Entergy 2004 Annual Report Download - page 34

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Entergy Corporation and Subsidiaries 2004
•The Non-Utility Nuclear business provided $415 million
in cash from operating activities compared to providing
$183 million in 2003. The increase resulted primarily from
lower intercompany income tax payments and increases in
generation and contract pricing that led to an
increase in revenues.
•Entergy’s investment in Entergy-Koch, LP provided
$526 million in cash from operating activities compared to
using $41 million in 2003. Entergy received dividends from
Entergy-Koch of $529 million in 2004 compared to
$100 million in 2003. In addition, tax payments related to the
investment were higher in 2003 because the investment had
higher net income in 2003.
•The non-nuclear wholesale assets business used $46 million in
cash from operating activities compared to using $70 million
in 2003. The decrease in cash used resulted primarily from a
one-time $33 million payment in 2003 related to a generation
contract in the non-nuclear wholesale assets business.
•The parent company, Entergy Corporation, used $146 million
in cash fromoperating activities in 2004 compared to providing
$209 million in 2003 primarily due to higher intercompany
income tax payments.
As discussed in Note 3 to the consolidated financial statements, in
2003, the domestic utility companies and System Energy filed, with
the Internal Revenue Service (IRS), a change in tax accounting
method notification for their respective calculations of cost of goods
sold. The cash benefit fromthe method change was $74 millionon
a consolidated basis in 2004. This accounting method change is
an issue across the utility industry and will likely be challenged by
the IRS onaudit. As of December 31, 2004, Entergyhas a
consolidated net operating loss (NOL) carryforward for tax
purposes of $2.9 billion, principally resulting from the change in
tax accounting method related to cost of goods sold. If the tax
accounting method change is sustained, Entergy expects to fully
utilize the NOL carryforward through 2006.
2003 Compared to 2002
Entergy’s cash flow provided by operating activities decreased in
2003 primarily due to the following:
•The U.S. Utilityprovided $1,675 million in operating cash flow
in 2003 compared to providing $2,341 million in 2002. The
decrease primarily resulted from the tax accounting election
made by Entergy Louisiana, as discussed below. Also
contributing to the decrease were higher payments for fuel
during the period, whichalso significantly increased the amount
of deferred fuel costs.
•The non-nuclear wholesale assets business used $70 million in
operating cash flowin 2003 compared to providing $43 million
in 2002 primarilydue to a decrease of $64 millionin the
income tax refund received in 2003 compared to 2002. Also
contributing to the increase in cash used was a one-time
$33 millionpayment in 2003 related to a generationcontract in
the non-nuclear wholesale assets business.
•The Non-Utility Nuclear segment provided $183 million in
operating cash flow in 2003 compared to providing
$282 million in 2002 primarily due to higher tax payments and
unplanned outages.
•Operating cash flow used by the investment in Entergy-Koch,
LP decreased by $6 million in 2003. This decrease in cash flow
used was due to the receipt of $100 million in dividends from
Entergy-Koch in 2003. Almost entirely offsetting the dividends
received was an increase in tax payments related to Entergy’s
investment in Entergy-Koch due to increased income from
the investment.
Partially offsetting the decrease in cash flow in 2003 was an increase
due to the parent company providing $209 million in operating cash
flow in 2003 compared to using $439 million in 2002 primarily due
to the payment that Entergy Corporation made to Entergy
Louisiana in 2002 pursuant to the tax accounting election made by
Entergy Louisiana.
In 2001, Entergy Louisiana changed its method of accounting
for tax purposes related to its wholesale electric power contracts.
The most significant of these is the contract to purchase power from
the Vidalia project (the contract is discussed in Note 8 to the
consolidated financial statements). The new tax accounting method
has provided a cumulative cash flow benefit of approximately
$790 million through 2004, 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 flowbenefit of the election occurred in
2001 and the remainder occurred in 2002. In accordance with
Entergy’s intercompany tax allocation agreement, the cash flow
benefit for Entergy Louisiana occurred in the fourth
quarter of 2002.
In a September 2002 settlement of an LPSC proceeding that
concerned the Vidalia contract, the LPSC approved Entergy
Louisiana’s proposed treatment of the regulatory impact of the tax
accounting election. In general, the settlement permits Entergy
Louisiana to keep a portion of the tax benefit in exchange for
bearing the risk associated with sustaining the tax treatment. The
LPSC settlement divided the term of the Vidalia contract into two
segments: 2002-2012 and 2013-2031. During the first eight years
of the 2002-2012 segment, Entergy Louisiana agreed to credit rates
by flowing through its fuel adjustment calculation $11 million each
year, beginning monthlyin October 2002. Entergy Louisiana must
credit rates in this way and by this amount even if Entergy
Louisiana is unable to sustain the tax deduction. Entergy Louisiana
also must credit rates by $11 millioneach year for an additional
two years unless either the tax accounting method elected is
retroactively repealed or the Internal Revenue Service denies the
entire deduction related to the tax accounting method. Entergy
Louisiana agreed to credit ratepayers additional amounts unless the
tax accounting election is not sustained if it is challenged. During
2013-2031, Entergy Louisiana and its ratepayers would share the
remaining benefits of this tax accounting election.
MANAGEMENT’S FINANCIAL DISCUSSION and ANALYSIS continued