC’s decision also changed other aspects of
System Energy’s proposed rate schedule, including the
depreciation rate and decommissioning costs and their
methodology. FERC accepted System Energy’s compliance
tariff in November 2001. System Energy made refunds to
the domestic utility companies in December 2001.
In accordance with regulatory accounting principles,
during the pendency of the case, System Energy recorded
reserves for potential refunds against its revenues. Upon
the order becoming final, Entergy Arkansas, Entergy
Louisiana, Entergy Mississippi, Entergy New Orleans, and
System Energy recorded entries to spread the impacts of
FERC’s order to the various revenue, expense, asset, and
liability accounts affected, as if the order had been in place
since commencement of the case in 1995. System Energy
also recorded an additional reserve amount against its
revenue, to adjust its estimate of the impact of the order,
and recorded additional interest expense on that reserve.
System Energy also recorded reductions in its depreciation
and its decommissioning expenses to reflect the lower levels
in FERC’s order, and reduced tax expense affected by the order.
FERC SETTLEMENT
In November 1994, FERC approved an agreement settling
a long-standing dispute involving income tax allocation
procedures of System Energy. In accordance with the
agreement, System Energy has been refunding a total of
approximately $62 million, plus interest, to Entergy
Arkansas, Entergy Louisiana, Entergy Mississippi, and
Entergy New Orleans through June 2004. System Energy
also reclassified from utility plant to other deferred debits
approximately $81 million of other Grand Gulf 1 costs.
Although such costs are excluded from rate base, System
Energy is amortizing and recovering these costs over a
10-year period. Interest on the $62 million refund and the
loss of the return on the $81 million of other Grand Gulf 1
costs is reducing Entergy’s and System Energy’s net
income by approximately $10 million annually.
NOTE 3. INCOME TAXES
Income tax expenses for 2003, 2002, and 2001 consist of the
following (in thousands):
2003 2002 2001
Current
Federal (a) $ (731,129) $ 510,109 $321,085
Foreign 8,284 (3,295) 3,355
State (a) 23,396 43,788 53,565
Total (a) (699,449) 550,602 378,005
Deferred - net 1,307,092 (233,532) 110,944
Investment tax credit
adjustments - net (27,644) (23,132) (23,192)
Recorded income tax expense $ 579,999 $ 293,938 $465,757
(a) The actual cash taxes paid/(received) were $188,709 in 2003, $57,856 in 2002, and
($113,466) in 2001. Entergy Louisiana’s mark-to-market tax accounting election
significantly reduced taxes paid in 2001 and 2002. In 2001, Entergy Louisiana
changed its method of accounting for tax purposes related to the contract to
purchase power from the Vidalia project (the contract is discussed in Note 9 to the
consolidated financial statements). The new tax accounting method has provided a
cumulative cash flow benefit of approximately $805 million through 2003, which is
expected to reverse in the years 2005 through 2031. The election did not reduce book
income tax expense. The timing of the reversal of this benefit depends on several
variables, including the price of power. Approximately half of the consolidated cash
flow benefit of the election occurred in 2001 and the remainder occurred in 2002.
Total income taxes differ from the amounts computed by
applying the statutory income tax rate to income before
taxes. The reasons for the differences for the years 2003,
2002, and 2001 are (in thousands):
2003 2002 2001
Computed at statutory rate (35%) $535,663 $320,954 $425,692
Increases (reductions) in tax
resulting from:
State income taxes net of
federal income tax effect 54,024 44,835 45,124
Regulatory differences-
utility plant items 52,638 29,774 11,890
Amortization of investment
tax credits (24,364) (22,294) (22,488)
Flow-through/permanent
differences (30,221) (38,197) (20,698)
U.S. tax on foreign income 7,888 (28,416) 21,422
Other - net (15,629) (12,718) 4,815
Total income taxes $579,999 $293,938 $465,757
Effective income tax rate 37.9% 32.1% 38.3%