Entergy 2004 Annual Report Download - page 29

Entergy Corporation and Subsidiaries 2004
under each of the purchase agreements. Entergy Corporation has
guaranteed up to 50% of Entergy-Koch’s indemnification
obligations to the purchasers. Entergy does not expect any material
claims under these indemnification obligations, but to the extent
that any are asserted and paid, the gain that Entergy expects to
record in 2006 may be reduced.
Results of Operations
2004 Compared to 2003
The decrease in earnings for Energy Commodity Services from
$180.5 million to $3.5 million was primarily due to:
•earnings from Entergy’s investment in Entergy-Koch were
$254 million lower in 2004, primarily as a result of Entergy-
Koch’s trading business reporting a loss from its operations in
2004; and
•Entergy recorded a charge in 2004 of approximately $55 million
($36 million net-of-tax) as a result of an impairment of the
value of the Warren Power plant, which is owned in the
non-nuclear wholesale assets business. Entergy concluded that
the plant is impaired based on valuation studies prepared in
connection with the Entergy Asset Management stock sale
discussed below.
Partiallyoffsetting the decrease in earnings is a tax benefit resulting
fromthe sale of preferred stock and less than 1% of the common
stock of Entergy Asset Management, an Entergy subsidiary. In
December 2004, an Entergy subsidiary sold the stock to a third
party for $29.75 million. The sale resulted in a capital loss for
tax purposes of $370 million, producing a net tax benefit of
$97 million that Entergy recorded in the fourth quarter of 2004.
2003 Compared to 2002
The increase in earnings for EnergyCommodity Services in 2003
from a $145.8 million loss to $180.5 million in earnings was
primarily due to net charges recorded to operating expenses
in 2002, as discussed below. Higher earnings from Entergy’s
investment in Entergy-Koch also contributed to the increase in
earnings. The income from Entergy’s investment in Entergy-Koch
was $73 million higher in 2003 primarily as a result of higher
earnings in its trading business.
In 2002, Entergy recorded charges to reflect the effect of
Entergy’s decision to discontinue additional greenfield power plant
development and to reflect asset impairments resulting from
the deteriorating economics of wholesale power markets
principally in the United States and the United Kingdom. The net
charges of $428.5 million($238.3 million net-of-tax) consisted
of the following:
•The power development business obtained contracts in October
1999 to acquire 36 turbines from General Electric. Entergy’s
rights and obligations under the contracts for 22 of the turbines
were sold to an independent special-purpose entity in May
2001. $178.0 million of the charges, including an offsetting
net-of-tax benefit of $18.5 million related to the subsequent sale
of four turbines to a thirdparty, was a provisionfor the net costs
resulting from cancellation or sale of the turbines subject to
purchase commitments with the special-purpose entity;
•$204.4 million of the charges resulted from the write-off of
Entergy Power Development Corporation’s equity investment in
the Damhead Creek project and the impairment of the values of
its Warren Power power plant and its Crete and RS Cogen
projects. This portion of the charges reflected Entergy’s estimate
of the effects of reduced spark spreads in the United States and
the United Kingdom. Damhead Creek was sold in December
2002, resulting in net income of $31.4 million;
•$39.1 million of the charges related to the restructuring of the
non-nuclear wholesale assets business, which was comprised of
$22.5 million of impairments of administrative fixed assets,
$10.7 million of estimated sublease losses, and $5.9 million of
employee-related costs;
•$32.7 million of the charges resulted from the write-off of
capitalized project development costs for projects that would
not be completed; and
•again of $25.7 million ($15.9 million net-of-tax) realized on
the sale in August 2002 of an interest in projects under
development in Spain.
Parent & Other
Results of Operations
2004 Compared to 2003
The increase in earnings for Parent & Other from a $23.4 million
loss to $17.6 million in earnings was primarily due to the following:
•realization of $16.7 million of tax benefits related to the
Entergy-Koch investment; and
•Entergy’s competitive retail business earned a very small profit
in 2004 compared to reporting a $14.4 million loss in 2003.
2003 Compared to 2002
The loss from Parent & Other decreased in 2003 from
$38.6 million to $23.4 million primarily due to lower income
tax expense.
Income Taxes
The effectiveincome tax rates for 2004, 2003, and 2002 were
28.2%, 37.9%, and 32.1%, respectively. See Note 3 to the
consolidated financial statements for a reconciliation of the federal
statutory rate of 35.0% to the effective income tax rates. The lower
effective income tax rate in 2004 is primarily due to the tax benefits
resulting fromthe EntergyAsset Management stock sale
discussed above.
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MANAGEMENT’S FINANCIAL DISCUSSION and ANALYSIS continued